-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S2rBdbk2oZefvpGSip9B9312Co/CvDhs3cjgh+2Z8EEmOZoM83G1OJvAIOhtm5Jf YYuHvWlgKk2zw0zUpZsQ4g== 0000100716-99-000006.txt : 19990412 0000100716-99-000006.hdr.sgml : 19990412 ACCESSION NUMBER: 0000100716-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNICO AMERICAN CORP CENTRAL INDEX KEY: 0000100716 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 952583928 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-03978 FILM NUMBER: 99589161 BUSINESS ADDRESS: STREET 1: 23251 MULHOLLAND DR CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 8185919800 MAIL ADDRESS: STREET 1: 23251 MULHOLLAND DRIVE CITY: WOODLAND HILLS STATE: CA ZIP: 91364 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSAL COVERAGE CORP DATE OF NAME CHANGE: 19730823 10-K 1 10-K UNITED STATES 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, 1998 Commission File No. 0-3978 UNICO AMERICAN CORPORATION (Exact name of registrant as specified in its charter) Nevada 95-2583928 (State or other jurisdiction of (I.R.S Employee incorporation or organization) Identification No.) 23251 Mulholland Drive, Woodland Hills, California 91364 (Address of Principal Executive Offices) (Zip Code) (818) 591-9800 Registrant's telephone number Securities registered pursuant to Section 12(b) of the Act: None (Title of each class) Securities registered pursuant to section 12(g) of the Act: Common Stock, No Par Value (Title of Class) 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 willnot 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 The aggregate market value of Registrant's voting stock held by non-affiliates as of March 19, 1999 was $36,046,184 (based on theclosing sales price on such date, as reported by the Wall Street Journal). 6,224,369 Number of shares of common stock outstanding as of March 19, 1999 Portions of the definitive proxy statement which Registrant intends to file pursuant to Regulation 14(A) by a date no later than 120 days after December 31, 1998, 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 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. Unico American Corporation is an insurance holding company which provides property, casualty, health and life insurance and related premium financing through its wholly owned subsidiaries. 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"), the Company's property and casualty insurance company. Insurance company revenues and other revenues from insurance operations for the fiscal year ended December 31, 1998, are as follows:
Percent of Total Total Revenues Company Revenues Insurance Company Revenues $40,661,632 85.5% Other Revenues from Insurance Operations - - ---------------------------------------- Health and life insurance program commission income 2,216,446 4.6% Service fee income 1,896,258 4.0% Daily automobile rental insurance program commission and claim administration fees 807,503 1.7% Association operations membership and fee income 355,781 0.8% Workers' compensation program commission income 329,465 0.7% Commercial and personal automobile insurance program commission income, service fees and claim administration fees 1,843 - Miscellaneous fee income 242 - ---------- ----- Total gross commission and fee income 5,607,538 11.8% Insurance premium financing operation finance charges and late fees 1,033,479 2.2% Non-insurance company investment income 234,580 0.5% Other income 7,041 - --------- ----- Total Other Revenues from Insurance Operations 6,882,638 14.5% --------- ----- Total Revenues $47,544,270 100.0% ========== ======
INSURANCE COMPANY OPERATION --------------------------- General - - ------- The insurance company operation is conducted through Crusader, which as of December 31, 1998, is 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, 1998, 97% of Crusader's business was commercial multiple peril "business package" insurance policies. This business is written in all of the states in which it is licensed. Commercial multiple peril policies provide a combination of property and liability coverage for businesses and business property. 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. Crusader also writes separate commercial property and commercial liability policies. 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 above table. Crusader is licensed in all property and casualty and disability lines by the California Department of Insurance. 2 Reinsurance - - ----------- A reinsurance transaction occurs when an insurance company transfers ("cedes") a portion of its exposure on business written by it to a reinsurer which 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 has reinsurance agreements with National Reinsurance Corporation, a California admitted reinsurer. National Reinsurance Corporation was acquired by General Reinsurance Corporation in 1996. These reinsurance agreements help protect Crusader against liabilities in excess of certain retentions, including major or catastrophic losses which may occur from any one or more of the property and/or casualty risks which Crusader insures. Crusader also has additional catastrophe reinsurance from various other reinsurance companies of which 78% of the participating catastrophe reinsurers are admitted in California. The aggregate amount of earned premium ceded to the reinsurers was $5,700,222 for the fiscal year ended December 31, 1998, and $6,394,328 for the fiscal year ended December 31, 1997. On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per risk subject to aggregate limits and to catastrophe and clash covers. Beginning January 1, 1998, an annual aggregate deductible of $750,000 commenced on losses ceded to its reinsurance treaty covering losses between $250,000 and $500,000. The catastrophe and clash covers (subject to a maximum occurrence and annual aggregate) help protect the Company from one loss occurrence affecting multiple policies 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. 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. 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. Historical data includes the 14 years that Crusader has been in operation and the data from its general agent developed with other insurance companies prior to 1985. Since the ultimate liability of Crusader may be greater or less than estimated reserves, all reserves are constantly monitored and adjusted when appropriate. Reserves for loss adjustment expenses are estimated to cover the direct costs associated with specific claims as well as an estimate of administrative costs. The process of establishing loss reserves involves significant judgment. The following table shows the development of the unpaid losses and loss adjustment expenses for fiscal years 1989 through 1998. 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, including the estimated losses that had been incurred but not reported to the Company. 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 in Crusader's net loss and loss adjustment expense reserves in all years except 1994. These redundancies are due to Crusader's loss reserving practices used in determining its incurred but not reported losses and loss adjustment expenses ("IBNR"). There is no assurance the redundancies will continue and the Company believes a change in the way it computes IBNR is not warranted. Crusader is a relatively small insurance company with 14 years of its own statistical experience. Crusader is constantly changing its product mix and exposures, including the types of businesses insured within its business package program as well as its lines of business. In addition, it is regularly expanding its territories both inside and outside of California. Considering the uncertainties from this changing environment as well as its limited internal data and history, the Company recognizes the difficulties in developing its own unique IBNR statistics; therefore, it incorporates industry 3 standards and averages into its estimates. When Crusader establishes its IBNR reserves, although historically conservative, it is still well below industry average; and the Company believes that it is properly stated. When subsequent development justifies changes in IBNR, 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 --------------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ---- Reserve for Unpaid Losses and Loss Adjustment Expenses $23,511,133 $23,601,435 $22,918,442 $21,249,902 $20,824,039 $21,499,778 $27,633,304 Paid Cumulative as of 1 Year Later 6,326,868 6,204,559 6,425,329 6,368,554 8,904,427 7,687,180 8,814,611 2 Years Later 10,726,038 10,357,708 10,946,318 9,583,885 10,824,024 13,453,833 13,502,224 3 Years Later 13,652,062 12,935,827 12,409,499 11,814,445 13,178,262 16,597,366 18,911,104 4 Years Later 15,121,985 13,561,987 12,951,511 12,667,989 14,462,911 19,073,442 22,631,450 5 Years Later 15,316,299 13,768,277 13,357,941 13,093,970 15,821,444 21,452,429 6 Years Later 15,385,519 13,866,654 13,459,123 13,385,215 16,936,140 7 Years Later 15,416,138 13,923,206 13,422,013 14,067,010 8 Years Later 15,450,239 13,797,865 13,630,780 9 Years Later 15,467,116 13,996,301 10 Years Later 15,479,036 Reserves Reestimated as of 1 Year Later 22,315,883 20,990,669 20,153,906 18,562,116 19,599,695 20,912,743 25,666,251 2 Years Later 20,165,458 18,566,956 17,136,498 15,021,149 15,742,478 20,289,699 24,984,032 3 Years Later 18,348,965 15,846,416 14,788,046 13,802,009 15,463,566 21,217,766 24,575,023 4 Years Later 16,385,905 14,631,554 13,961,555 13,620,235 16,174,111 21,843,632 26,146,874 5 Years Later 15,782,294 14,115,281 13,833,745 13,790,786 16,888,885 23,767,472 6 Years Later 15,511,081 14,063,578 13,754,304 13,878,797 17,762,615 7 Years Later 15,471,448 14,063,080 13,529,769 14,374,473 8 Years Later 15,486,955 13,853,735 13,730,935 9 Years Later 15,489,438 14,037,964 10 Years Later 15,504,381 Cumulative Redundancy (Deficiency) $8,006,753 $9,563,471 $9,187,507 $6,875,429 $3,061,424 $(2,267,694) $1,486,430 ========= ========= ========= ========= ========= =========== ========= Gross Liability for Unpaid Losses and Loss Adjustment Expenses $23,011,868 $26,294,199 $32,370,752 Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (2,187,829) (4,794,421) (4,737,448) ---------- ---------- ---------- Net Liability for Unpaid Losses and Loss Adjustment Expenses $20,824,039 $21,499,778 $27,633,304 ========== ========== ========== Gross Liability Reestimated $23,757,220 $25,117,074 $28,999,151 Ceded Liability Reestimated (5,994,605) (1,349,602) (2,852,277) ---------- ---------- ---------- Net Liability Reestimated $17,762,615 $23,767,472 $26,146,874 ========== ========== ========== Gross Reserve Redundancy (Deficiency) $(745,352) $1,177,125 $3,371,601 ========= ========= =========
CRUSADER INSURANCE COMPANY ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Fiscal Year Ended Fiscal Year Ended December 31 March 31 ------------------------------------ 1996 1996 1997 1998 ---- ---- ---- ---- (Nine Months) Reserve for Unpaid Losses and Loss Adjustment Expenses $32,682,153 $37,111,846 $40,591,248 $40,374,232 Paid Cumulative as of 1 Year Later 7,019,175 10,996,896 12,677,646 2 Years Later 15,292,415 19,488,853 3 Years Later 20,898,580 Reserves Reestimated as of 1 Year Later 31,232,388 32,838,369 35,730,603 2 Years Later 28,636,286 31,086,210 3 Years Later 28,074,691 Cumulative Redundancy (Deficiency) $4,607,462 $6,025,636 $4,860,645 ========= ========= ========= Gross Liability for Unpaid Losses and Loss Adjustment Expenses $37,006,458 $39,740,865 $42,004,851 $41,513,945 Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (4,324,305) (2,629,019) (1,413,603) (1,139,713) ---------- ---------- --------- --------- Net Liability for Unpaid Losses and Loss Adjustment Expenses $32,682,153 $37,111,846 $40,591,248 $40,374,232 ========== ========== ========== ========== Gross Liability Reestimated $30,541,435 $35,583,279 $45,072,241 Ceded Liability Reestimated (2,466,744) (4,497,069) (9,341,638) ---------- ---------- ---------- Net Liability Reestimated $28,074,691 $31,086,210 $35,730,603 ========== ========== ========== Gross Reserve Redundancy (Deficiency) $6,465,023 $4,157,586 $(3,067,390) ========= ========= ==========
5 The following table provides an analysis of the rollforward of Crusader's losses and loss adjustment expenses, including a reconciliation of the ending balance sheet liability for the periods indicated:
Fiscal Year Ended December 31 -------------------------------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Reserve for unpaid losses and loss adjustment expenses at beginning of year - net of reinsurance $40,591,248 $37,111,846 $32,682,153 ---------- ---------- ---------- Incurred losses and loss adjustment expenses Provision for insured events of current year 22,454,229 23,564,325 16,251,499 (Decrease) in provision for events of prior years (*) (4,860,647) (4,275,759) (1,449,765) ---------- ---------- ---------- Total losses and loss adjustment expenses 17,593,582 19,288,566 14,801,734 ---------- ---------- ---------- Payments Losses and loss adjustment expenses attributable to insured events of the current year 5,132,952 4,812,268 3,352,866 Losses and loss adjustment expenses attributable to insured events of prior years 12,677,646 10,996,896 7,019,175 ---------- ---------- --------- Total payments 17,810,598 15,809,164 10,372,041 ---------- ---------- ---------- Reserve for unpaid losses and loss adjustment expenses at end of year - net of reinsurance $40,374,232 $40,591,248 $37,111,846 Reinsurance recoverable on unpaid losses and loss adjustment expenses at end of year 1,139,713 1,413,603 2,629,019 --------- --------- --------- Reserve for unpaid losses and loss adjustment expenses at end of year per balance sheet , gross of reinsurance (**) $41,513,945 $42,004,851 $39,740,865 ========== ========== ==========
(*) Decreases in incurred losses and loss adjustment expenses related to the indicated prior years reflect favorable loss experience during these years attributable to a number of combined factors which have produced favorable frequency and severity trends in recent years. In addition, actuarial assumptions based on historical trends have proven to be conservative. (**) 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 generally accepted accounting practices as assets rather than netted against the corresponding liability for such items on the balance sheet. 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. Due to certain sales cut-off adjustments, statutory net premiums written differ slightly from those reported on the Company's financial statements 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 which establishes a permissible net premium to surplus ratio, guidelines established by the National Association of Insurance Commissioners provide that such ratio should generally be no greater than 3 to 1.
Twelve Months Ended ----------------------------------------------------------------------------------- December 31 March 31 ------------------------------------------------ ---------------------------- Statutory: 1998 1997 1996 1996 1995 - - ---------- ---- ---- ---- ---- ---- Net Premiums Written $34,203,908 $36,059,086 $36,652,776 $32,915,964 $30,785,970 Policyholders'Surplus $37,611,089 $30,899,761 $25,748,757 $22,721,183 $19,585,839 Ratio .9 to 1 1.2 to 1 1.4 to 1 1.4 to 1 1.6 to 1
6 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 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 last examination of Crusader by the insurance department covered the three years ended December 31, 1997. The report of examination dated January 20, 1999, reported no exceptions to Crusader's statutory financial statements. 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. At December 31, 1998, Crusader's adjusted capital was well in excess of the required capital levels. California Insurance Guarantee Association - - ------------------------------------------ In 1969, the California Insurance Guarantee Association ("CIGA") was created pursuant to California law 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. Crusader 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 incurred in liquidating an insolvent insurer. In a particular year, Crusader cannot be assessed an amount greater than 1% of its premiums written in the preceding year. California Insurance Code Sections 1063.5 and 1063.14 allow Crusader to recoup assessments by surcharging policyholders. No assessment was made by CIGA for the 1998 or 1997 calendar years. 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 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 7 constitute 10% or more of the voting securities of a California insurance company or a person that 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. Crusader has been rated A- (Excellent) by A.M. Best Company since its initial rating in 1990. OTHER INSURANCE OPERATIONS -------------------------- General Agency Operations - - ------------------------- The Company's general agency subsidiaries are as follows: Unifax primarily sells and services commercial multiple peril "business package" insurance policies. In addition, it also sells and services commercial liability, commercial property, and workers' compensation insurance policies. Unifax's workers' compensation policies are sold in Arizona and California for non-affiliated insurers. All other policies are sold and serviced for Crusader by Unifax in Arizona, California, Kentucky, Montana, Nevada, Ohio, Oregon, Pennsylvania, Texas, and Washington. Bedford Insurance Services, Inc., ("Bedford") sells and services daily automobile rental policies in most states for a non-affiliated insurer. National Coverage Corporation ("NCC") renewed and serviced commercial and personal automobile policies in California for a non-affiliated insurer. This program was terminated in August 1996, and the corporation is now inactive. 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 service fee from the customer. These subsidiaries all hold licenses issued by the California Department of Insurance and other states where applicable. Insurance Claim Adjusting Operation - - ----------------------------------- The Company's subsidiary U.S. Risk Managers, Inc., ("U.S. Risk") provides insurance claim adjusting services to the non-affiliated property and casualty insurance company that Bedford represents as a general agent. These services consist of receiving, reserving, adjusting, paying and accounting for insurance claims. U.S. Risk engages independent field examiners for all work performed outside the Company's office. U.S. Risk operates under a license issued by the California Department of Insurance and other states where applicable. 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. 8 Insurance Premium Finance Operation - - ----------------------------------- American Acceptance Corporation ("AAC") is a licensed insurance premium finance company which 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. Currently, AAC is only financing Crusader policies. Health and Life Insurance Operations - - ------------------------------------ The Company's subsidiaries National Insurance Brokers, Inc., ("NIB") and American Insurance Brokers, Inc., ("AIB") market medical, dental, life, and accidental death and dismemberment insurance through non-affiliated insurance companies for individuals and groups. The services provided consist of marketing, billing and collection, accounting, and customer service. For their services, these subsidiaries receive a commission from the insurance company. Most of the business is produced through independent insurance agents and brokers who receive a commission from NIB or AIB. NIB and AIB hold licenses issued by the California Department of Insurance. All business is currently written in the State of California. Association Operation - - --------------------- The Company's subsidiary Insurance Club, Inc., DBA The American Association for Quality Health Care ("AAQHC"), is a membership association which provides various consumer benefits to its members, including participation in group health care and life insurance policies which AAQHC negotiates for the Association. For these services, AAQHC receives membership and fee income from its members. 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 fixed maturity investments to high grade obligations with a maximum term of eight years and a maximum investment in any one issuer of $1,500,000. This dollar limitation excludes bond premiums paid in excess of par value and U.S. government or U.S. government guaranteed issues. All investments in municipal securities are pre-refunded and secured by U.S. treasury securities. Short-term cash investments consist of bank money market accounts, certificates of deposit, commercial paper, a U.S. government obligation money market fund, and U.S. treasury bills. These short-term investments are either U.S. government obligations, FDIC insured or are in an institution with a Moody's rating of P1 and/or Standard & Poor's rating of A1. All of the Company's investments are readily marketable and could be liquidated without any material financial impact. 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 As of December 31 As of December 31 1998 1997 1996 ------------------------ ---------------------- --------------------- Amortized Market Amortized Market Amortized Market Type of Security Cost Value Cost Value Cost Value ---------------- ---- ----- ---- ----- ---- ----- Certificates of deposit $ 200 $ 200 $ 500 $ 500 $ 798 $ 798 U.S. treasury securities 9,610 10,098 15,480 15,794 22,447 22,613 Industrial and miscellaneous taxable bonds 52,404 54,011 31,765 32,489 13,106 13,440 State and municipal tax-exempt bonds 34,144 35,164 38,361 39,183 39,634 40,258 ------ ------ ------ ------ ------ ------ Total fixed maturity investments 96,358 99,473 86,106 87,966 75,985 77,109 Short-term cash investments 6,574 6,574 6,137 6,137 4,862 4,862 Equity investments 504 481 230 223 - - ------- ------- ------ ------ ------ ------ Total investments $103,436 $106,528 $92,473 $94,326 $80,847 $81,971 ======= ======= ====== ====== ====== ======
9 At December 31, 1998, the Company had a net unrealized gain on all investments of $3,091,906 before income taxes. The maturity dates of the Company's fixed maturity investments were as follows:
(Amounts in Thousands) -------------------------------------------------------------- As of December 31, 1998 As of December 31, 1997 Amortized Market Amortized Market --------------------------- ------------------------ Fixed maturities due Cost Value Cost Value ---- ----- ---- ----- Within 1 year $ 8,887 $ 8,935 $11,073 $11,109 Beyond 1 year but within 5 years 60,551 62,555 46,082 47,126 Beyond 5 years but within 10 years 26,920 27,983 28,951 29,731 ------ ------ ------ ------ Total $96,358 $99,473 $86,106 $87,966 ====== ====== ====== ======
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 must be priced before its costs are known. Insurance Company and General Agency Operations (Property & Casualty) - - --------------------------------------------------------------------- The Company's property and casualty insurance business continues to be very competitive. 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 with the general agents who produce business for them. Many of these general agents offer more products than Crusader. 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. Insurance Claim Adjusting Operation - - ----------------------------------- The insurance claim adjusting operation generates all its business from insurance policies produced by its sister company Bedford, for a non-affiliated insurance company. Competition is not a major factor as long as U.S. Risk produces a quality product at a fair price. The growth of U.S. Risk is dependent on the growth of Bedford. Insurance Premium Financing Operation - - ------------------------------------- The insurance premium financing operation currently finances only Crusader policies written through Unifax. Although competition is intense in the premium finance business, the competitive pricing, the quality of its service, and the ease and convenience of financing with AAC has made its growth and profitability possible. AAC's growth is dependent on the growth of Crusader and Unifax. Health and Life Insurance Operations - - ------------------------------------ Competition in the health and life insurance business is also intense. Approximately 95% of the Company's present health and life business is from the CIGNA HealthCare medical and dental plan programs. This percentage is slightly higher than the prior year. The Company is continuing its efforts to diversify and offer a wider variety of products to its customers, and it believes that this effort will make it more competitive and should increase future revenues. 10 EMPLOYEES --------- On March 5, 1999, the Company employed 142 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. 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 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. The Company is 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 has 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. Item 4. Submission of Matters to a Vote of Security Holders - - ------------------------------------------------------------- None. PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - - -------------------------------------------------------------------------------- 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) and dividends paid during the last two comparable twelve month periods are as follows: High Low Dividend Quarter Ended Price Price Declared ------------- ------ ------- -------- March 31, 1997 10 7/8 9 5/8 June 30, 1997 11 1/4 9 3/4 $0.07 September 30, 1997 11 3/4 10 3/4 December 31, 1997 14 1/8 11 1/2 March 31, 1998 18 1/8 12 $0.07 June 30, 1998 16 3/8 14 5/8 September 30, 1998 15 1/4 9 December 31, 1998 14 1/8 10 11 As of December 31, 1998, the approximate number of shareholders of record of the Company's common stock was 600. In addition, the Company estimates beneficial owners of the Company's common stock held in the name of nominees to be approximately 1,000. The Company has declared a cash dividend on its common stock annually since June 24, 1991. The Company's intention is to declare annual cash dividends subject to continued profitability and cash requirements. On May 1, 1998, the Company declared an annual cash dividend of $0.07 per common share payable on August 14, 1998, to shareholders of record on July 31, 1998. On March 10, 1999, the Company declared an annual cash dividend of $0.25 per common share payable on July 15, 1999, to shareholders of record on July 1, 1999. 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). The maximum dividend that may be made without prior approval is $8,243,434 as of December 31, 1998. From January 1, 1998, to December 31, 1998, the Company issued an aggregate of 90,082 shares of its common stock upon exercise of employee stock options granted under the Unico American Corporation Employee Incentive Stock Option Plan. These shares were issued to an aggregate of six employees of the Company. Of these shares, an aggregate of 73,613 shares were issued in exchange for an aggregate of 20,643 shares of common stock and an aggregate of 16,469 shares were issued in exchange for an aggregate of $57,643.75 in cash. These shares were acquired for investment and without a view to the public distribution or resale thereof, and the issuance thereof was exempt from the registration requirements under the Securities Act of 1933, as amended, under Section 4(2) thereof as transactions not involving a public offering. Item 6. Selected Financial Data - - --------------------------------
Fiscal Year Ended ----------------------------------------------------------------------------------------- December 31 March 31 ---------------------------------------------------- ------------------------------ 1998 1997 1996 1996 1995 ---- ---- ---- ---- ---- (Nine Months) Total revenues $47,544,270 $48,290,721 $34,884,657 $42,468,474 $39,444,223 Total costs and expenses 34,789,372 37,301,688 27,505,670 34,060,183 34,486,546 ---------- ---------- ---------- ---------- ---------- Income before taxes $12,754,898 $10,989,033 $7,378,987 $8,408,291 $4,957,677 Net income $8,708,669 $7,654,362 $5,174,510 $5,947,481 $3,792,179 Basic earnings per share $1.41 $1.25 $0.87 $1.00 $0.64 Diluted earnings per share $1.36 $1.20 $0.83 $0.97 $0.63 Cash dividends per share $0.07 $0.07 $0.07 $0.07 $0.07 Total assets $121,717,643 $112,942,384 $104,451,322 $95,817,377 $87,456,701 Stockholders' equity $54,168,082 $45,060,784 $37,355,419 $32,387,158 $26,147,827
Item 7. Management's Discussion and Analysis of Financial Condition and - - ------------------------------------------------------------------------ Results of Operations - - --------------------- In December 1996, the Company changed its fiscal year end from March 31 to December 31, effective December 31, 1996. As a result of this change, the Company's fiscal year ended December 31, 1996, consisted of nine months. For that reason, management's discussion and analysis includes many comparisons of the Company's fiscal year ended December 31, 1997, which consists of twelve months, to the comparable twelve month period of the prior year. The financial information for the unaudited twelve month period ended December 31, 1996, is included in this discussion for comparisons. 12 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. 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. Cash and investments (excluding unrealized gains) at December 31, 1998, were $103,713,721 compared to $92,530,294 at December 31, 1997, a 12% increase. Crusader's cash and investments at December 31, 1998, was $97,597,956, or 94% of the total held by the Company compared to $88,456,803 or 96% of the total held by the Company at December 31, 1997. 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 to maturity. The Company's investments are as follows:
December 31, 1998 December 31, 1997 December 31, 1996 ----------------- ----------------- ----------------- Amount % Amount % Amount % ------ -- ------ -- ------ -- Fixed maturities (at amortized cost) Certificates of deposit $ 200,000 - $ 500,000 1 $ 798,000 1 U.S. treasury securities 9,610,487 10 15,480,258 18 22,447,391 30 Industrial and miscellaneous (taxable) 52,403,981 54 31,765,034 37 13,105,416 17 State and municipal (tax exempt) 34,144,344 36 38,361,279 44 39,634,159 52 ---------- -- ---------- -- ---------- -- Total fixed maturity investments 96,358,812 100 86,106,571 100 75,984,966 100 ---------- === ---------- === ---------- === Short-term cash investments (at cost) Certificates of deposit 425,000 6 225,000 4 125,000 3 Commercial paper 3,425,000 52 4,750,000 77 2,810,000 58 Bank money market accounts 694,834 11 368,743 6 329,597 7 U.S. gov't obligation money market fund 1,290,108 20 58,032 1 814,713 16 Short-term U.S. treasury 735,346 11 732,216 12 757,653 15 Bank savings accounts 3,574 - 3,504 - 24,800 1 --------- --- --------- --- --------- --- Total short-term cash investments 6,573,862 100 6,137,495 100 4,861,745 100 --------- === --------- === --------- === Equity investments (at cost) 503,502 230,460 - ----------- ---------- ---------- Total investments $103,436,176 $92,474,526 $80,846,711 =========== ========== ==========
The tax exempt interest income earned (net of bond premium and discount amortization) during the fiscal year ended December 31, 1998, was $1,698,211 compared to $1,809,043 in the fiscal year ended December 31, 1997. In the twelve month period ended December 31, 1996, tax exempt interest income earned totaled $1,770,382. The Company's investment policy limits investments in any one issuer. This limit was raised from $1,000,000 to $1,500,000 in 1997. This limitation excludes bond premiums paid in excess of par value and U.S. government or U.S. government guaranteed issues. All of the Company's fixed maturity investments are high-grade investment quality, all state and municipal tax exempt fixed maturity investments are pre-refunded issues, and all certificates of deposit are FDIC insured. 13 AAC had a bank line of credit with a variable rate of interest referenced to the bank's LIBOR rate. The bank note payable was paid in full on July 3, 1997, resulting in no amounts being outstanding under the bank credit line. The credit line matured on September 2, 1998, and was not renewed. AAC did not borrow against its line of credit in 1998 or 1997. The maximum and average bank note payable and weighted average interest rate are as follows: Fiscal Year Ended December 31 -------------------------------- 1998 1997 ---- ---- Maximum bank note payable - $750,001 Average bank note payable - $296,576 Weighted average interest rate - 7.3% In addition to the AAC line of credit, Unico has a $2,000,000 line of credit with Union Bank. Interest on this line is referenced to LIBOR and is payable monthly. The agreement contains certain covenants including maintenance of certain financial ratios. This credit line expires September 2, 1999, at which time it is expected to be renewed. As of December 31, 1998 and 1997, no amounts were borrowed. 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 $2,867,099, statutory deposits of $2,725,000, and dividend restriction between Crusader and Unico (See Item 1 - Business - Insurance Company Operation - Holding Company Act) 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. Dividends paid by Crusader to Unico were $1,500,000 in 1998 and $1,500,000 in 1997. These funds were invested by Unico in U.S. treasury notes and high grade commercial paper. Crusader's statutory capital and surplus as of December 31, 1998, was $37,611,089, an increase of $6,711,328 (22%) over December 31, 1997. Crusader's statutory capital and surplus as of December 31, 1997, was $30,899,761, an increase of $5,151,004 (20%) over December 31, 1996. There are no material commitments for capital expenditures as of the date of this report. YEAR 2000 - - --------- The Company has initiated a review of all computer programs to ensure that all computer systems will function properly with respect to dates in the year 2000 and thereafter. The Year 2000 issue is the result of computer programs being written utilizing two digits rather than four digits to define a year. Any computer programs which have date sensitive software utilizing a two digit year would recognize a year of "00" as 1900 rather than 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar activities. The Company has assessed its Year 2000 issues and has made and tested the necessary modifications to its computer system. The project to review and correct all programs was completed and tested at December 31, 1998, prior to any anticipated impact on its operating systems. The costs of the project has been charged to current operations as incurred and did not have a material effect on the Company's results of operations or financial position. Crusader anticipates that any claims from its policyholders due to Year 2000 events will not be material. Any business interruption losses resulting from Year 2000 events which Crusader policyholders may incur, would not be provided any coverage unless such events also caused physical damage to the insureds property, which the Company believes is not a material exposure. The Company does business with thousands of licensed agents and brokers and does not anticipate it would be materially adversely affected if some of them are temporarily unable to function due to Year 2000 problems. The Company has requested and received information from its bank and reinsurers as to their Year 2000 readiness. Based on the information received to date, the Company believes that it will not be materially adversely affected by its bank or its reinsurers. Due to the nature of the Company's business, it is not dependent on any specific suppliers, and therefore, does not expect to be adversely materially affected by them. 14 Due to the unusual nature of the problem and lack of historical experience with Year 2000 issues, it is difficult to predict with certainty what will happen after December 31, 1999. As stated above, the Company does not anticipate it will be adversely materially affected by Year 2000 events from its internal operations or from others with whom the Company directly or indirectly does business. However, other events such as general public infrastructure failures, may adversely materially affect the Company's ability to operate during such failures. The Company has no formal contingency plans for Year 2000. Results of Operations: General - - ------- The Company had net income after taxes of $8,708,669 for the fiscal year ended December 31, 1998, compared to $7,654,362 for the fiscal year ended December 31, 1997, and $6,849,327 for the twelve month period ended December 31, 1996. Total revenue for the fiscal year ended December 31, 1998, was $47,544,270 compared to $48,290,721 for the fiscal year ended December 31, 1997, and $45,880,272 for the twelve month period ended December 31, 1996. For the fiscal year ended December 31, 1998, income before taxes increased by $1,765,865 (16%) and net income increased by $1,054,307 (14%) compared to the fiscal year ended December 31, 1997. The increase in pre-tax income was primarily due to an increase of $1,347,619 (21%) in the underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) from Crusader and an increase in investment income of $735,642 (15%) (excluding realized investment gains). For the fiscal year ended December 31, 1997, income before taxes increased by $1,212,956 (12%) and net income increased by $805,035 (12%) compared to the twelve month period ended December 31, 1996. The increase in pre-tax income was primarily due to an increase of $499,418 (8%) in the underwriting profit from Crusader, an increase in investment income of $762,891 (18%) (excluding realized investment gains). The effect of inflation on the net income of the Company during the fiscal year ended December 31, 1998, 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:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Gross written premium $37,079,303 $42,273,990 $41,425,715 Net written premium $34,126,963 $35,586,046 $36,643,457 Earned premium before reinsurance $40,615,417 $42,721,222 $38,667,566 Earned premium net of reinsurance $34,915,195 $36,326,894 $34,280,116 Losses and loss adjustment expenses $17,593,582 $19,288,566 $19,201,095 Unpaid losses and loss adjustment expenses $41,513,945 $42,004,851 $39,740,865
Crusader's primary line of business is commercial multiple peril "business package" policies. This line of business represented approximately 97% of Crusader's total written premium for both fiscal years ended December 31, 1998 and 1997. 15 Crusader's written premium by state is as follows: Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) California $31,323,804 $33,048,085 $32,396,631 Washington 1,958,179 4,704,286 5,024,276 Oregon 1,289,054 2,779,691 3,052,379 Arizona 1,095,922 1,346,589 862,352 Ohio 526,004 242,751 - Pennsylvania 416,485 41,511 - Texas 239,563 - - Montana 98,612 - - Kentucky 82,584 - - Nevada 49,096 111,077 90,077 ---------- ---------- ---------- Total $37,079,303 $42,273,990 $41,425,715 ========== ========== ========== In the fiscal year ended December 31, 1998, gross written premium decreased by $5,194,687 (12%) compared to the fiscal year ended December 31, 1997. In 1998, the Company changed its marketing strategy in the states of Washington and Oregon by discontinuing marketing through an exclusive agent in those states and commencing marketing directly to all retail agents and brokers. This change resulted in a decrease of $4,236,744 or 82% of the total decrease. The Company anticipates that the long-term results of this change will be increased revenues with reduced acquisition expense and less dependence on any one large producer. The foregoing statement is a forward looking statement and actual results may differ materially. Factors which would cause the results to differ include economic conditions in the states of Washington and Oregon, willingness of retail agents and brokers to deal directly with the Company, and competitive conditions. In 1998, the Company began writing business in the states of Texas, Montana, and Kentucky and increased its writings in the states of Ohio and Pennsylvania; however, it was not enough to offset the decreases in the states of California, Arizona, and Nevada. The decrease in gross written premium in these states was primarily due to intense price competition in the marketplace. Although the Company attempts to be competitive on price, it believes that maintaining adequate rates and a favorable loss ratio is a better business strategy than increasing premiums at inadequate rates. The validity of this strategy is reflected by the continued profitable loss ratio discussed below. The Company cannot determine how long this "soft market" condition will continue. In order to grow its premium in this "soft market," the Company is attempting to increase its activities in its existing states by new marketing and incentive programs and by offering new and improved products to its agents and brokers. The Company's geographical expansion plan is based on cloning its California business in other states with similar demographics and legal/regulatory environments. The Company's business package program has been written in California since it began writing business in 1985, and it has proved to be successful. When the Company enters a new state, it initially does so on a limited basis in terms of agent contracts, products, and premium. As the Company develops experience in those states, it then places an emphasis on growth by expanding products and distribution activity. The Company plans to begin writing business in Colorado in 1999 and Illinois in 2000. Currently, agents and brokers who call for quotes on policies sold by the Company may also have to call competitors for quotes on products which the Company does not offer. Thus, Crusader competes with not only other insurance companies, but with general agents who produce business for other insurance companies. Many of these general agents offer more products than the Company and thus make it easier for the agents and brokers because they can do more business with fewer telephone calls. To provide better service to the Company's agents and brokers, the Company is currently working on additional non-affiliated insurance company products to be offered by its General Agency Operations. In addition to generating additional commission and fee income, the expansion of the General Agency Operation should benefit Crusader because more agents and brokers may do business with the Company. 16 In the fiscal year ended December 31, 1997, gross written premium increased $848,275 (2%) compared to the twelve month period ended December 31, 1996. This slight increase in written premium was primarily due to increased price competition in the marketplace. In the fiscal year ended December 31, 1998, Crusader's direct earned premium decreased $2,105,805 (5%) and net premium earned decreased $1,411,699 (4%) from the fiscal year ended December 31, 1997. The decrease in earned premium is directly related to the decrease in written premium in the current fiscal year. In the fiscal year ended December 31, 1997, Crusader's direct earned premium increased $4,053,656 (10%) and net premium earned increased $2,046,778 (6%) over the twelve month period ended December 31, 1996. The percentage of earned ceded premium to gross premium earned was 14% for the fiscal year ended December 31, 1998, 15% for the fiscal year ended December 31, 1997, and 11% for the twelve month period ended December 31, 1996. 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) to net premiums earned (the "loss ratio") and (2) the ratio of policy acquisition and general operating costs to net premiums earned (the "expense ratio"). The following table shows the loss ratios, expense ratios, and combined ratios of Crusader as derived from data prepared in accordance with generally accepted accounting principles. As shown on the table, the loss ratio continued to improve primarily due to favorable development of prior year 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.
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Loss ratio 50.4% 53.1% 56.0% Expense ratio 27.2% 29.1% 26.5% ----- ---- ---- Combined ratio 77.6% 82.2% 82.5% ===== ==== ====
The Company's future writings and growth are dependent on market conditions, competition, the Company's ability to introduce new profitable products, and its ability to expand geographically. As of December 31, 1998, Crusader was licensed as an admitted insurance company in the states of California, Arizona, Montana, Nevada, Oregon, and Washington and is approved as a non-admitted surplus lines writer in several other states. Other Insurance Operations -------------------------- Daily Automobile Rental Insurance Program - - ----------------------------------------- The daily automobile rental insurance program is produced by Bedford. Bedford receives a commission and a claim administration fee from a non-affiliated insurance company based on premium written. Commission and fee income from the daily automobile rental insurance program are as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Daily auto rental program commission and claim administration fee $807,503 $757,098 $797,481
Revenues during the fiscal year ended December 31, 1998, were $807,503 an increase of $50,405 (7%) compared to the same period of the prior year. Revenue for the fiscal year ended December 31, 1997, decreased by $40,383 (5%) compared to the twelve month period ended December 31, 1996. The daily automobile rental insurance program commission and fee income increase for the current fiscal year was primarily the result of contingent commission income of $49,430. Excluding this contingent commission, revenues increased only $975. This slight increase is due to continued price competition in the daily automobile insurance market. To avoid underwriting losses for the non-affiliated insurance company which Bedford represents, it continues to produce business only at rates which it believes to be adequate. The Company cannot determine how long this "soft market" condition will continue. 17 Commercial and Personal Automobile Insurance Program - - ---------------------------------------------------- Unifax produced commercial auto policies in California for a non-affiliated insurer and received a commission from them based on premium written. Unifax also received a policy service fee from the insured. In February 1997, management decided to discontinue writing new policies in the Unifax commercial automobile program and only serviced and renewed existing policies until the book of business was sold to an non-affiliated third party in June 1997. As consideration for the sale of this book of business, Unifax will receive a percentage of the commission earned for a two year period on policies which were in force at the time of sale. NCC renewed and serviced existing commercial and personal automobile policies in California for a non-affiliated insurer until August 31, 1996, when the NCC program was discontinued. NCC received a commission and claim administration fee from the non-affiliated insurance company based on premium written and a policy service fee from the insured. Commercial and personal auto program commission, service fee, and claim administration income are as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Commercial and personal auto program commission, service fee, and claim administration income $1,843 $82,439 $212,909
Revenue for the fiscal year ended December 31, 1998, represents net commissions received on the sale of the commercial auto program. Revenue for the fiscal year ended December 31, 1997, decreased $130,470 (61%) compared to the twelve month period ended December 31, 1996, due to the discontinuance of the commercial automobile programs. Health and Life Insurance Program - - --------------------------------- Commission income from the health and life insurance sales of NIB and AIB is as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Commission income $2,216,446 $2,083,782 $2,432,208
NIB and AIB market health and life insurance through non-affiliated insurance companies for individuals and groups. Approximately 95% of the health and life commission income in the fiscal year ended December 31, 1998, was from the CIGNA HealthCare medical and dental plan programs compared to approximately 90% in the same period of the prior year. Revenues for the fiscal year ended December 31, 1998, increased $132,664 (6%) compared to the fiscal year ended December 31, 1997. Revenues for the fiscal year ended December 31, 1997, decreased $348,426 (14%) compared the twelve month period ended December 31, 1996. Group health and life insurance programs - The increase in commission income in the health and life insurance programs is primarily a result of an increase in sales of small business group accounts and to a rate increase implemented by CIGNA in July 1998. The Company has increased the number of CIGNA products available to small groups, including life insurance, vision and dental plans, in order to acquire new accounts and retain existing accounts. Individual medical and dental programs - Commission income from the individual medical and dental programs continues to increase due to aggressive marketing and the quality of the Company's customer service. 18 Workers' Compensation Program - - ----------------------------- Unifax produces workers' compensation policies in California and Arizona for non-affiliated insurers and receives a commission from them based on premium written.
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Commission income $329,465 $298,006 $81,775
Commission income for the fiscal year ended December 31, 1998, increased $31,459 (11%) compared to the fiscal year ended December 31, 1997. For the fiscal year ended December 31, 1997 commission income increased $216,231 (264%) compared to the twelve month period ended December 31, 1996. Commission income in this program has continued to increase primarily as the result of increased sales of workers' compensation insurance and incentive bonus commissions earned as a result of the increased sales. Association Operation - - --------------------- Membership and fee income from the association program of AAQHC is as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Membership and fee income $355,781 $336,968 $326,491
Membership and fee income in the fiscal year ended December 31, 1998, increased $18,813 (6%) compared to the fiscal year ended December 31, 1997. Membership income increased $10,477 (3%) in the fiscal year ended December 31, 1997, compared to the twelve month period ended December 31, 1996. AAQHC recognized an increase in group memberships in 1998 compared to a decrease in group memberships in 1997 and has continued to increase individual and family memberships. Premium Finance Program - - ----------------------- Premium finance charges and late fees earned from financing policies are as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Premium finance charges and late fees earned $1,033,479 $1,191,503 $1,191,796 New loans 8,092 8,615 9,256
AAC, the Company's insurance premium finance subsidiary, provides premium financing to Crusader, and until February 1997 a non-affiliated insurer on commercial auto policies produced by Unifax. In February 1997, the commercial auto program with the non-affiliated insurer was discontinued. 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 to finance those policies. AAC finances policies primarily in California. Premium finance charges and late fees earned on loans decreased $158,024 (13%) in the fiscal year ended December 31, 1998, compared to the fiscal year ended December 31, 1997. The decrease was primarily a result of fewer policies being financed due to a decrease in policies being written by Crusader and an overall decrease in the number of policyholders financing policies. For the fiscal year ended December 31, 1997, premium finance charges and late fees earned on loans decreased $293 compared to the twelve month period ended December 31, 1996. 19 Service Fee Income - - ------------------ Unifax sells and services insurance policies for Crusader. The service fee charged to the policyholder by Unifax is recognized as income in the consolidated financial statements. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected in commission income or commission expense. Service fee income from Unifax is as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Service fee income $1,896,258 $2,182,074 $2,105,851 Policies written 18,306 19,305 18,359
Service fee income is primarily related to the number of policies written by Unifax. Investment Income and Net Realized Gains - - ------------------------------------------- Investment income and net realized gains are as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Interest and dividend income Insurance company operations $5,497,323 $4,855,580 $4,073,066 Other operations 234,580 140,681 160,304 --------- --------- --------- Total interest and dividend income 5,731,903 4,996,261 4,233,370 On investments Net realized investment gains 247,931 25,093 210,033 --------- --------- --------- Total $5,979,834 $5,021,354 $4,443,403 ========= ========= =========
Investment interest and dividends earned (excluding net realized gains) increased $735,642 (15%) in the fiscal year ended December 31, 1998, compared to the fiscal year ended December 31, 1997, primarily as a result of additional invested assets from operating activities. Average invested assets in the fiscal year ended December 31, 1998, (at amortized value) increased $11,294,733 (13%) compared to the fiscal year ended December 31, 1997. Investment income return based on average invested assets was 5.85% for the fiscal year ended December 31, 1998, compared to 5.77% for the fiscal year ended December 31, 1997. The mix of taxable and tax exempt securities in the portfolio affect the above investment income return percentage. Tax exempt securities, which generally carry a lower yield than taxable securities, decreased to $34,144,344 (33% of total investments) at December 31, 1998, compared to $38,361,279 (41% of total investments) at December 31, 1997. Investment interest and dividends earned (excluding net realized gains) increased $762,891 (18%) in the fiscal year ended December 31, 1997, compared to the twelve month period ended December 31, 1996, primarily as a result of additional invested assets from operating activities. Average invested assets in the fiscal year ended December 31, 1997 (at amortized value) increased $10,979,066 (15%) compared to the twelve month period ended December 31, 1996. Investment income return based on average invested assets was 5.77% for the fiscal year ended December 31, 1997, compared to 5.59% for the twelve month period ended December 31, 1996. Tax exempt securities decreased to $38,361,279 (41% of total investments) at December 31, 1997, compared to $39,634,159 (49% of total investments) at December 31, 1996. Additional information regarding investments and investment income is described in the "Management Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 20 Operating Expenses - - ------------------ Policy Acquisition Costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs which are 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 which represents a reimbursement of the acquisition costs related to the premium ceded. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. Policy acquisition costs, net of ceding commission, are as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Policy acquisition costs $9,497,857 $10,562,191 $9,102,302 Ratio to net earned premium 27% 29% 27%
Salaries and Employee Benefits increased $457,794 (12%) for the fiscal year ended December 31, 1998, compared to the fiscal year ended December 31, 1997. Salaries and employee benefits decreased $5,707 in the fiscal year ended December 31, 1997, compared to the twelve month period ended December 31, 1996.
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Salaries and employee benefits $4,215,753 $3,757,959 $3,763,666
Commissions to Agents/Brokers (not including commissions on Crusader policies which are reflected in policy acquisition costs) are generally related to gross commission income. Commissions to agents and brokers increased $8,087 (1%) for the fiscal year ended December 31, 1998, compared to the fiscal year ended December 31, 1997. An increase of 10% in the commission expense for the daily automobile program and an increase of 3% in commission expense for the health and life programs was offset by a decrease in commission expense as a result of the discontinuance of the commercial auto program. During the fiscal year ended December 31, 1997, commission expense decreased $217,776 (17%) compared to twelve month period ended December 31, 1996. This decrease was primarily related to the 14% decrease in health and life insurance commission income.
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Commission to agents/brokers $1,043,686 $1,035,599 $1,253,375
Other Operating Expenses generally do not change significantly with changes in production. This is true for both increases and decreases in production. Other operating expenses decreased $218,879 (8%) for the fiscal year ended December 31, 1998, compared to the fiscal year ended December 31, 1997. This decrease was primarily due to a $240,155 reduction in interest expense payable due to a settlement of federal income tax issues for the fiscal years ended March 31, 1990, through March 31, 1994, which were under appeal. Other operating expenses decreased $126,384 (5%) during the fiscal year ended December 31, 1997, compared to the twelve month period ended December 31, 1996. The decrease was primarily due to a decrease in interest expense of $101,425 as a result of the reduction in the Company's bank note payable.
Fiscal Year Ended Fiscal Year Ended 12 Months Ended December 31 December 31 December 31 1998 1997 1996 ---- ---- ---- (Unaudited) Other operating expenses $2,438,494 $2,657,373 $2,783,757
21 Forward Looking Statements - - -------------------------- Certain statements contained herein that are not historical facts are forward looking. These statements 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," premium rate adequacy relating to competition or regulation, actual versus estimated claim experience, regulatory changes or developments, unforeseen calamities, general market conditions, the Company's ability to introduce new profitable products, and the Company's ability to expand geographically. Item 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, 1998, consisted of the following: Fixed maturity bonds (at amortized value) $96,158,812 Short-term cash investments (at cost) 6,573,862 Equity securities (at cost) 503,503 Certificates of deposit (over 1 year) (at cost) 200,000 ----------- Total invested assets $103,436,177 =========== 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. Since inception of the Company, only nine bonds issues have been sold prior to their maturity or call date. Because fixed maturity bonds are primarily held to maturity, the change in the market value of these bonds resulting from interest rate movements are unrealized, and no gains or losses are recognized in the consolidated statement of operations. Unrealized gains and losses are reported as a separate component of stockholders' equity, net of any deferred tax effect. As of December 31, 1998, the Company's unrealized gains (net of unrealized losses) before income taxes on its fixed maturity bond portfolio was $3,113,908. Given a hypothetical parallel increase of 100 basis points in interest rates, the fair value of the fixed maturity bond portfolio would decrease by approximately $3.2 million. This decrease would not be reflected in the statement of operations except to the extent that the securities are sold. The Company's short-term investments and certificates of deposit have only minimal interest rate risk. Due to the Company's small investment in equity securities of (approximately one half of one percent of total invested assets) the Company has only minimal exposure to equity price risk. 22 Item 8. Financial Statements and Supplementary Data - - ---------------------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number Independent Auditors' Reports 24-25 Consolidated Balance Sheets as of December 31, 1998, and December 31, 1997 26 Consolidated Statements of Operations for the fiscal year ended December 31, 27 1998, the fiscal year ended December 31, 1997, the twelve months ended December 31, 1996 (unaudited), and the nine month fiscal year ended December 31, 1996. Consolidated Statement of Comprehensive Income for the fiscal year ended 28 December 31, 1998, the fiscal year ended December 31, 1997, the twelve months ended December 31, 1996 (unaudited), and the nine month fiscal year ended December 31, 1996. Consolidated Statements of Changes in Stockholders' Equity for the fiscal year 29 ended December 31, 1998, the fiscal year ended December 31, 1997, and the nine month fiscal year ended December 31, 1996. Consolidated Statements of Cash Flows for the fiscal year ended December 31, 30 1998, the fiscal year ended December 31, 1997, and the nine month fiscal year ended December 31, 1996. Notes to Consolidated Financial Statements 31
23 INDEPENDENT AUDITORS' REPORT The Board of Directors Unico American Corporation We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides 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, 1998, and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California February 24, 1999 24 INDEPENDENT AUDITORS' REPORT Board of Directors Unico American Corporation We have audited the accompanying consolidated balance sheets of Unico American Corporation and its subsidiaries as of December 31, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the nine months ended December 31, 1996, and the year ended March 31, 1996. These 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of Unico American Corporation and its subsidiaries as of December 31, 1996, and the consolidated results of operations and cash flows for the nine months ended December 31, 1996 and the year ended March 31, 1996 in conformity with generally accepted accounting principles. GETZ, KRYCLER & JAKUBOVITS Sherman Oaks, California March 20, 1997 25 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 December 31 1998 1997 ---- ---- ASSETS ------ Investments Available for sale: Fixed maturities, at market value (amortized cost: December 31, 1998 $96,358,812; December 31, 1997 $86,106,571) $99,472,720 $87,965,590 Equity securities at market ( cost: December 31, 1998 $503,503; December 31, 1997 $230,460) 481,500 223,100 Short-term investments, at cost 6,573,862 6,137,495 ----------- ---------- Total Investments 106,528,082 94,326,185 Cash 277,544 55,768 Accrued investment income 2,022,197 1,807,364 Premiums and notes receivable, net 5,922,716 7,404,606 Reinsurance recoverable: Paid losses and loss adjustment expenses 146,205 56,379 Unpaid losses and loss adjustment expenses 1,139,713 1,413,603 Prepaid reinsurance premiums 19,452 945,563 Deferred policy acquisition costs 4,665,772 4,886,684 Property and equipment (net of accumulated depreciation) 205,369 203,709 Deferred income taxes 208,976 1,005,865 Other assets 581,617 836,658 ----------- ----------- Total Assets $121,717,643 $112,942,384 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES - - ----------- Unpaid losses and loss adjustment expenses $41,513,945 $42,004,851 Unearned premiums 18,136,895 21,673,009 Advance premium and premium deposits 2,329,356 2,091,180 Accrued expenses and other liabilities 5,418,459 2,095,567 Income taxes payable 150,906 16,993 ---------- ---------- Total Liabilities $67,549,561 $67,881,600 ---------- ---------- STOCKHOLDERS' EQUITY - - --------------------- Common stock, no par - authorized 10,000,000 shares, issued and outstanding shares 6,223,424 at December 31, 1998, and 6,153,706 at December 31, 1997 $2,895,702 $2,838,058 Accumulated other comprehensive income 1,998,536 1,222,095 Retained earnings 49,273,844 41,000,631 ---------- ---------- Total Stockholders' Equity $54,168,082 $45,060,784 ---------- ---------- Total Liabilities and Stockholders' Equity $121,717,643 $112,942,384 =========== ===========
See accompanying notes to consolidate financial statements. 26 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
12 Months Fiscal Year Fiscal Year Ended Ended Ended December 31 December 31 December 31 1998 1997 1996 1996 ---- ---- ---- ---- (Unaudited) (Nine Months) REVENUES Insurance Company Revenues Premium earned $40,615,417 $42,721,222 $38,667,566 $29,373,374 Premium ceded 5,700,222 6,394,328 4,387,450 3,307,085 ---------- ---------- ---------- ---------- Net premium earned 34,915,195 36,326,894 34,280,116 26,066,289 Net investment income 5,497,323 4,855,580 4,073,066 3,115,110 Net realized investment gains 247,931 25,093 210,033 190,491 Other income 1,183 428 215 185 ---------- ---------- ---------- ---------- Total Insurance Company Revenues 40,661,632 41,207,995 38,563,430 29,372,075 Other Revenues from Insurance Operations Gross commissions and fees 5,607,538 5,740,589 5,956,941 4,488,601 Investment income 234,580 140,681 160,304 117,774 Finance charges and late fees earned 1,033,479 1,191,503 1,191,796 898,171 Other income 7,041 9,953 7,801 8,036 ---------- ---------- ---------- ---------- Total Revenues 47,544,270 48,290,721 45,880,272 34,884,657 ---------- ---------- ---------- ---------- EXPENSES Losses and loss adjustment expenses 17,593,582 19,288,566 19,201,095 14,801,734 Policy acquisition costs 9,497,857 10,562,191 9,102,302 6,887,173 Salaries and employee benefits 4,215,753 3,757,959 3,763,666 2,850,985 Commissions to agents/brokers 1,043,686 1,035,599 1,253,375 946,791 Other operating expenses 2,438,494 2,657,373 2,783,757 2,018,987 ---------- ---------- ---------- ---------- Total Expenses 34,789,372 37,301,688 36,104,195 27,505,670 ---------- ---------- ---------- ---------- Income Before Taxes 12,754,898 10,989,033 9,776,077 7,378,987 Income Tax Provision 4,046,229 3,334,671 2,926,750 2,204,477 --------- --------- --------- --------- Net Income $8,708,669 $7,654,362 $6,849,327 $5,174,510 ========= ========= ========= ========= PER SHARE DATA: Basic Shares Outstanding 6,194,133 6,132,096 5,967,667 5,970,977 Basic Earnings Per Share $1.41 $1.25 $1.15 $0.87 Diluted Shares Outstanding 6,420,580 6,401,359 6,240,855 6,250,930 Diluted Earnings Per Share $1.36 $1.20 $1.10 $0.83
See accompanying notes to consolidated financial statements. 27 UNICO AMERICAN CORPORATION AND SUBSIDIARIES STATEMENT OF COMPREHENSIVE INCOME
12 Months Fiscal Year Fiscal Year Ended Ended Ended December 31 December 31 December 31 1998 1997 1996 1996 ---- ---- ---- ---- (Unaudited) (Nine Months) Net income $8,708,669 $7,654,362 $6,849,327 $5,174,510 Other changes in comprehensive income net of tax: Unrealized gains (losses) on securities classified as available-for-sale arising during the period 839,134 480,091 (438,196) 210,217 Less: reclassification adjustment for gains included in net income (62,693) - - - --------- --------- --------- --------- Comprehensive Income $9,485,110 $8,134,453 $6,411,131 $5,384,727 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 28 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, THE FISCAL YEAR ENDED DECEMBER 31, 1997, AND THE NINE MONTHS ENDED DECEMBER 31, 1996
Common Shares Unrealized ------------------------ Investment Issued and Gains & Retained Outstanding Amount (Losses) Earnings Total ----------- ------ ------- -------- ----- Balance - March 31, 1996 5,957,738 $2,834,801 $531,787 $29,020,570 $32,387,158 Net shares issued for exercise of stock options 71,043 1,621 - - 1,621 Cash dividend paid ($0.07 per share) - - - (418,087) (418,087) Change in market value of investments, net of deferred income tax - - 210,217 - 210,217 Net income - - - 5,174,510 5,174,510 --------- --------- ------- ---------- ---------- Balance - December 31, 1996 6,028,781 2,836,422 742,004 33,776,993 37,355,419 Net shares issued for exercise of stock options 124,787 1,636 - - 1,636 Shares canceled or adjusted 138 - - - - Cash dividend paid ($0.07 per share) - - - (430,724) (430,724) Change in market value of investments, net of deferred income tax - - 480,091 - 480,091 Net income - - - 7,654,362 7,654,362 --------- --------- --------- ---------- ---------- Balance - December 31, 1997 6,153,706 2,838,058 1,222,095 41,000,631 45,060,784 Net shares issued for exercise of stock options 69,439 57,644 57,644 Shares canceled or adjusted 279 Cash dividend paid ($0.07 per share) (435,456) (435,456) Change in market value of investments, net of deferred income tax 776,441 776,441 Net income - - - 8,708,669 8,708,669 --------- --------- --------- ---------- ---------- Balance - December 31, 1998 6,223,424 $2,895,702 $1,998,536 $49,273,844 $54,168,082 ========= ========= ========= ========== ==========
See accompanying notes to consolidated financial statements. 29 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Cash flows from operating activities: Net income $8,708,669 $7,654,362 $5,174,510 Adjustments to reconcile net income to net cash from operations Depreciation and amortization 98,585 104,029 83,488 Bond amortization, net 644,726 579,228 431,502 Net realized (gain) on sale of securities (247,931) (25,093) (190,491) Changes in assets and liabilities Premium, notes and investment income receivable 1,267,057 1,130,420 (940,098) Reinsurance recoverable 184,064 1,611,980 1,454,711 Prepaid reinsurance premiums 926,111 702,243 (284,182) Deferred policy acquisitions costs 220,912 66,401 (619,377) Other assets 255,041 (197,802) 232,479 Reserve for unpaid losses and loss adjustment expenses (490,906) 2,263,986 2,734,407 Unearned premium reserve (3,536,114) (447,232) 2,473,739 Advance premium and premium deposits 238,176 2,083 (257,666) Accrued expenses and other liabilities 3,305,659 (300,129) 63,301 Income taxes current/deferred 484,230 267,463 (185,648) ---------- ---------- ---------- Net Cash Provided from Operations 12,058,279 13,411,939 10,170,675 ---------- ---------- ---------- Investing Activities Purchase of fixed maturity investments (24,797,224) (19,934,951) (12,981,849) Proceeds from maturity of fixed maturity investments 12,898,500 8,198,000 4,628,378 Proceeds from sale of fixed maturity investments 1,041,250 996,856 - Purchase of equity securities - cost (3,583,913) (1,019,500) (2,253,112) Proceeds from sale of equity securities 3,480,043 814,132 3,438,841 Net increase in short-term investments (397,102) (1,236,490) (1,373,335) Additions to property and equipment (100,245) (77,766) (34,841) ------------ ------------ ----------- Net Cash (Used) by Investing Activities (11,458,691) (12,259,719) (8,575,918) ---------- ---------- --------- Financing Activities Proceeds from issuance of common stock 57,644 1,636 1,621 Repayment of note payable - bank - (750,001) (1,250,000) Dividends paid to shareholders (435,456) (430,724) (418,087) --------- ----------- ----------- Net Cash (Used) by Financing Activities (377,812) (1,179,089) (1,666,466) ------- --------- --------- Net increase (decrease) in cash 221,776 (26,869) (71,709) Cash at beginning of year 55,768 82,637 154,346 -------- ------ ------- Cash at End of Year $277,544 $55,768 $82,637 ======= ====== ====== Supplemental cash flow information Cash paid during the period for: Interest $60,116 $21,950 $76,312 Income taxes $3,430,000 $2,970,000 $2,515,000
See accompanying notes to consolidated financial statements. 30 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. Unico American Corporation and its subsidiaries (the "Company"), all of which are wholly owned provides primarily in California, property, casualty, health and life insurance, and related premium financing. Change of Fiscal Year - - --------------------- On December 16, 1996, the Board of Directors approved a change in the Company's fiscal year end from March 31 to December 31 effective December 31, 1996. As a result of the change, the Company's Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the fiscal year ended December 31, 1996, covers nine months. Principles of Consolidation - - --------------------------- The 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 consolidated financial statements have been prepared in conformity with 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 which differs from generally accepted accounting principles. Use of Estimates - - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosure of certain 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 from those estimates. Investments - - ----------- All of the Company's fixed maturity investments are classified as available-for sale and are stated at market value. Although classified as available-for-sale, the Company's 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 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. The Company had net unrealized investment gains of $1,998,536 as of December 31, 1998, and net unrealized investment gains of $1,222,095 as of December 31, 1997. Property and Equipment - - ---------------------- Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using accelerated depreciation 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. 31 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - - --------------------------------------------------------------- Fair Value of Financial Instruments - - ----------------------------------- The Company has used the following methods and assumptions in estimating its fair value disclosures: 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. Cash and Short-Term Investments - The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Premiums and Notes Receivable - The carrying amounts reported in the balance sheet for these instruments approximate the fair values. Earnings Per Share - - ------------------ During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share," which requires presentation of basic and diluted earnings per share for all publicly traded companies effective for fiscal years ending after December 15, 1997. Basic earnings per share excludes the impact of common share equivalents and is based upon the weighted average common shares outstanding. Diluted earnings per share utilizes the average market price per share when applying the treasury stock method in determining common share equivalents. 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. Revenue Recognition - - ------------------- a. General Agency Operations ----------------------------- Commissions and service 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 which approximates the interest (actuarial) method. Losses and Loss Adjustment Expenses - - ----------------------------------- The process of establishing loss reserves involves significant judgment. The reserves for unpaid losses and loss adjustment expenses are based on estimates of ultimate claim cost, including claims incurred but not reported. These estimates are reviewed regularly, and as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in results of operations in the period in which they become known. 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. 32 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - - --------------------------------------------------------------- Restricted Funds - - ---------------- Restricted funds are as follows: Fiscal Year Ended December 31 ----------------------------- 1998 1997 ---- ---- Restricted Funds: Premium trust funds (1) $2,867,099 $2,668,472 Assigned to state agencies (2) 2,725,000 2,725,000 --------- --------- Total restricted funds $5,592,099 $5,393,472 ========= ========= (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 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 direct and indirect costs associated with the production of insurance policies such as commissions, premium taxes, and certain other underwriting expenses which 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 are 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. Comprehensive Income - - -------------------- Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997, was adopted by the Company in 1998. The Company is reporting comprehensive income for the same periods as presented on the Consolidated Statements of Operations. The implementation of SFAS No. 130 had no effect on the financial position or results of operations of the Company. 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 for the fiscal year ended December 31, 1998, and has identified its insurance company operation as its primary reporting segment. Revenues from this segment comprise 85.5% of consolidated revenues. The Company's remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues. 33 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - - --------------------------------------------------------------- The insurance company operation is conducted through Crusader, which as of December 31, 1998, is 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, 1998, 97% of Crusader's business was commercial multiple peril "business package" insurance policies. This business is written in all of the states in which it is licensed. Commercial multiple peril policies provide a combination of property and liability coverage for businesses and business property. 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. Crusader also writes separate commercial property and commercial liability policies. Revenues, income before income taxes and assets by segment were as follows:
Fiscal Year Fiscal Year 12 Months Fiscal Year Ended Ended Ended Ended December 31 December 31 December 31 December 31 1998 1997 1996 1996 ---- ---- ---- ---- (Unaudited) (Nine Months) Revenues Insurance company operation $40,661,632 $41,207,995 $38,563,430 $29,372,075 ---------- ---------- ---------- ---------- Other insurance operations 17,962,867 19,699,853 19,659,943 15,020,813 Intersegment elimination (1) (11,080,229) (12,617,127) (12,343,101) (9,508,231) ---------- ---------- ----------- ----------- Total other insurance operations 6,882,638 7,082,726 7,316,842 5,512,582 --------- --------- --------- --------- Total revenues $47,544,270 $48,290,721 $45,880,272 $34,884,657 ========== ========== ========== ========== Income before income taxes Insurance company operation $11,753,137 $9,086,143 $7,045,273 $5,123,899 Other insurance operations 1,001,761 1,902,887 2,730,804 2,255,088 --------- --------- --------- --------- Total income before income taxes $12,754,898 $10,989,030 $9,776,077 $7,378,987 ========== ========== ========= ========= Assets Insurance company operation $104,779,787 $97,075,764 $89,277,712 $89,277,712 Intersegment eliminations (2) (150,097) (1,475,299) (3,244,509) (3,244,509) ----------- ---------- ---------- ---------- Total Insurance company operation 104,629,690 95,600,465 86,033,203 86,033,203 Other insurance operations 17,087,953 17,341,919 18,418,119 18,418,119 ---------- ---------- ---------- ---------- Total assets $121,717,643 $112,942,384 $104,451,322 $104,451,322 =========== =========== =========== =========== (1) Intersegment revenue eliminations reflect commissions paid by Crusader to Unifax. (2) Intersegment asset eliminations reflect the elimination of Crusader receivables and Unifax payables.
34 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - - -------------------------------------------------------------- Reclassifications - - ----------------- Certain reclassifications have been made to prior year balances to conform to the current year presentation. Recently Issued Accounting Standards - - ------------------------------------ Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" is effective for financial statements beginning after December 15, 1998. SOP 98-1 requires that the cost of internally developed software be capitalized. The Company will implement this standard during the first quarter of 1999 and is currently evaluating the impact that it will have on the 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. Deposit premiums represent funds received from the Company's daily automobile rental program which guarantee the payment of premiums for past coverage months. These deposits are required when information such as gross receipts or number of rental cars is required to compute the actual premium due, but is not available until after the coverage month. NOTE 3 - INVESTMENTS - - --------------------- A summary of net investments and related income is as follows: Investment income is summarized as follows:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Fixed maturities $5,463,418 $4,694,838 $3,041,485 Equity securities 8,095 48,960 46,144 Short-term investments 260,725 253,053 145,855 --------- --------- --------- Total investment income 5,732,238 4,996,851 3,233,484 Less investment expenses 335 590 600 --------- --------- --------- Net investment income $5,731,903 $4,996,261 $3,232,884 ========= ========= =========
Net realized investment gains and (losses) are summarized as follows:
Fiscal Year Ended December 31 ----------------------------- 1998 1996 1996 ---- ---- ---- (Nine Months) Gross realized gains: Fixed maturities $ 78,758 $ - $ - Equity securities 170,540 25,093 196,413 Gross realized (losses): Equity securities (1,367) - ( 5,922) ------- ------ ------- Net realized investment gains $247,931 $25,093 $190,491 ======= ====== =======
35 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - INVESTMENTS (continued) - - -------------------------------- A summary of the unrealized appreciation (depreciation) on investments carried at market and the applicable deferred federal income taxes is shown below:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Gross unrealized appreciation: Fixed maturities $3,181,405 $1,878,723 $1,183,881 Equity securities - - - Gross unrealized (depreciation): Fixed maturities (67,497) (19,704) (59,633) Equity securities (39,238) (7,360) - --------- --------- --------- Net unrealized appreciation on investments 3,074,670 1,851,659 1,124,248 Deferred federal income taxes (1,076,134) (629,564) (382,244) --------- --------- ------- Net unrealized appreciation, net of deferred income taxes $1,998,536 $1,222,095 $ 742,004 ========= ========= =======
The amortized cost and estimated market value of fixed maturity investments at December 31, 1998, 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 Market Value ---------- ------------ Due in one year or less $ 8,887,129 $ 8,934,493 Due after one year through five years 60,551,170 62,555,458 Due after five years through ten years 26,920,513 27,982,769 ---------- ---------- Total fixed maturities $96,358,812 $99,472,720 ========== ========== The amortized cost and estimated market values of investments in fixed maturities by categories are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- December 31, 1998 - - ----------------- Available for sale: Fixed maturities Certificates of deposit $ 200,000 $ - $ - $ 200,000 U.S. treasury securities 9,610,487 487,783 10,098,270 State and municipal tax exempt bonds 34,144,344 1,028,944 9,379 35,163,909 Industrial and miscellaneous taxable bonds 52,403,981 1,664,678 58,118 54,010,541 ---------- --------- ------ ---------- Total fixed maturities $96,358,812 $3,181,405 $67,497 $99,472,720 ========== ========= ====== ========== December 31, 1997 - - ----------------- Available for sale: Fixed maturities Certificates of deposit $ 500,000 $ - $ - $ 500,000 U.S. treasury securities 15,480,258 313,491 224 15,793,525 State and municipal tax exempt bonds 38,361,279 822,093 - 39,183,372 Industrial and miscellaneous taxable bonds 31,765,034 743,139 19,480 32,488,693 ---------- --------- ------ ---------- Total fixed maturities $86,106,571 $1,878,723 $19,704 $87,965,590 ========== ========= ====== ==========
36 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - INVESTMENTS (continued) - - -------------------------------- Short-term investments have an initial maturity of one year or less and consist of the following: Fiscal Year Ended December 31 ----------------------------- 1998 1997 ---- ---- Certificates of deposit $ 425,000 $ 225,000 Commercial paper 3,425,000 4,750,000 Commercial bank money market accounts 694,834 368,743 U.S. government obligation money market fund 1,290,108 58,032 Short-term U.S. treasury note 735,346 732,216 Savings account 3,574 3,504 --------- --------- Total short-term investments $6,573,862 $6,137,495 ========= ========= NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION) - - ---------------------------------------------------------------- Property and equipment consist of the following:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 Furniture, fixtures, computer, office, and transportation equipment $2,304,799 $2,204,554 Accumulated depreciation 2,099,430 2,000,845 --------- --------- Net property and equipment $ 205,369 $ 203,709 ======== =======
NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET - - ------------------------------------------- Premiums and notes receivable are substantially secured by unearned premiums and funds held as security for performance.
Fiscal Year Ended December 31 ----------------------------- 1998 1997 ---- ---- Premiums receivable $1,553,977 $2,525,588 Premium finance notes receivable 4,388,900 4,902,269 --------- --------- Total premiums and notes receivable 5,942,877 7,427,857 Less allowance for doubtful accounts 20,161 23,251 --------- --------- Net premiums and notes receivable $5,922,716 $7,404,606 ========= =========
Bad debt expense for the fiscal year ended December 31, 1998, and the fiscal year ended December 31, 1997, was $25,736 and $28,903, 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 - DEFERRED POLICY ACQUISITION COSTS - - ------------------------------------------ Deferred policy acquisition costs, net of ceding commission, consist of commissions, premium taxes, inspection fees, and certain other underwriting costs which are related to and vary with the production of Crusader Insurance Company policies. These costs are incurred by Crusader and include allocated expenses of other Unico subsidiaries. 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. 37 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - DEFERRED POLICY ACQUISITION COSTS (continued) - - -----------------------------------------------------
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Deferred policy acquisition costs at beginning of year $4,886,684 $4,953,085 $4,333,708 Policy acquisition costs incurred during year 9,276,945 10,495,790 7,506,550 Policy acquisition costs amortized during year (9,497,857) (10,562,191) (6,887,173) ---------- --------- --------- Deferred policy acquisition costs at end of year $4,665,772 $4,886,684 $4,953,085 ========= ========= =========
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES - - --------------------------------------------------- The following table provides an analysis of the rollforward of Crusader's losses and loss adjustment expenses, including a reconciliation of the ending balance sheet liability for the periods indicated:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Reserve for unpaid losses and loss adjustment expenses at beginning of year - net of reinsurance $40,591,248 $37,111,846 $32,682,153 ---------- ---------- ---------- Incurred losses and loss adjustment expenses Provision for insured events of current year 22,454,229 23,564,325 16,251,499 (Decrease) in provision for events of prior years (*) (4,860,647) (4,275,759) (1,449,765) ---------- ----------- ----------- Total losses and loss adjustment expenses 17,593,582 19,288,566 14,801,734 ---------- ---------- ---------- Payments Losses and loss adjustment expenses attributable to insured events of the current year 5,132,952 4,812,268 3,352,866 Losses and loss adjustment expenses attributable to insured events of prior years 12,677,646 10,996,896 7,019,175 ---------- ---------- --------- Total payments 17,810,598 15,809,164 10,372,041 ---------- ---------- ---------- Reserve for unpaid losses and loss adjustment expenses at end of year - net of reinsurance $40,374,232 $40,591,248 $37,111,846 Reinsurance recoverable on unpaid losses and loss adjustment expenses at end of year 1,139,713 1,413,603 2,629,019 --------- ---------- ---------- Reserve for unpaid losses and loss adjustment expenses at end of year per balance sheet - gross of reinsurance (**) $41,513,945 $42,004,851 $39,740,865 ========== ========== ==========
(*) Decreases in incurred losses and loss adjustment expenses related to the indicated prior years reflect favorable loss experience during these years attributable to a number of combined factors which have produced favorable frequency and severity trends in recent years. In addition, actuarial assumptions based on historical trends have proven to be conservative. (**) 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 generally accepted accounting practices as assets rather than netted against the corresponding liability for such items on the balance sheet. 38 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - CLAIMS AND LITIGATION - - ------------------------------ 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 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 has 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 9 - ACCRUED EXPENSES AND OTHER LIABILITIES - - ----------------------------------------------- Accrued expenses and other liabilities consist of the following:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 ---- ---- Premium payable $3,994,888 $ 525,839 Unearned claim adjusting income 300,000 300,000 Profit sharing contributions 359,948 395,000 Accrued contingent interest expense - 300,000 Accrued salaries 441,427 406,117 Other 322,196 168,611 ---------- ---------- Total accrued expenses and other liabilities $5,418,459 $2,095,567 ========= =========
NOTE 10 - NOTE PAYABLE - BANK - - ----------------------------- American Acceptance Corporation ("AAC"), the Company's premium finance subsidiary, had a line of credit with Union Bank which was used only to fund its premium finance operation. Interest on the note is referenced to the London Interbank Offered Rate ("LIBOR"). The note amount was collateralized by the assets of AAC and is guaranteed by the Company. The credit line matured September 2, 1998, and was not renewed. AAC did not borrow against this line of credit in 1998 or 1997. The loan agreement contained certain covenants including restrictions on certain transactions between AAC and the Company and the maintenance of certain financial ratios. AAC was in compliance with all terms of its loan agreement. Fiscal Year Ended December 31 ----------------------------- 1998 1997 ---- ---- Note payable - bank $ - $ - ====== ======= Maximum bank note payable - $750,001 Average bank note payable - $296,576 Weighted average interest rate - 7.3% 39 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - NOTE PAYABLE - BANK (continued) - - ---------------------------------------- In addition to the AAC line of credit, Unico has a $2,000,000 line of credit with Union Bank. Interest on this line is referenced to LIBOR and is payable monthly. The agreement contains certain covenants including maintenance of certain financial ratios. This credit line expires September 2, 1999, at which time it is expected to be renewed. As of December 31, 1998 and 1997, no amounts were borrowed. NOTE 11 - LEASE COMMITMENT - - -------------------------- 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 fiscal year ended December 31, 1998, $1,025,952 for the fiscal year ended December 31, 1997, and $769,464 for the nine month period ended December 31, 1996. The lease provides for the following minimum annual rental commitments: Fiscal Year Ending December 31, 1999 $1,025,952 December 31, 2000 $1,025,952 December 31, 2001 $1,025,952 December 31, 2002 $1,025,952 December 31, 2003 (through March 31, 2007) $4,360,296 --------- Total minimum payments $8,464,104 ========= 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. NOTE 12 - REINSURANCE - - --------------------- A reinsurance transaction occurs when an insurance company transfers ("cedes") a portion of its exposure on business written by it to a reinsurer which 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. The Company's reinsurance agreements help protect Crusader against liabilities in excess of certain retentions, including major or catastrophic losses which may occur from any one or more of the property and/or casualty risks which Crusader insures. The Company continually monitors and evaluates the liquidity and financial strength of its reinsurers to determine their ability to fulfill obligations assumed under the reinsurance contracts. Crusader has reinsurance agreements with National Reinsurance Corporation and NAC Reinsurance Corporation, both California admitted reinsurers. National Reinsurance Corporation was acquired by General Reinsurance Corporation in 1996. Crusader also has additional catastrophe reinsurance from various other reinsurance companies of which 78% of the participating catastrophe reinsurers are admitted in California. Any catastrophe loss ceded to the reinsurer not admitted in California requires the reinsurer to immediately obtain a non-cancelable (Evergreen) letter of credit covering their ceded outstanding loss including any IBNR. Crusader's retention increased from $150,000 to $250,000 per risk on July 1, 1997. This retention is subject to a maximum dollar amount and to catastrophe and clash covers. The catastrophe and clash covers (subject to a maximum occurrence and annual aggregate amount) help protect the Company from one loss occurrence affecting multiple policies. 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 that is ceded. Crusader does not currently assume any reinsurance from other insurance companies. The Company intends to continue obtaining reinsurance although the availability and cost may vary from time to time. 40 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - REINSURANCE (continued) - - -------------------------------- The effect of reinsurance on premiums written, premiums earned, and incurred losses is as follows:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Premiums written: Direct business $37,079,303 $42,273,990 $31,847,113 Reinsurance assumed - - - Reinsurance ceded $(2,952,340) $(6,687,944) $(3,701,766) Premiums earned: Direct business $40,615,417 $42,721,222 $29,373,374 Reinsurance assumed - - - Reinsurance ceded $(5,700,222) $(6,394,328) $(3,307,085) Incurred losses and loss adjustment expenses: Direct $20,557,887 $26,415,828 $16,777,799 Assumed - - - Ceded $(2,964,305) $(7,127,262) $(1,976,065)
NOTE 13 - PROFIT SHARING PLAN - - ----------------------------- During the fiscal year ended March 31, 1986, the Company adopted the Unico American Corporation Profit Sharing Plan. Employees who are at least 21 years of age and have been employed by the Company for at least two years are participants in the Plan. Pursuant to the terms of the Plan, the Company annually contributes to 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 are entitled to receive benefits under the plan upon the later of the following: the date 60 days after the end of the plan year in which the participant's retirement occurs or one year and 60 days after the end of the plan year following the participant's termination with the Company. However, the participant's interest must be distributed in its entirety no later than April 1 of the calendar year following the calendar year in which the participant attains age 70 1/2 or otherwise in accordance with the Treasury Regulations promulgated under the Internal Revenue Code of 1954 as amended. Contributions to the plan were as follows: Fiscal year ended December 31, 1998 $563,160 Fiscal year ended December 31, 1997 $545,906 Fiscal year ended December 31, 1996 (nine months) $364,226 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 generally accepted accounting principles. 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) all bonds are recorded at amortized cost, regardless of trading activity; (c) non-admitted assets are charged directly against surplus; (d) loss reserves and unearned premium reserves are stated net of reinsurance; and (e) federal income taxes are recorded when payable. Additionally, the cash flow presentation is not consistent with generally accepted accounting principles and a reconciliation from net income to cash provided by operations is not presented. 41 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - STATUTORY CAPITAL AND SURPLUS (continued) - - -------------------------------------------------- In 1998, the National Association of Insurance Commissioners ("NAIC") approved codified accounting practices that changed the definition of what constitutes prescribed statutory accounting practices and will result in changes to the accounting policies that insurance enterprises use to prepare statutory financial statements commencing in 2001. The Company is currently evaluating the impact of these rules. No assurance can be given that future legislation or regulatory changes resulting from such activities will not adversely affect the Company. Crusader Insurance Company statutory capital and surplus is as follows: As of December 31, 1998 $37,611,089 As of December 31, 1997 $30,899,761 Crusader Insurance Company statutory net income is as follows: Fiscal year ended December 31, 1998 $8,243,434 Fiscal year ended December 31, 1997 $6,658,352 Fiscal year ended December 31, 1996 (nine months) $3,526,515 The Company believes that Crusader's statutory capital and surplus was 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. The maximum dividend that may be made without prior approval as of December 31, 1998, is $8,243,434. After taking into account the dividends paid by Crusader to its parent in 1998 of $1,500,000, the remaining dividend which may be made without prior approval as of December 31, 1998, is $6,743,434. NOTE 15 - INCENTIVE STOCK OPTION PLAN - - ------------------------------------- The Company under its 1985 stock option plan provides for the grant of "incentive stock options" to officers and key employees. The options and prices set forth below have been adjusted, where applicable, for all subsequent stock splits, reverse stock splits, and stock dividends. All options were granted at fair market value. As of December 31, 1998, all options outstanding were exercisable. There are no additional options available for future grant under the 1985 plan. The changes in the number of common shares under option are summarized as follows: Options Exercise Price Outstanding at March 31, 1996 680,000 $3.4375 to $4.375 Options granted - Options exercised (114,651) $3.4375 to $3.85 Options terminated (4,650) $3.50 ------- Outstanding at December 31, 1996 560,699 $3.4375 to $4.375 Options granted - Options exercised (186,751) $3.4375 to $3.50 Options terminated - ------- Outstanding at December 31, 1997 373,948 $3.4375 to $4.375 Options granted - Options exercised (90,082) $3.50 to $4.375 Options terminated (89,320) $3.50 ------- Outstanding at December 31, 1998 194,546 $3.4375 to $4.375 ======= 42 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - TAXES ON INCOME The provision for taxes on income consists of the following:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Current provision: Federal $3,516,390 $2,900,181 $2,133,283 State 179,521 184,020 159,364 --------- --------- --------- Total federal and state 3,695,911 3,084,201 2,292,647 Deferred 350,318 250,470 (88,170) --------- --------- --------- Provision for taxes $4,046,229 $3,334,671 $2,204,477 ========= ========= =========
The income tax provision reflected in the consolidated statements of operations is less than the expected federal income tax on income as shown in the table below:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Computed tax expense $4,336,665 $3,736,270 $2,508,855 Tax effect of: Tax exempt income (490,783) (522,813) (393,009) Dividend exclusion (1,638) (9,905) (9,335) Other 23,525 (54,971) (56,354) State income tax expense 178,460 186,090 154,320 --------- --------- --------- Tax per financial statement $4,046,229 $3,334,671 $2,204,477 ========= ========= =========
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:
Fiscal Year Ended December 31 ----------------------------- 1998 1997 ---- ---- Deferred tax assets: Discount on loss reserves $1,682,596 $1,900,368 Unearned premiums 1,291,298 1,285,242 Other - 118,668 --------- --------- Total deferred tax assets $2,973,894 $3,304,278 --------- --------- Deferred tax liabilities: Deferred acquisition costs $1,633,021 $1,661,474 Discount on salvage & subrogation 8,493 7,376 Unrealized gain on investments 1,076,135 629,563 Other 47,269 - --------- --------- Total deferred tax liabilities $2,764,918 $2,298,413 --------- --------- Net deferred tax assets $208,976 $1,005,865 ======= =========
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 carry forward period are reduced. As a California insurance company, Crusader is obligated to pay a premium tax on gross premiums written in the states of Arizona, California, Montana, Nevada, Oregon, and Washington. The premium tax is in lieu of state franchise taxes; thus, the above provision for state taxes does not include the premium tax. 43 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - EARNINGS PER SHARE - - ---------------------------- A reconciliation of the numerator and denominator used in the basic and diluted earnings per share calculation is presented below:
Fiscal Year Fiscal Year 12 Months Fiscal Year Ended Ended Ended Ended December 31 December 31 December 31 December 31 1998 1997 1996 1996 ---- ---- ---- ---- (Unaudited) (Nine Months) Basic Earnings Per Share - - ------------------------ Net income numerator $8,708,669 $7,654,362 $6,849,327 $5,174,510 ========= ========= ========= ========= Weighted average shares outstanding denominator 6,194,133 6,132,096 5,967,667 5,970,977 ========= ========= ========= ========= Per share amount $1.41 $1.25 $1.15 $0.87 Diluted Earnings Per Share - - -------------------------- Net income numerator $8,708,669 $7,654,362 $6,849,327 $5,174,510 ========= ========= ========= ========= Weighted average shares outstanding 6,194,133 6,132,096 5,967,667 5,970,977 Effect of diluted securities 226,447 269,263 273,188 279,953 --------- --------- --------- --------- Diluted shares outstanding denominator 6,420,580 6,401,359 6,240,855 6,250,930 ========= ========= ========= ========= Per share amount $1.36 $1.20 $1.10 $0.83
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - - ------------------------------------------------------ Summarized unaudited quarterly financial data for each of the calendar years 1998 and 1997 is set forth below:
Comparable Period by Quarter Ended ------------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Calendar Year 1998 ------------------ Total revenues $12,477,544 $11,811,421 $11,804,173 $11,451,132 Income before taxes 3,125,463 3,291,037 3,177,009 3,161,389 Net income 2,163,710 2,184,110 2,179,796 2,181,053 Earnings per share: Basic $0.35 $0.35 $0.35 $0.35 Diluted $0.34 $0.34 $0.34 $0.34 Calendar Year 1997 ------------------ Total revenues $12,043,649 $12,100,854 $12,166,012 $11,980,206 Income before taxes 2,496,230 2,729,840 2,812,198 2,950,765 Net income 1,765,154 1,884,584 1,950,806 2,053,818 Earnings per share: Basic $0.29 $0.31 $0.32 $0.33 Diluted $0.28 $0.30 $0.30 $0.32
44 Item 9. Changes in and Disagreements with Accountants on Accounting ----------------------------------------------------------- and Financial Disclosure - - ------------------------ Change in accountants was previously reported. 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 - - ------------------------------------------------------------------------ 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. 45 PART IV ------- Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K - - ------------------------------------------------------------------------ (a) Financial Statements and Schedules Filed as a Part of this Report: 1. Financial statements: The consolidated financial statements for the fiscal year ended December 31, 1998, are contained herein as listed in the index to consolidated financial statements on page 23. 2. Financial schedules: Index to Consolidated Financial Statements Independent Auditors' Report on Financial Statement Schedules Schedule I - Summary of Investments Other than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant Schedule III - Supplemental Insurance Information Schedule IV - Reinsurance Schedule VI - Supplemental Information Concerning Property/Casualty Insurance Operations Schedules other than those listed above are omitted, since they are not applicable, not required, or the information required to be 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 Unico American Corporation Employee Incentive Stock Option Plan (1985) (Incorporated herein by reference to Exhibit 10.3 the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31,1985).(*) 10.3 Amendment to Unico American Corporation Incentive Stock Option Plan (1985). (Incorporated herein by reference to Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1987). (*) 10.4 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). 10.5 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). 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). 27 Financial Data Schedule (*) Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: None. 46 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 23, 1999 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 23, 1999 ------------- President and Chief Erwin Cheldin Executive Officer, (Principal Executive Officer) /s/ LESTER A. AARON Treasurer, Chief Financial March 23, 1999 --------------- Officer and Director Lester A. Aaron (Principal Accounting and Principal Financial Officer) /s/ CARY L. CHELDIN Executive Vice President March 23, 1999 --------------- and Director Cary L. Cheldin /s/ GEORGE C. GILPATRICK Vice President, Secretary March 23, 1999 -------------------- and Director George C. Gilpatrick /s/ ROGER H. PLATTEN Vice President and Director March 23, 1999 ---------------- Roger H. Platten 47 INDEPENDENT AUDITORS' REPORT The Board of Directors Unico American Corporation Under date of February 24, 1999, we reported on the consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 1998, and 1997, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, as contained in the annual report on the Form 10-K for the year 1998. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed under Item 14(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 audit. 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 February 24, 1999 48 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES Board of Directors Unico American Corporation Under date of March 20, 1997, we reported on the consolidated balance sheet of Unico American Corporation and subsidiaries as of December 31, 1996, and the related consolidated statement of operations, shareholders' equity and cash flows for the nine months ended December 31, 1996, and the year ended March 31, 1996, as contained in the annual report of Form 10-K for the nine months ended December 31, 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed under Item 14(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 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. GETZ, KRYCLER & JAKUBOVITS Sherman Oaks, California March 20, 1997 49 SCHEDULE I UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1998
Column A Column B Column C Column D - - -------- -------- -------- -------- Amount at which shown in the Type of Investment Cost Value Balance Sheet - - ------------------ ---- ----- ------------- Fixed maturities: U.S. treasury securities $ 9,610,487 $10,098,270 $10,098,270 State and municipal tax exempt bonds 34,144,344 35,163,909 35,163,909 Industrial and miscellaneous bonds 52,403,981 54,010,541 54,010,541 Certificates of deposit 200,000 200,000 200,000 ---------- ---------- ---------- Total fixed maturities 96,358,812 99,472,720 99,472,720 Equity securities 503,503 481,500 481,500 Short-term investments 6,573,862 6,573,862 6,573,862 ----------- ----------- ----------- Total investments $103,436,177 $106,528,082 $106,528,082 =========== =========== ===========
50 SCHEDULE II UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS - PARENT COMPANY ONLY
Fiscal Year Ended December 31 ----------------------------- 1998 1997 ---- ---- ASSETS ------ Investments Available for sale: Fixed maturities, at market value (amortized cost December 31, 1998 $999,335 ; December 31, 1997 $0) $1,002,401 $ - Short-term investments 1,750,000 1,200,000 --------- --------- Total Investments 2,752,401 1,200,000 Cash 20,864 19,939 Accrued investment income 28,967 5,343 Investments in subsidiaries 60,382,968 51,736,149 Property and equipment (net of accumulated depreciation) 205,369 203,709 Other assets 104,129 105,604 ---------- ---------- Total Assets $63,494,698 $53,270,744 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES - - ----------- Accrued expenses and other liabilities $797,019 $1,089,713 Payables to subsidiaries (net of receivables) 8,378,991 7,103,254 Income taxes payable 150,606 16,993 --------- --------- Total Liabilities $9,326,616 $8,209,960 --------- --------- STOCKHOLDERS' EQUITY - - -------------------- Common stock $2,895,702 $2,838,058 Net unrealized investment gains 1,998,536 1,222,095 Retained earnings 49,273,844 41,000,631 ---------- ---------- Total Stockholders' Equity $54,168,082 $45,060,784 ---------- ---------- Total Liabilities and Stockholders' Equity $63,494,698 $53,270,744 ========== ==========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 51 SCHEDULE II (continued) UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY
12 Months Fiscal Year Ended Ended Fiscal Year Ended December 31 December 31 December 31 ----------------------------- 1998 1997 1996 1996 ---- ---- ---- ---- (Unaudited) (Nine Months) REVENUES - - -------- General and administrative expenses allocated to subsidiaries $4,863,910 $5,036,332 $4,977,656 $3,870,364 Net investment income 210,071 150,292 92,846 82,569 Other income 6,031 9,401 12,130 7,414 --------- --------- --------- --------- Total Revenue 5,080,012 5,196,025 5,082,632 3,960,347 EXPENSES - - -------- General and administrative expenses 5,018,162 5,109,898 5,033,280 3,937,137 --------- --------- --------- --------- Income before equity in net income of subsidiaries 61,850 86,127 49,352 23,210 Equity in net income of subsidiaries 8,646,819 7,568,235 6,799,975 5,151,300 --------- --------- --------- --------- Net Income $8,708,669 $7,654,362 $6,849,327 $5,174,510 ========= ========= ========= =========
The Company and its subsidiaries file a consolidated federal income tax return. Unico received cash dividends from Crusader of $1,500,000 in the fiscal year ended December 31, 1998, $1,500,000 in the fiscal year ended December 31, 1997, and $500,000 in the nine month fiscal year ended December 31, 1996. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 52 SCHEDULE II (continued) UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
Fiscal Year Ended December 31 ----------------------------- 1998 1997 1996 ---- ---- ---- (Nine Months) Cash flows from operating activities: Net income $8,708,669 $7,654,362 $5,174,510 Adjustments to reconcile net income to net cash from operations Undistributed equity in net (income) of subsidiaries (8,646,819) (7,568,235) (5,151,300) Depreciation and amortization 98,030 104,029 83,488 Accrued expenses and other liabilities (159,081) (7,941) 4,608 Accrued investment income (23,624) (5,343) (2,500) Other assets 1,474 (2,353) (21,390) ------- ------- ------ Net cash provided (used) from operations (21,351) 174,519 87,416 ------- ------- ------ Cash flows from investing activities Purchase of fixed maturity investments (998,781) - - Increase in short-term investments (550,000) (1,200,000) - Purchase of property and equipment (100,245) (77,766) (34,841) ---------- --------- ------ Net cash (used) by investing activities (1,649,026) (1,277,766) (34,841) ---------- --------- ------ Cash flows from financing activities Proceeds from issuance of common stock 57,644 1,636 1,621 Dividends paid to stockholders (435,456) (430,724) (418,087) Net change in payables and receivables from subsidiaries 2,049,114 1,522,949 340,068 --------- --------- ------- Net cash provided (used) by financing activities 1,671,302 1,093,861 (76,398) --------- --------- ------ Net increase (decrease) in cash 925 (9,386) (23,823) Cash at beginning of year 19,939 29,325 53,148 ------ ------ ------ Cash at end of year $20,864 $19,939 $29,325 ====== ====== ======
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes. 53 SCHEDULE III UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION
Future Benefits, Deferred Benefits, Claims, Policy Losses, Net Losses and Acquisition and Loss Unearned Premium Investment Settlement Cost Expenses Premiums Revenue Income Expenses --------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1998 Property & Casualty $4,665,772 $41,513,945 $18,136,895 $34,915,195 $5,497,323 $17,593,582 Fiscal Year Ended December 31, 1997 Property & Casualty $4,886,684 $42,004,851 $21,673,009 $36,326,894 $4,855,580 $19,288,566 Fiscal Year Ended March 31, 1996 Property & Casualty $4,953,085 $39,740,865 $22,120,241 $26,066,289 $3,115,110 $14,801,734 Amortization of Deferred Policy Other Acquisition Operating Premium Cost Costs Written --------------------------------------------- Fiscal Year Ended December 31, 1998 Property & Casualty $9,497,857 $1,663,214 $34,126,963 Fiscal Year Ended December 31, 1997 Property & Casualty $10,562,191 $1,855,589 $35,586,046 Fiscal Year Ended March 31, 1996 Property & Casualty $6,887,173 $1,653,077 $28,145,347
54 SCHEDULE IV UNICO AMERICAN CORPORATION AND SUBSIDIARIES REINSURANCE
Ceded to Assumed Percentage of Gross Other from Other Net Amount Assumed Amount Companies Companies Amount to Net --------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1998 Property & Casualty $40,615,417 $5,700,222 - $34,915,195 - Fiscal Year Ended December 31, 1997 Property & Casualty $42,721,222 $6,394,328 - $36,326,894 - Fiscal Year Ended December 31, 1996 (Nine Months) Property & Casualty $29,373,374 $3,307,085 - $26,066,289 -
55 SCHEDULE VI UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS
Claims and Reserves for Claim Unpaid Discount Adjustment Deferred Claims if Any, Expenses Incurred Affiliation Policy and Claim Deducted Net Related to with Acquisition Adjustment in Unearned Earned Investment (1) Current Year Registrant Costs Expenses Column C Premiums Premiums Income (2) Prior Year (A) (B) (C) (D) (E) (F) (G) (H) -------------------------------------------------------------------------------------------------------------------------- Company & Consolidated Subsidiaries Fiscal Year Ended December 31, 1998 $4,665,772 $41,513,945 - $18,136,895 $34,915,195 $5,497,323 $22,454,229 (1) $(4,860,647) (2) December 31,1997 $4,886,684 $42,004,851 - $21,673,009 $36,326,894 $4,855,580 $23,564,325 (1) $(4,275,759) (2) December 31,1996 $4,953,085 $39,740,865 - $22,120,241 $26,066,289 $3,115,110 $16,251,499 (1) (Nine Months) $(1,449,765) (2) Amortization of Deferred Paid Claims Policy and Claim Acquisition Adjustment Premiums Costs Expenses Written (I) (J) (K) --------------------------------------------------------------- Company & Consolidated Subsidiaries Fiscal Year Ended December 31, 1998 $9,497,857 $17,810,598 $34,126,963 December 31, 1997 $10,562,191 $15,809,164 $35,586,046 December 31, 1996 $6,887,173 $10,372,041 $28,145,347 (Nine Months)
56 EX-27 2 FDS --
7 1 Year Dec-31-1998 Jan-01-1998 Dec-31-1998 106,046,582 0 0 481,500 0 0 106,528,082 277,544 1,285,918 4,665,772 121,717,643 41,513,945 18,136,895 2,329,356 0 0 0 0 2,895,702 51,272,380 121,717,643 34,915,195 5,731,903 247,931 6,649,241 17,593,582 9,497,857 7,697,933 12,754,898 4,046,229 8,708,669 0 0 0 8,708,669 1.41 1.36 40,591,248 22,454,229 (4,860,647) 5,132,952 12,677,646 40,374,232 4,860,645
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