10-Q 1 unam0601.txt FORM 10-Q 6-30-2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period from April 1, 2001 to June 30, 2001 Commission File No. 0-3978 UNICO AMERICAN CORPORATION (Exact name of registrant as specified in its charter) Nevada 95-2583928 (State or other jurisdiction of (I.R.S. Employee incorporation or organization) Identification No.) 23251 Mulholland Drive, Woodland Hills, California 91364 (Address of Principal Executive Offices) (Zip Code) (818) 591-9800 Registrant's telephone number Securities registered pursuant to Section 12(b) of the Act: None (Title of each class) Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value (Title of Class) No Change (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 5,453,219 Number of shares of common stock outstanding as of August 10, 2001 1 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ----------------------------- UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30 December 31 2001 2000 ---- ---- ASSETS ------ Investments Available for sale: Fixed maturities, at market value (amortized cost: June 30, 2001 $91,867,642; December 31, 2000 $94,798,077) $93,204,140 $94,982,630 Equity securities at market (cost: June 30, 2001 $2,400; December 31, 2000 $25,920) 2,400 25,920 Short-term investments, at cost 3,125,120 3,355,354 ---------- ---------- Total Investments 96,331,660 98,363,904 Cash 115,399 54,806 Accrued investment income 1,772,075 1,908,547 Premiums and notes receivable, net 6,235,577 5,807,731 Reinsurance recoverable: Paid losses and loss adjustment expenses 972,141 393,198 Unpaid losses and loss adjustment expenses 10,464,858 10,671,343 Prepaid reinsurance premiums 62,323 29,531 Deferred policy acquisition costs 4,813,375 4,500,147 Property and equipment (net of accumulated depreciation) 258,028 114,107 Deferred income taxes 431,726 948,442 Other assets 1,917,326 1,154,064 ----------- ----------- Total Assets $123,374,488 $123,945,820 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES ----------- Unpaid losses and loss adjustment expenses $45,614,076 $45,217,369 Unearned premiums 18,601,164 17,099,927 Advance premium and premium deposits 2,381,993 2,316,016 Income taxes payable 4,123 - Accrued expenses and other liabilities 7,299,959 7,899,179 ---------- ---------- Total Liabilities $73,901,315 $72,532,491 ---------- ---------- STOCKHOLDERS' EQUITY --------------------- Common stock, no par - authorized 10,000,000 shares; issued and outstanding shares 5,453,219 at June 30, 2001, and 5,692,699 at December 31, 2000 $ 2,671,750 $ 2,789,494 Accumulated other comprehensive income 882,089 121,805 Retained earnings 45,919,334 48,502,030 ---------- ---------- Total Stockholders' Equity $49,473,173 $51,413,329 ---------- ---------- Total Liabilities and Stockholders' Equity $123,374,488 $123,945,820 =========== ===========
See notes to unaudited consolidated financial statements. 2 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- REVENUES -------- Insurance Company Revenues Premium earned $8,680,327 $8,093,893 $16,989,613 $16,210,445 Premium ceded 1,093,666 1,614,606 2,770,489 2,954,112 --------- --------- ---------- ---------- Net premium earned 7,586,661 6,479,287 14,219,124 13,256,333 Net investment income 1,391,162 1,411,869 2,800,178 2,843,359 Net realized investment (losses) - - (23,520) - Other income 11,733 4,613 14,753 9,648 --------- --------- ---------- ---------- Total Insurance Company Revenues 8,989,556 7,895,769 17,010,535 16,109,340 Other Revenues from Insurance Operations Gross commissions and fees 1,388,032 1,469,708 2,748,799 2,884,060 Investment income 40,303 102,688 98,621 195,355 Net realized investment gains 3,212 - 3,212 - Finance charges and late fees earned 216,414 208,898 421,207 416,032 Other income 3,470 3,057 6,481 4,619 ---------- --------- ---------- ---------- Total Revenues 10,640,987 9,680,120 20,288,855 19,609,406 ========== ========= ========== ========== EXPENSES -------- Losses and loss adjustment expenses 8,210,872 4,739,888 13,676,767 9,690,427 Policy acquisition costs 2,138,850 2,003,216 4,167,089 4,106,567 Salaries and employee benefits 1,116,585 1,098,302 2,230,290 2,179,863 Commissions to agents/brokers 316,810 323,667 639,817 656,795 Other operating expenses 593,286 706,577 1,322,143 1,338,969 ---------- --------- ---------- ---------- Total Expenses 12,376,403 8,871,650 22,036,106 17,972,621 ---------- --------- ---------- ---------- Income (Loss) Before Taxes (1,735,416) 808,470 (1,747,251) 1,636,785 Income Tax Provision (638,691) 196,398 (702,630) 389,704 ---------- ------- --------- --------- Net Income (Loss) $(1,096,725) $ 612,072 $(1,044,621) $1,247,081 ========= ======= ========= ========= PER SHARE DATA -------------- Basic Shares Outstanding 5,453,219 6,270,012 5,550,799 6,287,488 Basic Earnings (Loss) Per Share $(0.20) $0.10 $(0.19) $0.20 Diluted Shares Outstanding 5,482,752 6,311,950 5,580,094 6,330,371 Diluted Earnings (Loss) Per Share $(0.20) $0.10 $(0.19) $0.20
See notes to unaudited consolidated financial statements. 3 UNICO AMERICAN CORPORATION AND SUBSIDIARIES STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income (loss) $(1,096,725) $612,072 $(1,044,621) $1,247,081 Other changes in comprehensive income, net of tax: Unrealized gains (losses) on securities classified as available-for-sale arising during the period (249,647) 19,064 746,880 (189,672) Less: reclassification adjustment for (gains) and losses included in net income (2,120) - 13,403 --------- ------- ------- --------- Comprehensive Income (loss) $(1,348,492) $631,136 $(284,338) $1,057,409 ========= ======= ======= =========
See notes to unaudited consolidated financial statements. 4 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30,
2001 2000 ---- ---- Cash Flows from Operating Activities: Net Income (Loss) $(1,044,621) $1,247,081 Adjustments to reconcile net income to net cash from operations Depreciation and amortization 45,511 31,473 Bond amortization, net 196,338 289,649 Net realized loss on sale of securities 20,308 - Changes in assets and liabilities Premium, notes and investment income receivable (291,374) (45,605) Reinsurance recoverable (372,458) (1,048,588) Prepaid reinsurance premiums (32,792) (10,797) Deferred policy acquisitions costs (313,228) (149,806) Other assets (763,263) 227,002 Reserve for unpaid losses and loss adjustment expenses 396,707 (1,926,253) Unearned premium reserve 1,501,237 338,219 Funds held as security and advanced premiums 65,977 (50,697) Accrued expenses and other liabilities (599,220) (36,419) Income taxes current/deferred 129,179 106,573 --------- --------- Net Cash (Used) from Operations (1,061,699) (1,028,168) --------- --------- Investing Activities Purchase of fixed maturity investments (4,154,470) (4,469,270) Proceeds from maturity of fixed maturity investments 6,872,180 6,355,600 Net decrease in short-term investments 249,833 763,854 Additions to property and equipment (189,432) (6,537) --------- --------- Net Cash Provided by Investing Activities 2,778,111 2,643,647 --------- --------- Financing Activities Repurchase of common stock (1,383,186) (509,926) Dividends paid to shareholders (272,633) (945,745) --------- --------- Net Cash (Used) by Financing Activities (1,655,819) (1,455,671) --------- --------- Net increase in cash 60,593 159,808 Cash at beginning of period 54,806 105,439 ------- ------- Cash at End of Period $115,399 $265,247 ======= ======= Supplemental Cash Flow Information Cash paid during the period for: Interest $ 75 $ - Income taxes $10,000 $100,025
See notes to unaudited consolidated financial statements. 5 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --------------------------------------------------- Nature of Business ------------------ Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, health and life insurance through its agency subsidiaries; and provides insurance premium financing, claim administration services, and membership association services through its other subsidiaries. Unico American Corporation is referred to herein as the "Company" or "Unico" and such references include both the corporation and its subsidiaries, all of which are wholly owned, unless otherwise indicated. Unico was incorporated under the laws of Nevada in 1969. Principles of Consolidation --------------------------- The accompanying unaudited consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Quarterly financial statements should be read in conjunction with the financial statements and related notes in the Company's 2000 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. NOTE 2 - INCENTIVE STOCK PLANS ------------------------------ The Company's 1985 stock option plan provided for the grant of incentive stock options to officers and key employees. The plan covers an aggregate of 1,500,000 shares of the Company's common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.). As of June 30, 2001, there were 71,275 options outstanding and all are currently exercisable. There are no additional options available for future grant under the 1985 plan. The Company's 1999 Omnibus Stock Plan also provides, among other things, for the grant of incentive options to officers and key employees. The plan covers an aggregate of 500,000 shares of the Company's common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.). As of June 30, 2001, there were options covering 105,000 shares of common stock outstanding under this plan. Options covering 40,000 of these shares of common stock were exercisable. NOTE 3 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY -------------------------------------------------------------------- The Company has previously announced that its Board of Directors had authorized the repurchase in the open market from time to time of up to an aggregate of 945,000 shares of the common stock of the Company. During the six months ended June 30, 2001, the Company retired an aggregate of 239,600 shares of its common stock at a cost of $1,383,187 of which $117,744 was allocated to capital and $1,265,443 was allocated to retained earnings. As of June 30, 2001, the Company had purchased and retired under the Board of Directors' authorization an aggregate of 868,200 shares of its common stock at a cost of $5,513,255. 6 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE 4 - EARNINGS PER SHARE --------------------------- The following table represents the reconciliation of the numerators and denominators of the Company's basic earnings per share and diluted earnings per share computations reported on the Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000, and for the six months ended June 30, 2001 and 2000:
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2001 2000 2001 2000 ---- ---- ---- ---- Basic Earnings (Loss) Per Share ------------------------------- Net income (loss) numerator $(1,096,725) $612,072 $(1,044,621) $1,247,081 ========= ======= ========= ========= Weighted average shares outstanding denominator 5,453,219 6,270,012 5,550,799 6,287,488 ========= ========= ========= ========= Basic Earnings (Loss) Per Share $(0.20) $0.10 $(0.19) $0.20 Diluted Earnings (Loss) Per Share --------------------------------- Net income (loss) numerator $(1,096,725) $612,072 $(1,044,621) $1,247,081 ========= ======= ========= ========= Weighted average shares outstanding 5,453,219 6,270,012 5,550,799 6,287,488 Effect of diluted securities 29,533 41,938 29,295 42,883 --------- --------- --------- --------- Diluted shares outstanding denominator 5,482,752 6,311,950 5,580,094 6,330,371 ========= ========= ========= ========= Diluted Earnings (Loss) Per Share $(0.20) $0.10 $(0.19) $0.20
NOTE 5 - SEGMENT REPORTING -------------------------- Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures about Segments of an Enterprise and Related Information, became effective for fiscal years effective after December 15, 1997. SFAS No. 131 establishes standards for the way information about operating segments is reported in financial statements. The Company has adopted SFAS No. 131 and has identified its insurance company operation, Crusader Insurance Company ("Crusader"), as its primary reporting segment. Revenues from this segment comprised 84% of consolidated revenues for the three and six months ended June 30, 2001, and 82% of revenues for the three and the six months ended June 30, 2000. The Company's remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues.
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2001 2000 2001 2000 ---- ---- ---- ---- Revenues -------- Insurance company operation $8,989,556 $7,895,769 $17,010,535 $16,109,340 Other insurance operations 4,524,309 4,254,558 8,802,162 8,437,907 Intersegment elimination (1) (2,872,878) (2,470,207) (5,523,842) (4,937,841) --------- --------- --------- --------- Total other insurance operations 1,651,431 1,784,351 3,278,320 3,500,066 --------- --------- --------- --------- Total Revenues $10,640,987 $9,680,120 $20,288,855 $19,609,406 ========== ========= ========== ========== Income (Loss) Before Income Taxes ---------------------------------- Insurance company operation $(2,134,389) $631,244 $(2,307,685) $1,381,761 Other insurance operations 398,973 177,226 560,434 255,024 --------- ------- --------- --------- Total Income (Loss) Before Income Taxes $(1,735,416) $808,470 $(1,747,251) $1,636,785 ========= ======= ========= =========
7 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE 5 - SEGMENT REPORTING (continued) -------------------------------------- As of June 30 ------------- 2001 2000 ---- ---- Assets Insurance company operation $106,352,408 $103,136,569 Intersegment eliminations (2) (1,298,145) (459,126) ----------- ----------- Total insurance company operation 105,054,263 102,677,443 Other insurance operations 18,320,225 17,227,900 ----------- ----------- Total Assets $123,374,488 $119,905,343 =========== =========== (1) Intersegment revenue eliminations reflect commission paid by Crusader to Unifax Insurance Systems, Inc., ("Unifax") a wholly owned subsidiary of the Company. (2) Intersegment asset eliminations reflect the elimination of Crusader receivables and Unifax payables. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS ------------- (a) Liquidity and Capital Resources: ------------------------------------- Due to the nature of the Company's business (insurance and insurance services) and whereas Company growth does not normally require material reinvestments of profits into property or equipment, the cash flow generated from operations usually results in improved liquidity for the Company. Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, reserves for loss payments, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. As of June 30, 2001, the Company had cash and investments of $95,110,561 (at amortized cost) of which $91,231,964 (96%) were investments of Crusader. As of the quarter ended June 30, 2001, the Company had invested $91,867,642 (at amortized cost) or 97% of its invested assets in fixed maturity obligations. In accordance with Statement of Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company is required to classify its investments in debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading securities. Although all of the Company's investments are classified as available-for-sale, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments. The Company's investments in fixed maturity obligations of $91,867,642 (at amortized cost) include $17,344,603 (19%) of pre-refunded state and municipal tax-exempt bonds, $6,127,756 (7%) of U.S. treasury securities, $67,995,283 (74%) of high-quality industrial and miscellaneous bonds, and $400,000 of certificates of deposit. The tax-exempt interest income earned for the three and six months ended June 30, 2001, was $221,066 and $454,229, respectively. The tax-exempt interest income earned for the three and six months ended June 30, 2000, was $308,286 and $640,681, respectively. The balance of the Company's investments are in equity securities and high-quality, short-term investments that include a U.S. treasury bill, bank money market accounts, certificates of deposit, commercial paper and a short-term treasury money market fund. 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS (continued) ------------------------ (a) Liquidity and Capital Resources: (continued) ------------------------------------------------ The Company's investment policy limits investments in any one company to $2,000,000. This limitation excludes bond premiums paid in excess of par value and U.S. government or U.S. government guaranteed issues. The Company's investment guidelines on equity securities limit investments in equity securities to an aggregate maximum of $2,000,000. All of the Company's investments are high-grade investment quality, all state and municipal tax-exempt fixed maturity investments are pre-refunded issues, and all certificates of deposits are FDIC insured. Cash flow used from operations for the six months ended June 30, 2001, was $1,061,699 and was primarily due to the net loss of $1,044,621 for the period. On May 18, 2001, the Company paid the five-cent ($0.05) per share cash dividend that was declared by the Board of Directors on March 1, 2001, to shareholders of record at the close of business on April 27, 2001. The Company has previously announced that its Board of Directors had authorized the repurchase in the open market from time to time of up to an aggregate of 945,000 shares of the common stock of the Company (See Note 3). During the six months ended June 30, 2001, the Company retired an aggregate of 239,600 shares of its common stock at a cost of $1,383,187. Of this amount, $427,836 came from cash on hand and the proceeds from the maturities of short-term investments, and $955,351 from the proceeds of the sale of U.S. treasury notes. No shares of the common stock of the Company were repurchased in the three months ended June 30, 2001. Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments at June 30, 2001, net of trust restriction of $2,789,125, statutory deposits of $2,725,000, and the dividend restriction between Crusader and Unico, plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next twelve months without the necessity of borrowing funds. The Company has completed its upgrade and replacement of computer systems at a cost of approximately $150,000. There are no other material commitments for capital expenditures as of the date of this report. City of Los Angeles Business License ------------------------------------ On September 13, 2000, the City of Los Angeles audited Unico (parent company only) for the years 1997, 1998 and 1999 with respect to its Los Angeles business license gross receipts tax. The audit resulted in an assessment of $97,681 in gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in a total amount claimed due of $160,949. The assessment was based on the city's position that expenses of Unico's subsidiaries that are paid by Unico (parent company) are subject to the gross receipts business tax when those expenses are reimbursed by the subsidiaries to Unico. The Company disagreed with the audit findings and has appealed the matter. A formal hearing was held on January 3, 2001, that resulted in a reduction in the gross receipts tax due from $97,681 to $32,636. The Company has also requested that all penalties be waived and that interest be adjusted to reflect the decrease in tax due. As of March 31, 2001, the Company has expensed the revised tax due. 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS (continued) ------------------------ (b) Results of Operations: -------------------------- All comparisons made in this discussion are comparing the three and six months ended June 30, 2001, to the three and six months ended June 30, 2000, unless otherwise indicated. The Company had a net loss of $1,096,725 for the three months ending June 30, 2001, compared to net income of $612,072 for the three months ended June 30, 2000, a decrease in net income of $1,708,797. For the six months ended June 30, 2001, the Company had a net loss $1,044,621, compared to net income of $1,247,081 for the six months ended June 30, 2000, a decrease in net income of $2,291,702. Total revenues increased $960,867 (10%) for the three months and $679,449 (3%) for the six months ended June 30, 2001, when compared to the three and six months ended June 30, 2000. PREMIUM WRITTEN before reinsurance increased $1,337,963 (16%) to $9,615,414 for the three months and increased $1,942,185 (12%) to $18,490,849 for the six months ended June 30, 2001, compared to the three and six months ended June 30, 2000. Although the Company attempts to be competitive on price, it believes that maintaining adequate rates on the insurance policies it sells is a better business strategy than increasing total written premium by selling more policies at inadequate rates. The Company believes that the growth in written premium in the current quarter and year-to-date periods is the result of a continued subsidence in the intensity of price-based competition in the property/casualty insurance market. The Company cannot determine how long the existing market conditions will continue, nor in which direction they might change. The increase in written premium in California accounted for $969,456 (72%) of this increase in the three months and $1,408,186 (73%) of the increase in the six months ended June 30, 2001. Crusader's written premium by state is as follows:
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ Increase Increase 2001 2000 (Decrease) 2001 2000 (Decrease) ---- ---- -------- ---- ---- -------- California $8,043,077 $7,073,621 $969,456 $15,533,228 $14,125,042 $1,408,186 Ohio 385,195 189,191 196,004 696,346 305,337 391,009 Arizona 353,151 320,552 32,599 633,782 681,050 (47,268) Pennsylvania 156,229 130,324 25,905 400,006 347,477 52,529 Montana 192,317 175,445 16,872 308,592 256,667 51,925 Washington 179,604 176,396 3,208 295,078 392,815 (97,737) Oregon 109,412 128,794 (19,382) 242,448 278,423 (35,975) Texas 70,359 60,083 10,276 233,015 109,148 123,867 Nevada 115,208 17,551 97,657 127,803 40,124 87,679 Idaho 6,018 4,402 1,616 15,707 4,402 11,305 Kentucky 4,844 1,092 3,752 4,844 8,179 (3,335) --------- --------- --------- ---------- ---------- --------- Total $9,615,414 $8,277,451 $1,337,963 $18,490,849 $16,548,664 $1,942,185 ========= ========= ========= ========== ========== =========
PREMIUM EARNED before reinsurance increased $586,434 (7%) to $8,680,327 for the three months and increased $779,168 (5%) to $16,989,613 for the six months ended June 30, 2001, compared to the three and six months ended June 30, 2000. The increase in earned premium is a direct result of the related increase in written premium previously discussed. 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS (continued) ------------------------ PREMIUM CEDED decreased $520,940 (32%) to $1,093,666 for the three months and $183,623 (6%) to $2,770,489 for the six months ended June 30, 2001, compared to the three and six months ended June 30, 2000. Earned premium ceded consists of both premium ceded under the Company's current reinsurance contracts and premium ceded to the Company's provisionally rated reinsurance contracts. The decrease in ceded premium is primarily the result of the decrease in premium ceded by the Company under its provisionally rated reinsurance contract. Premium ceded under the provisionally rated contract, which was canceled on a runoff basis effective December 31, 1997, is subject to adjustment based on the amount of losses ceded, limited by a maximum percentage that can be charged by the reinsurer. The change in premium ceded between the quarter and year-to-date periods is as follows: Three Months Six Months Ended Ended June 30, 2001 June 30, 2001 ------------- ------------- Increase in ceded premium (excluding provisionally rated premium ceded) $ 62,760 $ 85,471 (Decrease) in provisionally rated premium ceded (583,700) (269,094) ------- ------- Net decrease in ceded premium $(520,940) $(183,623) ======= ======= NET INVESTMENT INCOME, excluding realized investment gains, decreased $83,092 (5%) to $1,431,465 for the three months and $139,915 (5%) to $2,898,799 for the six months ended June 30, 2001, compared to investment income of $1,514,557 for the three months and $3,038,714 for the six months ended June 30, 2000. The decrease in investment income is primarily due to a decrease in invested assets due to the cost of the repurchase of the Company's common stock. The Company has funded the common stock repurchase from cash on hand, the maturities of short-term investments, and the proceeds of the sale of U.S. treasury bonds. The Company continually evaluates the recoverability of its investment holdings. When a decline in value of fixed maturities or equity securities is considered other than temporary, a loss is recognized in the consolidated statement of operations. During the quarter ended March 31, 2001, the Company realized a loss of $23,520 on one equity security where a decline in market value was considered other than temporary. During the quarter ended June 30, 2001, the Company had no realized losses due to a decline in market value considered other than temporary. GROSS COMMISSION AND FEE INCOME decreased $81,676 (6%) to $1,388,032 for the three months and decreased $135,261 (5%) to $2,748,799 for the six months ended June 30, 2001, compared to the three and six months ended June 30, 2000. The decrease for the three and six months consisted of the following: Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 ------------- ------------- Service fee income $ 24,903 $ 15,803 Other commission and fee income 11,104 15,226 Health and life insurance program (7,770) (21,629) Workers' compensation program (13,205) (25,936) Daily automobile rental insurance program: Excluding contingent commission * (26,729) (58,891) Contingent commission (69,979) (59,834) ------ ------ Net (decrease) in commission and fee income $(81,676) $(135,261) ====== ======= * Due to intense price competition, written premium in the daily automobile rental insurance program has decreased approximately 15% for both the three months and six months ended June 30, 2001. This decrease in written premium has resulted in a decrease in commission and fee income (excluding contingent commission) of $26,729 for the three months and $58,891 for the six months ended June 30, 2001. To avoid underwriting losses for the non-affiliated insurer, the Company continues to produce business only at rates that it believes to be adequate. The Company cannot determine how long the existing market conditions will continue, nor in which direction they might change. 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS (continued) ------------------------ LOSSES AND LOSS ADJUSTMENT EXPENSES were 108% of net premium earned for the three months and 96% of net premium earned for the six months ended June 30, 2001, compared to 73% of net premium earned for the three months and six months ended June 30, 2000. This increase was primarily due to an increase in incurred losses of prior years of approximately $2,992,000 (adverse development) in the three months and $3,877,000 (adverse development) in the six months ended June 30, 2001, compared to an increase in incurred losses of prior years of approximately $528,000 (adverse development) in the three months and an increase in incurred losses for prior years of approximately $1,031,000 (adverse development) in the six months ended June 30, 2000. The Company's incurred losses and loss adjustment expenses for the quarter ended June 30, 2001, continued to be negatively impacted by higher than anticipated claim cost from business outside of California (primarily from liquor liability claims) and from continued losses due to the impact of changes in California law that expanded coverage and increased loss exposure (primarily on construction defect claims - Montrose Chemical Corp. v. Admiral Insurance Co. (1995) and Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996). The most significant of these factors in both the first and second quarter were from liquor liability claims for losses occurring outside California in 1999 that were reported to the Company in 2001. These claims arise from the liability of tavern owners related to the sale of alcoholic beverages. The frequency and severity of these claims were significantly greater than had been anticipated by the Company. The Company is taking corrective actions to address the adverse development on its non-California liquor liability coverages. These actions include instituting more stringent underwriting criteria, limiting coverages offered, and increasing rates. POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees, and certain other underwriting costs, which are related to the production of Crusader insurance policies. These costs include both Crusader expenses and allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay Crusader a ceding commission, which is primarily a reimbursement of the acquisition cost related to the ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. These costs were 28% of net premium earned for the three months and 29% of net earned premium for the six months ended June 30, 2001, compared to 31% of net premium earned for both the three months and six months ended June 30, 2000. SALARIES AND EMPLOYEE BENEFITS increased $18,283 (2%) to $1,116,585 for the three months and increased $50,427 (2%) to $2,230,290 for the six months ended June 30, 2001, compared to salary and employee benefits of $1,098,302 for the three months and $2,179,863 for the six months ended June 30, 2000. COMMISSIONS TO AGENTS/BROKERS decreased $6,857 (2%) to $316,810 for the three months and decreased $16,978 (3%) to $639,817 for the six months ended June 30, 2001, compared to the three and six months ended June 30, 2000. OTHER OPERATING EXPENSES decreased $113,291 (16%) for the three months and $16,826 (1%) for the six months ended June 30, 2001, compared to the three and six months ended June 30, 2000. The decrease in the three months was primarily due to a reduction in legal fees of $49,057 related to the settlement of the State of Washington regulatory proceedings on January 31, 2001, and a decrease in marketing expenses of $46,732. INCOME TAX PROVISION provided a benefit of $638,691 for the three months and a benefit of $702,630 for the six months ended June 30, 2001, compared to income tax expense of $196,398 (24% of income before taxes) in the three months and $389,704 (24% of income before taxes) in the six months ended June 30, 2000. This change was primarily due to a pre-tax loss of $1,735,416 (including tax exempt investment income of $197,906) in the three months and a pre-tax loss of $1,747,251 (including tax exempt investment income of $386,094) in the six months ended June 30, 2001, compared to pre-tax income of $808,470 (including tax exempt investment income of $262,044) in the three months and pre-tax income of $1,636,785 (including tax exempt investment income of $544,579) in the six month ended June 30, 2000. The effect of inflation on net income of the Company during the three and six months ended June 30, 2001, and the three and six months ended June 30, 2000, was not significant. 12 Forward Looking Statements -------------------------- Certain statements contained herein, including the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," that are not historical facts are forward looking. These statements, which may be identified by forward-looking words or phrases such as "anticipate," "believe," "expect," "intend," "may," "should," and "would," involve risks and uncertainties, many of which are beyond the control of the Company. Such risks and uncertainties could cause actual results to differ materially from these forward-looking statements. Factors which could cause actual results to differ materially include premium rate adequacy relating to competition or regulation, actual versus estimated claim experience, regulatory changes or developments, unforeseen calamities, general market conditions, the Company's ability to introduce new profitable products, and the Company's ability to expand geographically. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------- The Company's consolidated balance sheet includes a substantial amount of invested assets whose fair values are subject to various market risk exposures including interest rate risk and equity price risk. The Company's invested assets consist of the following:
June 30 December 31 Increase 2001 2000 (Decrease) ---- ---- -------- Fixed maturity bonds (at amortized value) $91,467,642 $94,398,077 $(2,930,435) Short-term cash investments (at cost) 3,125,120 3,355,354 (230,234) Equity securities (at cost) 2,400 25,920 (23,520) Certificates of deposit (over 1 year, at cost) 400,000 400,000 - ---------- ---------- --------- Total invested assets $94,995,162 $98,179,351 $(3,184,189) ========== ========== =========
There have been no material changes in the composition of the Company's invested assets or market risk exposures since the end of the preceding fiscal year end. PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS -------------------------------------------------------- (a) On June 1, 2001, the Company held its Annual Meeting of Stockholders. (b) Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934; there was no solicitation in opposition to nominees of the Board of Directors as listed in the Proxy Statement and all such nominees were elected. (c) At the meeting, the following persons were elected by the vote indicated as directors to serve until the next annual meeting of shareholders and until their successors are duly elected and qualified. There were 27,080 no broker non-votes. Name For Against or Withheld ---- --- ------------------- Erwin Cheldin 4,738,841 2,936 Lester A. Aaron 4,738,841 2,936 Cary L. Cheldin 4,738,841 2,936 George C. Gilpatrick 4,738,941 2,836 David A. Lewis 4,738,914 2,863 Warren D. Orloff 4,737,929 3,848 Donald B. Urfrig 4,738,941 2,836 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (a) Exhibits: None (b) Reports on Form 8-K: None. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto authorized. UNICO AMERICAN CORPORATION Date: August 10, 2001 By: /s/ Erwin Cheldin ----------------- Erwin Cheldin Chairman of the Board, President and Chief Executive Officer, (Principal Executive Officer) Date: August 10, 2001 By: /s/ Lester A. Aaron ------------------- Lester A. Aaron Treasurer, Chief Financial Officer, (Principal Accounting and Principal Financial Officer) 14