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
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
---- ----
ASSETS
------
Investments
Available for sale:
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
- --------
Insurance Company Revenues
<S> <C> <C> <C> <C>
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
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
======= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
UNICO AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
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
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Basic Earnings Per Share
- ------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues
- --------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
7
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
(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
======= =========
</TABLE>
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
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS (continued)
- ------------------------
Crusader's written premium by state is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1999 1998 Increase 1999 1998 Increase
---- ---- (Decrease) ---- ---- (Decrease)
-------- --------
<S> <C> <C> <C> <C> <C> <C>
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)
========= ========= ======= ========== ========== =========
</TABLE>
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:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
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)
===== =====
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
September 30 December 31 Increase
1999 1998 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
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
=========== =========== =======
</TABLE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 103,568,212
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 85,500
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 103,653,712
<CASH> 184,321
<RECOVER-REINSURE> 2,713,260
<DEFERRED-ACQUISITION> 4,493,256
<TOTAL-ASSETS> 120,578,499
<POLICY-LOSSES> 38,973,507
<UNEARNED-PREMIUMS> 17,346,798
<POLICY-OTHER> 2,450,626
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,098,389
<OTHER-SE> 51,868,205
<TOTAL-LIABILITY-AND-EQUITY> 120,578,499
20,774,812
<INVESTMENT-INCOME> 4,459,661
<INVESTMENT-GAINS> 64,793
<OTHER-INCOME> 4,936,826
<BENEFITS> 11,450,352
<UNDERWRITING-AMORTIZATION> 6,336,141
<UNDERWRITING-OTHER> 6,093,397
<INCOME-PRETAX> 6,356,202
<INCOME-TAX> 1,831,670
<INCOME-CONTINUING> 4,524,532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,524,532
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.71
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
