-----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, SZ7E62wMPARCieeqFdNDRlr6RxXCRKcKx6/XI7nEhNTHvuIbz3tRbmqJDwd/KNAQ qQcTWXmbAGcfP6HHypTB2w== 0000100716-99-000013.txt : 19991115 0000100716-99-000013.hdr.sgml : 19991115 ACCESSION NUMBER: 0000100716-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNICO AMERICAN CORP CENTRAL INDEX KEY: 0000100716 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 952583928 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03978 FILM NUMBER: 99748752 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-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ( X ) Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period from July 1, 1999 to September 30, 1999 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from__________to__________ 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 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 6,304,965 Number of shares of common stock outstanding as of November 8, 1999 1 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30 December 31 1999 1998 ---- ---- ASSETS ------ Investments Available for sale: Fixed maturities, at market value (amortized cost: September 30, 1999, $99,311,652; December 31, 1998, $96,358,812) $98,854,061 $99,472,720 Equity securities at market (cost: September 30, 1999, $164,170; December 31, 1998, $503,503) 85,500 481,500 Short-term investments, at cost 4,714,151 6,573,862 ----------- ----------- Total Investments 103,653,712 106,528,082 Cash 184,321 277,544 Accrued investment income 1,885,124 2,022,197 Premiums and notes receivable, net 5,997,772 5,922,716 Reinsurance recoverable: Paid losses and loss adjustment expenses 211,108 146,205 Unpaid losses and loss adjustment expenses 2,502,152 1,139,713 Prepaid reinsurance premiums 32,716 19,452 Deferred policy acquisition costs 4,493,256 4,665,772 Property and equipment (net of accumulated depreciation) 167,133 205,369 Deferred income taxes 1,051,241 208,976 Other assets 399,964 581,617 ----------- ----------- Total Assets $120,578,499 $121,717,643 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES - ----------- Unpaid losses and loss adjustment expenses $38,973,507 $41,513,945 Unearned premiums 17,346,798 18,136,895 Advance premium and premium deposits 2,450,626 2,329,356 Accrued expenses and other liabilities 6,840,974 5,418,459 Income taxes payable - 150,906 ---------- ---------- Total Liabilities $65,611,905 $67,549,561 ---------- ---------- STOCKHOLDERS' EQUITY - --------------------- Common stock, no par - authorized 10,000,000 shares; issued and outstanding shares 6,304,953 at September 30, 1999, and 6,223,424 at December 31, 1998 $3,098,389 $2,895,702 Accumulated other comprehensive income (loss) (353,933) 1,998,536 Retained earnings 52,222,138 49,273,844 ---------- ---------- Total Stockholders' Equity $54,966,594 $54,168,082 ---------- ---------- Total Liabilities and Stockholders' Equity $120,578,499 $121,717,643 =========== ===========
See notes to unaudited consolidated financial statements. 2 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES - -------- Insurance Company Revenues Premium earned $8,606,924 $10,048,497 $26,256,814 $31,018,804 Premium ceded 2,265,845 1,537,040 5,482,002 4,308,176 --------- ---------- ---------- ---------- Net premium earned 6,341,079 8,511,457 20,774,812 26,710,628 Net investment income 1,439,237 1,385,234 4,257,017 4,045,696 Net realized investment gains 5,633 124,939 64,793 141,169 Other income 256 75 628 1,138 --------- ---------- ---------- ---------- Total Insurance Company Revenues 7,786,205 10,021,705 25,097,250 30,898,631 Other Revenues from Insurance Operations Gross commissions and fees 1,462,969 1,456,945 4,235,672 4,242,324 Investment income 63,434 63,173 202,644 166,786 Finance charges and late fees earned 229,492 261,475 690,359 779,393 Other income 1,528 875 10,167 6,004 --------- ---------- ---------- ---------- Total Revenues 9,543,628 11,804,173 30,236,092 36,093,138 --------- ---------- ---------- ---------- EXPENSES - -------- Losses and loss adjustment expenses 3,972,201 4,372,848 11,450,352 13,567,529 Policy acquisition costs 2,062,228 2,286,373 6,336,141 7,312,011 Salaries and employee benefits 1,097,561 1,046,831 3,235,432 3,088,568 Commissions to agents/brokers 327,904 275,964 968,551 756,502 Other operating expenses 610,538 645,148 1,889,414 1,775,019 --------- --------- ---------- ---------- Total Expenses 8,070,432 8,627,164 23,879,890 26,499,629 --------- --------- ---------- ---------- Income Before Taxes 1,473,196 3,177,009 6,356,202 9,593,509 Income Tax Provision 415,554 997,213 1,831,670 3,065,893 --------- --------- --------- --------- Net Income $1,057,642 $2,179,796 $4,524,532 $6,527,616 ========= ========= ========= ========= PER SHARE DATA Basic Shares Outstanding 6,304,953 6,220,753 6,255,774 6,185,212 Basic Earnings Per Share $0.17 $0.35 $0.72 $1.06 Diluted Shares Outstanding 6,367,661 6,421,286 6,359,146 6,428,962 Diluted Earnings Per Share $0.17 $0.34 $0.71 $1.02
See notes to unaudited consolidated financial statements. 3 UNICO AMERICAN CORPORATION AND SUBSIDIARIES STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- Net income $1,057,642 $2,179,796 $4,524,532 $6,527,616 Other changes in comprehensive income net of tax: Unrealized gains (losses) on securities classified as available-for-sale arising during the period (373,582) 1,185,511 (2,332,372) 1,280,954 Less: reclassification adjustment for gains included in net income - (51,980) (20,097) (62,692) ------- --------- --------- --------- Comprehensive Income $684,060 $3,313,327 $2,172,063 $7,745,878 ======= ========= ========= =========
See notes to unaudited consolidated financial statements. 4 UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ---- ---- Cash Flows from Operating Activities: Net Income $4,524,532 $6,527,616 Adjustments to reconcile net income to net cash from operations Depreciation and amortization 66,048 73,120 Bond amortization, net 524,756 495,668 Net realized (gain) on sale of securities (64,793) (141,169) Changes in assets and liabilities Premium, notes and investment income receivable 62,017 908,487 Reinsurance recoverable (1,427,342) (125,955) Prepaid reinsurance premiums (13,264) 930,190 Deferred policy acquisitions costs 172,516 22,511 Other assets 181,653 351,218 Reserve for unpaid losses and loss adjustment expenses (2,540,438) 283,530 Unearned premium reserve (790,097) (2,430,237) Funds held as security and advanced premiums 121,270 183,608 Accrued expenses and other liabilities 1,439,749 2,111,299 Income taxes current/deferred 265,292 399,807 --------- --------- Net Cash Provided from Operations 2,521,899 9,589,693 --------- --------- Investing Activities Purchase of fixed maturity investments (11,342,604) (17,457,379) Proceeds from maturity of fixed maturity investments 7,839,250 7,794,600 Proceeds from sale of fixed maturity investments - 1,041,250 Purchase of equity securities - cost (3,758,378) (3,128,440) Proceeds from sale of equity securities 4,162,504 1,523,994 Net increase in short-term investments 1,885,470 1,413,644 Additions to property and equipment (27,812) (55,422) --------- --------- Net Cash (Used) by Investing Activities (1,241,570) (8,867,753) --------- --------- Financing Activities Proceeds from issuance of common stock 202,687 48,894 Dividends paid to shareholders (1,576,239) (435,455) --------- ------- Net Cash (Used) by Financing Activities (1,373,552) (386,561) --------- ------- Net increase (decrease) in cash (93,223) 335,379 Cash at beginning of period 277,544 55,768 ------- ------- Cash at End of Period $184,321 $391,147 ======= ======= Supplemental Cash Flow Information Cash paid during the period for: Interest $1,492 $121 Income taxes $1,725,000 $2,505,000
See notes to unaudited consolidated financial statements. 5 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Nature of Business - ------------------ Unico American Corporation ("Unico") is an insurance holding company. Unico 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. 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 nine months ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Quarterly financial statements should be read in conjunction with the financial statements and related notes in the Company's 1998 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. 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 certain costs of internally developed software be capitalized. There were no costs incurred for software purchase or development in the three and nine months ended September 30, 1999, which were required to be capitalized. Statement of Position 97-3 (SOP 97-3), Accounting by Insurance and Other Enterprises for Insurance Related Assessments, is effective for financial statements beginning after December 15, 1998. SOP 97-3 requires that liability for insurance related assessments be recognized when an assessment is probable, the event obligating the assessment has occurred, and the assessment can be reasonably estimated. The adoption of SOP 97-3 has no material effect on the financial statements. NOTE 2 - INCENTIVE STOCK OPTION PLAN - ------------------------------------ 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 September 30, 1999, there were 101,415 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, which covers 500,000 shares of the Company's common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) was approved by shareholders June 4, 1999. As of September 30, 1999, there were 135,000 options outstanding. None of the options outstanding are currently exercisable. 6 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 3 - 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 September 30, 1999 and 1998, and for the nine months ended September 30, 1999 and 1998:
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- Basic Earnings Per Share - ------------------------ Net income numerator $1,057,642 $2,179,796 $4,524,532 $6,527,616 ========= ========= ========= ========= Weighted average shares outstanding denominator 6,304,953 6,220,753 6,255,774 6,185,212 ========= ========= ========= ========= Basic Earnings Per Share $0.17 $0.35 $0.72 $1.06 Diluted Earnings Per Share - -------------------------- Net income numerator $1,057,642 $2,179,796 $4,524,532 $6,527,616 ========= ========= ========= ========= Weighted average shares outstanding 6,304,953 6,220,753 6,255,774 6,185,212 Effect of diluted securities 62,708 200,533 103,372 243,750 --------- --------- --------- --------- Diluted shares outstanding denominator 6,367,661 6,421,286 6,359,146 6,428,962 ========= ========= ========= ========= Diluted Earnings Per Share $0.17 $0.34 $0.71 $1.02
NOTE 4 - 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 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 comprise 83% 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.
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1999 1998 1999 1998 ---- ---- ---- ---- Revenues - -------- Insurance company operation $7,786,205 $10,021,705 $25,097,250 $30,898,631 Other insurance operations 4,230,042 4,478,785 12,750,287 13,732,791 Intersegment elimination (1) (2,472,619) (2,696,317) (7,611,445) (8,538,284) --------- --------- --------- --------- Total other insurance operations 1,757,423 1,782,468 5,138,842 5,194,507 --------- --------- --------- --------- Total Revenues $9,543,628 $11,804,173 $30,236,092 $36,093,138 ========= ========== ========== ========== Income Before Income Taxes - -------------------------- Insurance company operation $1,299,567 $2,918,040 $6,029,732 $8,527,677 Other insurance operations 173,629 258,969 326,470 1,065,832 --------- --------- --------- --------- Total Income Before Income Taxes $1,473,196 $3,177,009 $6,356,202 $9,593,509 ========= ========= ========= =========
7 UNICO AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 4 - SEGMENT REPORTING (continued) - -------------------------------------- As of September 30 ------------------ 1999 1998 ---- ---- Assets - ------ Insurance company operation $103,040,819 $103,678,448 Intersegment eliminations (2) (334,797) (24,507) ----------- ----------- Total insurance company operation 102,706,022 103,653,941 Other insurance operations 17,872,477 16,817,492 ---------- ---------- Total Assets $120,578,499 $120,471,433 =========== =========== (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 September 30, 1999, the Company had cash and investments of $104,374,294 (at amortized cost) of which $97,113,254 (93%) were cash and investments of Crusader. As of the quarter ended September 30, 1999, the Company had invested $99,311,652 (at amortized cost) or 95% 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 $99,311,652 (at amortized cost) include $28,198,842 (28%) of pre-refunded state and municipal tax exempt bonds, $10,069,595 (10%) of U.S. treasury securities, $60,843,215 (62%) of high-quality industrial and miscellaneous bonds, and $200,000 of certificates of deposit. The tax exempt interest income earned for the three and nine months ended September 30, 1999, was $345,940 and $1,124,231, respectively. The tax exempt interest income earned for the three and nine months ended September 30, 1998, was $417,366 and $1,283,319, 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) - ------------------------ The Company's investment policy limits investments in any one issuer 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 also limits its holdings of equity securities to no greater than five percent of stockholders' equity. 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 deposit are FDIC insured. On July 15, 1999, the Company paid the twenty-five cents ($0.25) per share cash dividend that was declared by the Board of Directors on March 12, 1999, to shareholders of record at the close of business on July 1, 1999. Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments at September 30, 1999, net of trust restriction of $2,909,934, 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. State of Washington Regulatory Proceeding - ----------------------------------------- In August 1999 the Insurance Commissioner of the State of Washington announced that she would seek to suspend Crusader's Certificate of Authority to do business in the State of Washington for a period of 120 days, impose a $307,000 fine, and seek repayment of policy service fees to Washington policyholders. The Insurance Commissioner alleges that a service fee of $250 per policy, which was charged by a Washington agent, is premium and subject to rate filing requirements and premium taxes. The Company does not believe it has done anything improper and intends to defend vigorously these charges and does not believe that the outcome of this matter will have an adverse material effect on its financial statements. Year 2000 - --------- The Company 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 cost 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 covered unless such events also caused physical damage to the insured's 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. 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS (continued) - ------------------------- 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. There are no material commitments for capital expenditures as of the date of this report. (b) Results of Operations: - --------------------------- All comparisons made in this discussion are comparing the three and nine months ended September 30, 1999, to the three and nine months ended September 30, 1998, unless otherwise indicated. The Company's net income decreased $1,122,154 (51%) to $1,057,642 for the three months and $2,003,084 (31%) to $4,524,532 for the nine months ended September 30, 1999, compared to net income of $2,179,796 for the three months and $6,527,616 for the nine months ended September 30, 1998. Total revenues decreased $2,260,545 (19%) for the three months and $5,857,046 (16%) for the nine months ended September 30, 1999, when compared to the three and nine months ended September 30, 1998. Premium earned before reinsurance decreased $1,441,573 (14%) to $8,606,924 for the three months and $4,761,990 (15%) to $26,256,814 for the nine months ended September 30, 1999, compared to the three and nine months ended September 30, 1998. In May, 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 commenced marketing directly to all retail agents and brokers. 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. In addition, intense price competition adversely affected the premium written and earned in all states in which the Company does business. 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 premium writings at inadequate rates. The Company cannot determine how long this "soft market" condition will continue. Premium ceded increased $728,805 (47%) to $2,265,845 for the three months and $1,173,826 (27%) to $5,482,002 for the nine months ended September 30, 1999, compared to the three and nine months ended September 30, 1998. Ceded premiums increased due to higher than anticipated loss experience ceded to the Company's provisionally rated reinsurance contract. Premium ceded under this contract, which was canceled on a run off 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 is as follows:
Three months ended Nine months ended September 30, 1999 September 30, 1999 ------------------ ------------------ (Decrease) in ceded premium (excluding provisionally rated premium ceded) $(280,804) $(635,703) Increase in provisionally rated premium ceded 1,009,609 1,809,529 --------- --------- Net increase in ceded premium $728,805 $1,173,826 ======= =========
Premium written before reinsurance decreased $761,834 (8%) to $8,273,478 for the three months and decreased $3,121,849 (11%) to $25,466,717 for the nine months ended September 30, 1999, compared to the three and nine months ended September 30, 1998. The decrease in written premium is primarily the result of intense price competition as previously discussed. Written premium in the states of Oregon and Washington increased $126,355 (37%) to $466,665 for the three months and, primarily due to the change in marketing strategy discussed above, decreased $1,450,241 (52%) to $1,317,632 for the nine months ended September 30, 1999, when compared to the three and nine months ended September 30, 1998. 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS (continued) - ------------------------ Crusader's written premium by state is as follows:
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------ 1999 1998 Increase 1999 1998 Increase ---- ---- (Decrease) ---- ---- (Decrease) -------- -------- California $7,139,128 $7,882,362 $(743,234) $21,931,544 $23,928,116 $(1,996,572) Arizona 230,150 293,196 (63,046) 791,597 975,451 (183,854) Washington 272,990 208,333 64,657 734,330 1,660,213 (925,883) Oregon 193,675 131,977 61,698 583,302 1,107,660 (524,358) Pennsylvania 92,189 66,872 25,317 502,655 213,917 288,738 Ohio 156,710 145,995 10,715 403,759 374,450 29,309 Montana 127,943 68,149 59,794 345,634 68,149 277,485 Texas 16,408 133,623 (117,215) 92,143 133,623 (41,480) Kentucky 35,007 72,705 (37,698) 63,023 75,893 (12,870) Nevada 9,278 32,100 (22,822) 18,730 51,094 (32,364) --------- --------- ------- ---------- ---------- --------- Total $8,273,478 $9,035,312 $(761,834) $25,466,717 $28,588,566 $(3,121,849) ========= ========= ======= ========== ========== =========
Net investment income, excluding realized investment gains, increased $54,264 (4%) to $1,502,671 for the three months and $247,179 (6%) to $4,459,661 for the nine months ended September 30, 1999, compared to investment income of $1,448,407 for the three months and $4,212,482 for the nine months ended September 30, 1998. This increase was primarily due to a 5% increase (at amortized cost) in bonds and short term invested assets. Gross commission and fee income increased $6,024 (0.4%) to $1,462,969 for the three months and decreased $6,652 (0.2%) to $4,235,672 for the nine months ended September 30, 1999, compared to the three and nine months ended September 30, 1998. The increase for the three months and decrease for the nine months consisted of the following:
Three months ended Nine months ended September 30, 1999 September 30, 1999 ------------------ ------------------ Health and life insurance program $169,455 $401,606 Daily automobile rental insurance program (63,399) (42,127) Commercial automobile insurance program 118 4,262 Workers' compensation program (96,482) (195,636) Other commission income 22,153 22,153 Service fee income (25,821) (196,910) ------ ------- Net increase (decrease) in commission and fee income $6,024 $(6,652) ===== =====
Health and life insurance commission and fee income increased primarily as a result of an increase in the sales of small business group accounts for CIGNA, an increase in the number of small business group accounts administered by the Company for CIGNA, and the recognition of a bonus commission of $95,000 from CIGNA in the quarter ended September 30, 1999. Daily automobile rental insurance program commission and fee income decreased primarily due to the recognition of a contingent commission income of $49,430 in the quarter ended September 30, 1998. The commercial automobile insurance program book of business was sold to a non-affiliated third party in June 1997. As consideration for the sale, the Company received a percentage of the commission earned for a two year period on policies which were in force at the time of sale. The final payment was received and recognized in the quarter ended September 30, 1999. Workers' compensation income decreased primarily due to a change in the non-affiliated insurance company which underwrites the workers' compensation policies sold by the Company. This change, which took place in October 1998, resulted in decreased revenues because the new company does not write all the classes of business that were written by the previous company. The Company is currently attempting to increase the classes of business that it is authorized to write. 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS (continued) - ------------------------- Other commission income represents commission from unaffiliated insurance companies on new programs written by Unifax. Service fee income decreased primarily due to the related decrease in the number of policies written by Unifax for Crusader. Losses and loss adjustment expenses were 63% of net premium earned for the three months and 55% for the nine months ended, September 30, 1999 compared to 51% of net premium earned for the three months and 51% for the nine months ended September 30, 1998. The increase in the ratio of losses and loss adjustment expenses to net earned premium for both the three and nine month period in the current year over the prior year was primarily due to the increase in the provisionally rated ceded premium discussed above. 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 33% of net premium earned for the three months and 30% of net premium earned for the nine months ended September 30, 1999, compared to 27% of net premium earned for the three months and 27% of net premium earned for nine months ended September 30, 1998. The increase in the ratio of policy acquisition costs to net earned premium for both the three and nine month period in the current year over the prior year was primarily due to the increase in the provisionally rated ceded premium discussed above. Salaries and employee benefits increased $50,730 (5%) to $1,097,561 for the three months and increased $146,864 (5%) to $3,235,432 for the nine months ended September 30, 1999, compared to the three and nine months ended September 30, 1998. Commissions to agents/brokers increased $51,940 (19%) to $327,904 for the three months and increased $212,049 (28%) to $968,551 for the nine months ended September 30, 1999, compared to the three and nine months ended September 30, 1998. The increase is primarily due to commissions paid to agents and brokers related to the increase in revenue from the health and life program. Other operating expenses decreased $34,610 (5%) for the three months and increased $114,395 (6%) for the nine months ended September 30, 1999, compared to the three and nine months ended September 30, 1998. The decrease for the current quarter was primarily due the fact that the quarter ended September 30, 1998 included $45,875 of insurance department examination fees related to Crusader's regular tri-annual examination. The increase for the nine months was primarily due to i) the fact that the nine months ended September 30, 1998 included $134,069 of insurance department examination fees related to Crusader's regular tri-annual examination and ii) the fact that the nine months ended September 30, 1998, quarter included a $240,155 interest expense credit resulting from a settlement of federal income tax issues which had been under appeal The effect of inflation on net income of the Company during the three and nine months ended September 30, 1999, and 1998 was not significant. Forward Looking Statements - -------------------------- Information contained in this discussion, other than historical information, is considered "forward looking statements" and may be subject to change based on various important factors and uncertainties. Some, but not all, of the factors and uncertainties that may cause actual results to differ significantly from those expected in any forward looking statements are disclosed in the Company's 1998 Form 10-K as filed with the Securities and Exchange Commission. Further, the statements herein concerning the effects of the Company's stated expectations as to the long-term results of marketing in the states of Washington and Oregon directly to retail agents and brokers rather than through the Company's former 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS (continued) - ------------------------ general agent and the statement herein concerning the possible outcome of the State of Washington regulatory proceeding are forward looking statements which involve risks and uncertainties that could cause actual results to differ materially from these forward looking statements. With respect to the statement concerning the effects of the change in marketing in the states of Washington and Oregon, factors which would cause the actual results to differ materially include the Company's ability to effectively market to retail agents and brokers in those states, the willingness of the retail agents and brokers in those states to deal directly with the Company, and general economic conditions and competition in those states. With respect to the State of Washington regulatory proceeding, the outcome of the proceeding involves risks and uncertainties and actual results may differ from that anticipated by the Company if, in fact, the Insurance Commissioner prevails on all requests at the administrative hearing and the administrative judge's decision were upheld in the court proceedings following such a decision. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The Company's consolidated balance sheet includes a substantial amount of invested assets whose fair values are subject to various market risk exposures including interest rate risk and equity price risk. The Company's invested assets consist of the following:
September 30 December 31 Increase 1999 1998 (Decrease) ---- ---- ---------- Fixed maturity bonds (at amortized value) $99,111,652 $96,158,812 $2,952,840 Short-term cash investments (at cost) 4,714,151 6,573,862 (1,859,711) Equity securities (at cost) 164,170 503,503 (339,333) Certificates of deposit (over 1 year, at cost) 200,000 200,000 - ----------- ----------- --------- Total invested assets $104,189,973 $103,436,177 $753,796 =========== =========== =======
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 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - -------------------------------------------------- (c) On August 26, 1999, the Company granted to 17 employees incentive stock options covering an aggregate of 135,000 shares of its common stock exercisable at $9.25 per share. These options expire ten years from the date of the grant and are not exercisable prior to September 1, 2000. Options covering 10,000 or less shares become exercisable at the rate of 2,500 shares per year commencing September 1, 2000; and options covering more than 10,000 shares become exercisable at the rate of 5,000 shares per year commencing September 1, 2000. All of these options were granted to employees having the title of manager or higher. Each person who was granted an option represented that he or she was acquiring the option, and any shares issuable upon exercise thereof, for investment and without a view to distribution or resale in violation of the Securities Act of 1933, as amended. These options were granted in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended, contained in Section 4(2) thereof, as transactions not involving a public offering. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: - ------------------------------------------------------- (a) Exhibits: Exhibit 27 - Financial Data Schedule. (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: November 9, 1999 By: /s/ ERWIN CHELDIN ----------------- Erwin Cheldin Chairman of the Board, President and Chief Executive Officer, (Principal Executive Officer) Date: November 9, 1999 By: /s/ LESTER A. AARON ------------------- Lester A. Aaron Treasurer, Chief Financial Officer, (Principal Accounting and Principal Financial Officer) 14 EX-27 2 FDS --
7 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 103,568,212 0 0 85,500 0 0 103,653,712 184,321 2,713,260 4,493,256 120,578,499 38,973,507 17,346,798 2,450,626 0 0 0 0 3,098,389 51,868,205 120,578,499 20,774,812 4,459,661 64,793 4,936,826 11,450,352 6,336,141 6,093,397 6,356,202 1,831,670 4,524,532 0 0 0 4,524,532 0.72 0.71 0 0 0 0 0 0 0
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