UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission File No. 0-3978
UNICO AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2583928
(State or other jurisdiction of (I.R.S Employee
incorporation or organization) Identification No.)
23251 Mulholland Drive, Woodland Hills, California 91364
(Address of Principal Executive Offices) (Zip Code)
(818) 591-9800
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
Securities registered pursuant to section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and willnot be contained, to the
best of Registrant's knowledge, in definitive proxy of information statements
incorporated by reference as Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of Registrant's voting stock held by non-affiliates
as of March 19, 1999 was $36,046,184 (based on theclosing sales price on such
date, as reported by the Wall Street Journal).
6,224,369
Number of shares of common stock outstanding as of March 19, 1999
Portions of the definitive proxy statement which Registrant intends to file
pursuant to Regulation 14(A) by a date no later than 120 days after December 31,
1998, to be used in connection with the annual meeting of shareholders, are
incorporated herein by reference into Part III hereof. If such definitive proxy
statement is not filed in the 120 day period, the information called for by Part
III will be filed as an amendment to this Form 10-K not later than the end of
the 120 day period.
1
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PART I
------
Item 1. Business
- - -----------------
Unico American Corporation is referred to herein as the "Company" or "Unico" and
such references include both the corporation and its subsidiaries, all of which
are wholly owned, unless otherwise indicated. Unico was incorporated under the
laws of Nevada in 1969. Unico American Corporation is an insurance holding
company which provides property, casualty, health and life insurance and related
premium financing through its wholly owned subsidiaries. Descriptions of the
Company's operations in the following paragraphs are categorized between the
Company's major segment, its insurance company operation, and all other revenues
from insurance operations. The insurance company operation is conducted through
Crusader Insurance Company ("Crusader"), the Company's property and casualty
insurance company. Insurance company revenues and other revenues from insurance
operations for the fiscal year ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Percent of Total
Total Revenues Company Revenues
<S> <C> <C>
Insurance Company Revenues $40,661,632 85.5%
Other Revenues from Insurance Operations
- - ----------------------------------------
Health and life insurance program commission income 2,216,446 4.6%
Service fee income 1,896,258 4.0%
Daily automobile rental insurance program commission
and claim administration fees 807,503 1.7%
Association operations membership and fee income 355,781 0.8%
Workers' compensation program commission income 329,465 0.7%
Commercial and personal automobile insurance program
commission income, service fees and claim administration fees 1,843 -
Miscellaneous fee income 242 -
---------- -----
Total gross commission and fee income 5,607,538 11.8%
Insurance premium financing operation finance charges and late fees 1,033,479 2.2%
Non-insurance company investment income 234,580 0.5%
Other income 7,041 -
--------- -----
Total Other Revenues from Insurance Operations 6,882,638 14.5%
--------- -----
Total Revenues $47,544,270 100.0%
========== ======
</TABLE>
INSURANCE COMPANY OPERATION
---------------------------
General
- - -------
The insurance company operation is conducted through Crusader, which as of
December 31, 1998, is licensed as an admitted insurance carrier in the states of
Arizona, California, Montana, Nevada, Oregon and Washington. Crusader is a
multiple line property and casualty insurance company which began transacting
business on January 1, 1985. As of December 31, 1998, 97% of Crusader's business
was commercial multiple peril "business package" insurance policies. This
business is written in all of the states in which it is licensed. Commercial
multiple peril policies provide a combination of property and liability coverage
for businesses and business property. Commercial property coverages insure
against loss or damage to buildings, inventory and equipment from natural
disasters, including hurricanes, windstorms, hail, water, explosions, severe
winter weather and other events such as theft and vandalism, fires and storms
and financial loss due to business interruption resulting from covered property
damage. Commercial liability coverages insure against third party liability from
accidents occurring on the insured's premises or arising out of its operations,
such as injuries sustained from products sold. Crusader also writes separate
commercial property and commercial liability policies.
Crusader's business is produced by Unifax Insurance Systems, Inc., ("Unifax")
its sister corporation. Unifax has substantial experience with these classes of
business. The commissions paid by Crusader to Unifax are eliminated as
intercompany transactions and are not reflected in the above table. Crusader is
licensed in all property and casualty and disability lines by the California
Department of Insurance.
2
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Reinsurance
- - -----------
A reinsurance transaction occurs when an insurance company transfers ("cedes") a
portion of its exposure on business written by it to a reinsurer which assumes
that risk for a premium ("ceded premium"). Reinsurance does not legally
discharge the Company from primary liability under its policies. If the
reinsurer fails to meet its obligations, the Company must nonetheless pay its
policy obligations. Crusader has reinsurance agreements with National
Reinsurance Corporation, a California admitted reinsurer. National Reinsurance
Corporation was acquired by General Reinsurance Corporation in 1996. These
reinsurance agreements help protect Crusader against liabilities in excess of
certain retentions, including major or catastrophic losses which may occur from
any one or more of the property and/or casualty risks which Crusader insures.
Crusader also has additional catastrophe reinsurance from various other
reinsurance companies of which 78% of the participating catastrophe reinsurers
are admitted in California.
The aggregate amount of earned premium ceded to the reinsurers was $5,700,222
for the fiscal year ended December 31, 1998, and $6,394,328 for the fiscal year
ended December 31, 1997.
On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per
risk subject to aggregate limits and to catastrophe and clash covers. Beginning
January 1, 1998, an annual aggregate deductible of $750,000 commenced on losses
ceded to its reinsurance treaty covering losses between $250,000 and $500,000.
The catastrophe and clash covers (subject to a maximum occurrence and annual
aggregate) help protect the Company from one loss occurrence affecting multiple
policies
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays
a commission to Crusader which includes a reimbursement of the cost of acquiring
the portion of the premium which is ceded. Crusader does not currently assume
any reinsurance. The Company intends to continue obtaining reinsurance although
the availability and cost may vary from time to time.
The unpaid losses ceded to the reinsurer are recorded as an asset on the balance
sheet.
Unpaid Losses and Loss Adjustment Expenses
- - ------------------------------------------
Crusader maintains reserves for losses and loss adjustment expenses with respect
to both reported and unreported losses. Crusader establishes reserves for
reported losses based on historical experience, upon case-by-case evaluation of
facts surrounding each known loss, and the related policy provisions. The amount
of reserves for unreported losses is estimated by analysis of historical and
statistical information. Historical data includes the 14 years that Crusader has
been in operation and the data from its general agent developed with other
insurance companies prior to 1985. Since the ultimate liability of Crusader may
be greater or less than estimated reserves, all reserves are constantly
monitored and adjusted when appropriate. Reserves for loss adjustment expenses
are estimated to cover the direct costs associated with specific claims as well
as an estimate of administrative costs.
The process of establishing loss reserves involves significant judgment. The
following table shows the development of the unpaid losses and loss adjustment
expenses for fiscal years 1989 through 1998. The top line of the table shows the
estimated liability for unpaid losses and loss adjustment expenses recorded at
the balance sheet date for each of the indicated years. This liability
represents the estimated amount of losses and loss adjustment expenses for
losses arising in the current and prior years that are unpaid at the balance
sheet date, including the estimated losses that had been incurred but not
reported to the Company. The table shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known.
The table reflects redundancies in Crusader's net loss and loss adjustment
expense reserves in all years except 1994. These redundancies are due to
Crusader's loss reserving practices used in determining its incurred but not
reported losses and loss adjustment expenses ("IBNR"). There is no assurance the
redundancies will continue and the Company believes a change in the way it
computes IBNR is not warranted. Crusader is a relatively small insurance company
with 14 years of its own statistical experience. Crusader is constantly changing
its product mix and exposures, including the types of businesses insured within
its business package program as well as its lines of business. In addition, it
is regularly expanding its territories both inside and outside of California.
Considering the uncertainties from this changing environment as well as its
limited internal data and history, the Company recognizes the difficulties in
developing its own unique IBNR statistics; therefore, it incorporates industry
3
<PAGE>
standards and averages into its estimates. When Crusader establishes its IBNR
reserves, although historically conservative, it is still well below industry
average; and the Company believes that it is properly stated. When subsequent
development justifies changes in IBNR, the Company acts accordingly.
When evaluating the information in the following table, it should be noted that
each amount includes the effects of all changes in amounts of prior periods;
therefore, the cumulative redundancy or deficiency represents the aggregate
change in the estimates over all prior years. Conditions and trends that have
affected development of liability in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
deficiencies or redundancies based on this table.
4
<PAGE>
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
Fiscal Year Ended March 31
---------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $23,511,133 $23,601,435 $22,918,442 $21,249,902 $20,824,039 $21,499,778 $27,633,304
Paid Cumulative as of
1 Year Later 6,326,868 6,204,559 6,425,329 6,368,554 8,904,427 7,687,180 8,814,611
2 Years Later 10,726,038 10,357,708 10,946,318 9,583,885 10,824,024 13,453,833 13,502,224
3 Years Later 13,652,062 12,935,827 12,409,499 11,814,445 13,178,262 16,597,366 18,911,104
4 Years Later 15,121,985 13,561,987 12,951,511 12,667,989 14,462,911 19,073,442 22,631,450
5 Years Later 15,316,299 13,768,277 13,357,941 13,093,970 15,821,444 21,452,429
6 Years Later 15,385,519 13,866,654 13,459,123 13,385,215 16,936,140
7 Years Later 15,416,138 13,923,206 13,422,013 14,067,010
8 Years Later 15,450,239 13,797,865 13,630,780
9 Years Later 15,467,116 13,996,301
10 Years Later 15,479,036
Reserves Reestimated as
of
1 Year Later 22,315,883 20,990,669 20,153,906 18,562,116 19,599,695 20,912,743 25,666,251
2 Years Later 20,165,458 18,566,956 17,136,498 15,021,149 15,742,478 20,289,699 24,984,032
3 Years Later 18,348,965 15,846,416 14,788,046 13,802,009 15,463,566 21,217,766 24,575,023
4 Years Later 16,385,905 14,631,554 13,961,555 13,620,235 16,174,111 21,843,632 26,146,874
5 Years Later 15,782,294 14,115,281 13,833,745 13,790,786 16,888,885 23,767,472
6 Years Later 15,511,081 14,063,578 13,754,304 13,878,797 17,762,615
7 Years Later 15,471,448 14,063,080 13,529,769 14,374,473
8 Years Later 15,486,955 13,853,735 13,730,935
9 Years Later 15,489,438 14,037,964
10 Years Later 15,504,381
Cumulative
Redundancy
(Deficiency) $8,006,753 $9,563,471 $9,187,507 $6,875,429 $3,061,424 $(2,267,694) $1,486,430
========= ========= ========= ========= ========= =========== =========
Gross Liability for Unpaid Losses and Loss Adjustment Expenses $23,011,868 $26,294,199 $32,370,752
Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (2,187,829) (4,794,421) (4,737,448)
---------- ---------- ----------
Net Liability for Unpaid Losses and Loss Adjustment Expenses $20,824,039 $21,499,778 $27,633,304
========== ========== ==========
Gross Liability Reestimated $23,757,220 $25,117,074 $28,999,151
Ceded Liability Reestimated (5,994,605) (1,349,602) (2,852,277)
---------- ---------- ----------
Net Liability Reestimated $17,762,615 $23,767,472 $26,146,874
========== ========== ==========
Gross Reserve Redundancy (Deficiency) $(745,352) $1,177,125 $3,371,601
========= ========= =========
</TABLE>
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
Fiscal Year
Ended Fiscal Year Ended December 31
March 31 ------------------------------------
1996 1996 1997 1998
---- ---- ---- ----
(Nine Months)
<S> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $32,682,153 $37,111,846 $40,591,248 $40,374,232
Paid Cumulative as of
1 Year Later 7,019,175 10,996,896 12,677,646
2 Years Later 15,292,415 19,488,853
3 Years Later 20,898,580
Reserves Reestimated as
of
1 Year Later 31,232,388 32,838,369 35,730,603
2 Years Later 28,636,286 31,086,210
3 Years Later 28,074,691
Cumulative
Redundancy
(Deficiency) $4,607,462 $6,025,636 $4,860,645
========= ========= =========
Gross Liability for Unpaid Losses and Loss Adjustment Expenses $37,006,458 $39,740,865 $42,004,851 $41,513,945
Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (4,324,305) (2,629,019) (1,413,603) (1,139,713)
---------- ---------- --------- ---------
Net Liability for Unpaid Losses and Loss Adjustment Expenses $32,682,153 $37,111,846 $40,591,248 $40,374,232
========== ========== ========== ==========
Gross Liability Reestimated $30,541,435 $35,583,279 $45,072,241
Ceded Liability Reestimated (2,466,744) (4,497,069) (9,341,638)
---------- ---------- ----------
Net Liability Reestimated $28,074,691 $31,086,210 $35,730,603
========== ========== ==========
Gross Reserve Redundancy (Deficiency) $6,465,023 $4,157,586 $(3,067,390)
========= ========= ==========
</TABLE>
5
<PAGE>
The following table provides an analysis of the rollforward of Crusader's losses
and loss adjustment expenses, including a reconciliation of the ending balance
sheet liability for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
--------------------------------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
Reserve for unpaid losses and loss adjustment expenses
<S> <C> <C> <C>
at beginning of year - net of reinsurance $40,591,248 $37,111,846 $32,682,153
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 22,454,229 23,564,325 16,251,499
(Decrease) in provision for events of prior years (*) (4,860,647) (4,275,759) (1,449,765)
---------- ---------- ----------
Total losses and loss adjustment expenses 17,593,582 19,288,566 14,801,734
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 5,132,952 4,812,268 3,352,866
Losses and loss adjustment expenses attributable to
insured events of prior years 12,677,646 10,996,896 7,019,175
---------- ---------- ---------
Total payments 17,810,598 15,809,164 10,372,041
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $40,374,232 $40,591,248 $37,111,846
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 1,139,713 1,413,603 2,629,019
--------- --------- ---------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet , gross of reinsurance (**) $41,513,945 $42,004,851 $39,740,865
========== ========== ==========
</TABLE>
(*) Decreases in incurred losses and loss adjustment expenses related to the
indicated prior years reflect favorable loss experience during these years
attributable to a number of combined factors which have produced favorable
frequency and severity trends in recent years. In addition, actuarial
assumptions based on historical trends have proven to be conservative.
(**) In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, reinsurance recoverable on unpaid losses and loss
adjustment expenses are reported for generally accepted accounting
practices as assets rather than netted against the corresponding liability
for such items on the balance sheet.
Net Premium Written to Policyholders' Surplus Ratio
- - ---------------------------------------------------
The following table shows, for the periods indicated, Crusader's statutory
ratios of net premiums written to statutory policyholders' surplus. Due to
certain sales cut-off adjustments, statutory net premiums written differ
slightly from those reported on the Company's financial statements Since each
property and casualty insurance company has different capital needs, an
"acceptable" ratio of net premium written to policyholders' surplus for one
company may be inapplicable to another. While there is no statutory requirement
applicable to Crusader which establishes a permissible net premium to surplus
ratio, guidelines established by the National Association of Insurance
Commissioners provide that such ratio should generally be no greater than 3 to
1.
<TABLE>
<CAPTION>
Twelve Months Ended
-----------------------------------------------------------------------------------
December 31 March 31
------------------------------------------------ ----------------------------
Statutory: 1998 1997 1996 1996 1995
- - ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Premiums Written $34,203,908 $36,059,086 $36,652,776 $32,915,964 $30,785,970
Policyholders'Surplus $37,611,089 $30,899,761 $25,748,757 $22,721,183 $19,585,839
Ratio .9 to 1 1.2 to 1 1.4 to 1 1.4 to 1 1.6 to 1
</TABLE>
6
<PAGE>
Regulation
- - ----------
The insurance company operation is subject to regulation by the California
Department of Insurance ("the insurance department") and by the department of
insurance of other states in which Crusader is licensed. The insurance
department has broad regulatory, supervisory, and administrative powers. These
powers relate primarily to the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature and
limitation of insurers' investments; the prior approval of rates, rules and
forms; the issuance of securities by insurers; periodic examinations of the
affairs of insurers; the annual and other reports required to be filed on the
financial condition and results of operations of such insurers or for other
purposes; and the establishment of reserves required to be maintained for
unearned premiums, losses, and other purposes. The regulations and supervision
by the insurance department are designed principally for the benefit of
policyholders and not for the insurance company shareholders. The last
examination of Crusader by the insurance department covered the three years
ended December 31, 1997. The report of examination dated January 20, 1999,
reported no exceptions to Crusader's statutory financial statements.
In December 1993, the National Association of Insurance Commissioners ("NAIC")
adopted a Risk-Based Capital ("RBC") Model Law for property and casualty
companies. The RBC Model Law is intended to provide standards for calculating a
variable regulatory capital requirement related to a company's current
operations and its risk exposures (asset risk, underwriting risk, credit risk
and off-balance sheet risk). These standards are intended to serve as a
diagnostic solvency tool for regulators that establishes uniform capital levels
and specific authority levels for regulatory intervention when an insurer falls
below minimum capital levels. The RBC Model Law specifies four distinct action
levels at which a regulator can intervene with increasing degrees of authority
over a domestic insurer if its RBC is equal to or less than 200% of its computed
authorized control level RBC.
A company's RBC is required to be disclosed in its statutory annual statement.
The RBC is not intended to be used as a rating or ranking tool nor is it to be
used in premium rate making or approval. At December 31, 1998, Crusader's
adjusted capital was well in excess of the required capital levels.
California Insurance Guarantee Association
- - ------------------------------------------
In 1969, the California Insurance Guarantee Association ("CIGA") was created
pursuant to California law to provide for payment of claims for which insolvent
insurers of most casualty lines are liable but which cannot be paid out of such
insurers' assets. Crusader is subject to assessment by CIGA for its pro-rata
share of such claims (based on premiums written in the particular line in the
year preceding the assessment by insurers writing that line of insurance in
California). Such assessments are based upon estimates of losses incurred in
liquidating an insolvent insurer. In a particular year, Crusader cannot be
assessed an amount greater than 1% of its premiums written in the preceding
year. California Insurance Code Sections 1063.5 and 1063.14 allow Crusader to
recoup assessments by surcharging policyholders. No assessment was made by CIGA
for the 1998 or 1997 calendar years.
Holding Company Act
- - -------------------
Crusader is subject to regulation by the insurance department pursuant to the
provisions of the California Insurance Holding Company System Regulatory Act
(the "Holding Company Act"). Pursuant to the Holding Company Act, the insurance
department may examine the affairs of Crusader at any time. Certain transactions
defined to be of an "extraordinary" type may not be effected without the prior
approval of the insurance department. Such transactions include, but are not
limited to, sales, purchases, exchanges, loans and extensions of credit, and
investments made within the immediately preceding 12 months involving the lesser
of 3% of admitted assets or 25% of policyholders' surplus, as of the preceding
December 31. An extraordinary transaction also includes a dividend which,
together with other dividends or distributions made within the preceding twelve
months, exceeds the greater of 10% of the insurance company's policyholders'
surplus as of the preceding December 31 or the insurance company's net income
for the preceding calendar year. An insurance company is also required to notify
the insurance department of any dividend after declaration, but prior to payment
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate
7
<PAGE>
constitute 10% or more of the voting securities of a California insurance
company or a person that controls a California insurance company, such as
Crusader. A person seeking to acquire "control," directly or indirectly, of the
Company must generally file with the Insurance Commissioner an application for
change of control containing certain information required by statute and
published regulations and provide a copy of the application to the Company. The
Holding Company Act also effectively restricts the Company from consummating
certain reorganization or mergers without prior regulatory approval.
The Company is in compliance with the Holding Company Act.
Rating
- - ------
Insurance companies are rated to provide both industry participants and
insurance consumers with meaningful information on specific insurance companies.
Higher ratings generally indicate financial stability and a strong ability to
pay claims. These ratings are based upon factors relevant to policyholders and
are not directed toward protection of investors. Such ratings are neither a
rating of securities nor a recommendation to buy, hold or sell any security and
may be revised or withdrawn at any time. Ratings focus primarily on the
following factors: capital resources, financial strength, demonstrated
management expertise in the insurance business, credit analysis, systems
development, market segment position and growth opportunities, marketing, sales
conduct practices, investment operations, minimum policyholders' surplus
requirements and capital sufficiency to meet projected growth, as well as access
to such traditional capital as may be necessary to continue to meet standards
for capital adequacy. Crusader has been rated A- (Excellent) by A.M. Best
Company since its initial rating in 1990.
OTHER INSURANCE OPERATIONS
--------------------------
General Agency Operations
- - -------------------------
The Company's general agency subsidiaries are as follows:
Unifax primarily sells and services commercial multiple peril "business package"
insurance policies. In addition, it also sells and services commercial
liability, commercial property, and workers' compensation insurance policies.
Unifax's workers' compensation policies are sold in Arizona and California for
non-affiliated insurers. All other policies are sold and serviced for Crusader
by Unifax in Arizona, California, Kentucky, Montana, Nevada, Ohio, Oregon,
Pennsylvania, Texas, and Washington.
Bedford Insurance Services, Inc., ("Bedford") sells and services daily
automobile rental policies in most states for a non-affiliated insurer.
National Coverage Corporation ("NCC") renewed and serviced commercial and
personal automobile policies in California for a non-affiliated insurer. This
program was terminated in August 1996, and the corporation is now inactive.
As general agents, these subsidiaries market, rate, underwrite, inspect and
issue policies, bill and collect insurance premiums, and maintain accounting and
statistical data. Unifax is the exclusive general agent for Crusader. Unifax and
Bedford are non-exclusive general agents for non-affiliated insurance companies.
The Company's marketing is conducted through advertising to independent
insurance agents and brokers. For its services, the general agent receives a
commission (based on the premium written) from the insurance company and, in
some cases, a service fee from the customer. These subsidiaries all hold
licenses issued by the California Department of Insurance and other states where
applicable.
Insurance Claim Adjusting Operation
- - -----------------------------------
The Company's subsidiary U.S. Risk Managers, Inc., ("U.S. Risk") provides
insurance claim adjusting services to the non-affiliated property and casualty
insurance company that Bedford represents as a general agent. These services
consist of receiving, reserving, adjusting, paying and accounting for insurance
claims. U.S. Risk engages independent field examiners for all work performed
outside the Company's office. U.S. Risk operates under a license issued by the
California Department of Insurance and other states where applicable. All claim
adjusting services for Crusader policies are administered by Crusader. Crusader
engages independent field examiners for all work performed outside the Company's
office.
8
<PAGE>
Insurance Premium Finance Operation
- - -----------------------------------
American Acceptance Corporation ("AAC") is a licensed insurance premium finance
company which provides insurance purchasers with the ability to pay their
insurance premiums on an installment basis. The premium finance company pays the
insurance premium to the insurance company in return for a premium finance note
from the insured. These notes are paid off by the insured in nine monthly
installments and are secured by the unearned premiums held by the insurance
company. Currently, AAC is only financing Crusader policies.
Health and Life Insurance Operations
- - ------------------------------------
The Company's subsidiaries National Insurance Brokers, Inc., ("NIB") and
American Insurance Brokers, Inc., ("AIB") market medical, dental, life, and
accidental death and dismemberment insurance through non-affiliated insurance
companies for individuals and groups. The services provided consist of
marketing, billing and collection, accounting, and customer service. For their
services, these subsidiaries receive a commission from the insurance company.
Most of the business is produced through independent insurance agents and
brokers who receive a commission from NIB or AIB. NIB and AIB hold licenses
issued by the California Department of Insurance. All business is currently
written in the State of California.
Association Operation
- - ---------------------
The Company's subsidiary Insurance Club, Inc., DBA The American Association for
Quality Health Care ("AAQHC"), is a membership association which provides
various consumer benefits to its members, including participation in group
health care and life insurance policies which AAQHC negotiates for the
Association. For these services, AAQHC receives membership and fee income from
its members.
INVESTMENTS
-----------
The investments of the Company are made by the Company's Chief Financial Officer
under the supervision of an investment committee appointed by the Company's
Board of Directors. The Company's investment guidelines on equity securities
limit investments in equity securities to an aggregate maximum of $2,000,000.
The Company's investment guidelines on fixed maturities limit fixed maturity
investments to high grade obligations with a maximum term of eight years and a
maximum investment in any one issuer of $1,500,000. This dollar limitation
excludes bond premiums paid in excess of par value and U.S. government or U.S.
government guaranteed issues. All investments in municipal securities are
pre-refunded and secured by U.S. treasury securities. Short-term cash
investments consist of bank money market accounts, certificates of deposit,
commercial paper, a U.S. government obligation money market fund, and U.S.
treasury bills. These short-term investments are either U.S. government
obligations, FDIC insured or are in an institution with a Moody's rating of P1
and/or Standard & Poor's rating of A1. All of the Company's investments are
readily marketable and could be liquidated without any material financial
impact.
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated:
<TABLE>
<CAPTION>
(Amounts in Thousands)
-------------------------------------------------------------------------------------
As of December 31 As of December 31 As of December 31
1998 1997 1996
------------------------ ---------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Type of Security Cost Value Cost Value Cost Value
---------------- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit $ 200 $ 200 $ 500 $ 500 $ 798 $ 798
U.S. treasury securities 9,610 10,098 15,480 15,794 22,447 22,613
Industrial and miscellaneous
taxable bonds 52,404 54,011 31,765 32,489 13,106 13,440
State and municipal
tax-exempt bonds 34,144 35,164 38,361 39,183 39,634 40,258
------ ------ ------ ------ ------ ------
Total fixed maturity investments 96,358 99,473 86,106 87,966 75,985 77,109
Short-term cash investments 6,574 6,574 6,137 6,137 4,862 4,862
Equity investments 504 481 230 223 - -
------- ------- ------ ------ ------ ------
Total investments $103,436 $106,528 $92,473 $94,326 $80,847 $81,971
======= ======= ====== ====== ====== ======
</TABLE>
9
<PAGE>
At December 31, 1998, the Company had a net unrealized gain on all investments
of $3,091,906 before income taxes.
The maturity dates of the Company's fixed maturity investments were as follows:
<TABLE>
<CAPTION>
(Amounts in Thousands)
--------------------------------------------------------------
As of December 31, 1998 As of December 31, 1997
Amortized Market Amortized Market
--------------------------- ------------------------
Fixed maturities due Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Within 1 year $ 8,887 $ 8,935 $11,073 $11,109
Beyond 1 year but within 5 years 60,551 62,555 46,082 47,126
Beyond 5 years but within 10 years 26,920 27,983 28,951 29,731
------ ------ ------ ------
Total $96,358 $99,473 $86,106 $87,966
====== ====== ====== ======
</TABLE>
COMPETITION
-----------
General
- - -------
The property and casualty insurance industry is highly competitive in the areas
of price and service. It is highly cyclical, characterized by periods of high
premium rates and shortages of underwriting capacity followed by periods of
severe price competition and excess capacity.
The profitability of insurers is affected by many factors including rate
competition, the frequency of claims and their average cost, natural disasters,
state regulations, interest rates, crime rates, general business conditions, and
court decisions redefining and expanding the extent of coverage and granting
higher compensation awards. One of the challenging and unique features of the
property and casualty business is the fact that, since premiums are collected
before losses are paid, its products must be priced before its costs are known.
Insurance Company and General Agency Operations (Property & Casualty)
- - ---------------------------------------------------------------------
The Company's property and casualty insurance business continues to be very
competitive. There are many substantial competitors who have larger resources,
operate in more states, and insure coverages in more lines and in higher limits
than the Company. In addition, Crusader competes not only with other insurance
companies, but with the general agents who produce business for them. Many of
these general agents offer more products than Crusader. The principal method of
competition among competitors is price. While the Company attempts to meet this
competition with competitive prices, its emphasis is on service, promotion, and
distribution.
Insurance Claim Adjusting Operation
- - -----------------------------------
The insurance claim adjusting operation generates all its business from
insurance policies produced by its sister company Bedford, for a non-affiliated
insurance company. Competition is not a major factor as long as U.S. Risk
produces a quality product at a fair price. The growth of U.S. Risk is dependent
on the growth of Bedford.
Insurance Premium Financing Operation
- - -------------------------------------
The insurance premium financing operation currently finances only Crusader
policies written through Unifax. Although competition is intense in the premium
finance business, the competitive pricing, the quality of its service, and the
ease and convenience of financing with AAC has made its growth and profitability
possible. AAC's growth is dependent on the growth of Crusader and Unifax.
Health and Life Insurance Operations
- - ------------------------------------
Competition in the health and life insurance business is also intense.
Approximately 95% of the Company's present health and life business is from the
CIGNA HealthCare medical and dental plan programs. This percentage is slightly
higher than the prior year. The Company is continuing its efforts to diversify
and offer a wider variety of products to its customers, and it believes that
this effort will make it more competitive and should increase future revenues.
10
<PAGE>
EMPLOYEES
---------
On March 5, 1999, the Company employed 142 persons at its facility located in
Woodland Hills, California. The Company has no collective bargaining agreements
and believes its relations with its employees are excellent.
Item 2. Properties
- - -------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin
Cheldin, the Company's president, chairman and principal stockholder, is the
owner of the building. On February 22, 1995, the Company signed an extension to
the lease with no increase in rent to March 31, 2007. The Company believes that
the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties.
The Company utilizes for its own operations 100% of the space it leases.
Item 3. Legal Proceedings
- - --------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings in which it may be named as either
plaintiff or defendant. The Company is required to resort to legal proceedings
from time to time in order to enforce collection of premiums, commissions, or
fees for the services rendered to customers or to their agents. These routine
items of litigation do not materially affect the Company and are handled on a
routine basis by the Company through its general counsel.
Likewise, the Company is sometimes named as a cross-defendant in litigation
which is principally directed against that insurer who has issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or others which relate to disputes concerning the
issuance or non-issuance of individual policies. These items are also handled on
a routine basis by the Company's general counsel, and they do not materially
affect the operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- - -------------------------------------------------------------
None.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- - --------------------------------------------------------------------------------
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "UNAM." The high and low sales prices (by quarter) and dividends paid
during the last two comparable twelve month periods are as follows:
High Low Dividend
Quarter Ended Price Price Declared
------------- ------ ------- --------
March 31, 1997 10 7/8 9 5/8
June 30, 1997 11 1/4 9 3/4 $0.07
September 30, 1997 11 3/4 10 3/4
December 31, 1997 14 1/8 11 1/2
March 31, 1998 18 1/8 12 $0.07
June 30, 1998 16 3/8 14 5/8
September 30, 1998 15 1/4 9
December 31, 1998 14 1/8 10
11
<PAGE>
As of December 31, 1998, the approximate number of shareholders of record of the
Company's common stock was 600. In addition, the Company estimates beneficial
owners of the Company's common stock held in the name of nominees to be
approximately 1,000.
The Company has declared a cash dividend on its common stock annually since June
24, 1991. The Company's intention is to declare annual cash dividends subject to
continued profitability and cash requirements. On May 1, 1998, the Company
declared an annual cash dividend of $0.07 per common share payable on August 14,
1998, to shareholders of record on July 31, 1998. On March 10, 1999, the Company
declared an annual cash dividend of $0.25 per common share payable on July 15,
1999, to shareholders of record on July 1, 1999. Because the Company is a
holding company and operates through its subsidiaries, its cash flow and,
consequently, its ability to pay dividends are dependent upon the earnings of
its subsidiaries and the distribution of those earnings to the Company. Also,
the ability of Crusader to pay dividends to the Company is subject to certain
regulatory restrictions under the Holding Company Act (See Item 1 - Business -
Insurance Company Operation - Holding Company Act). The maximum dividend that
may be made without prior approval is $8,243,434 as of December 31, 1998.
From January 1, 1998, to December 31, 1998, the Company issued an aggregate of
90,082 shares of its common stock upon exercise of employee stock options
granted under the Unico American Corporation Employee Incentive Stock Option
Plan. These shares were issued to an aggregate of six employees of the Company.
Of these shares, an aggregate of 73,613 shares were issued in exchange for an
aggregate of 20,643 shares of common stock and an aggregate of 16,469 shares
were issued in exchange for an aggregate of $57,643.75 in cash. These shares
were acquired for investment and without a view to the public distribution or
resale thereof, and the issuance thereof was exempt from the registration
requirements under the Securities Act of 1933, as amended, under Section 4(2)
thereof as transactions not involving a public offering.
Item 6. Selected Financial Data
- - --------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------------------
December 31 March 31
---------------------------------------------------- ------------------------------
1998 1997 1996 1996 1995
---- ---- ---- ---- ----
(Nine Months)
<S> <C> <C> <C> <C> <C>
Total revenues $47,544,270 $48,290,721 $34,884,657 $42,468,474 $39,444,223
Total costs and expenses 34,789,372 37,301,688 27,505,670 34,060,183 34,486,546
---------- ---------- ---------- ---------- ----------
Income before taxes $12,754,898 $10,989,033 $7,378,987 $8,408,291 $4,957,677
Net income $8,708,669 $7,654,362 $5,174,510 $5,947,481 $3,792,179
Basic earnings per share $1.41 $1.25 $0.87 $1.00 $0.64
Diluted earnings per share $1.36 $1.20 $0.83 $0.97 $0.63
Cash dividends per share $0.07 $0.07 $0.07 $0.07 $0.07
Total assets $121,717,643 $112,942,384 $104,451,322 $95,817,377 $87,456,701
Stockholders' equity $54,168,082 $45,060,784 $37,355,419 $32,387,158 $26,147,827
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- - ------------------------------------------------------------------------
Results of Operations
- - ---------------------
In December 1996, the Company changed its fiscal year end from March 31 to
December 31, effective December 31, 1996. As a result of this change, the
Company's fiscal year ended December 31, 1996, consisted of nine months. For
that reason, management's discussion and analysis includes many comparisons of
the Company's fiscal year ended December 31, 1997, which consists of twelve
months, to the comparable twelve month period of the prior year. The financial
information for the unaudited twelve month period ended December 31, 1996, is
included in this discussion for comparisons.
12
<PAGE>
Liquidity and Capital Resources:
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company. Because the Company is a
holding company and operates through its subsidiaries, its cash flow is
dependent upon the earnings of its subsidiaries and the distributions of those
earnings to the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. Cash and
investments (excluding unrealized gains) at December 31, 1998, were $103,713,721
compared to $92,530,294 at December 31, 1997, a 12% increase. Crusader's cash
and investments at December 31, 1998, was $97,597,956, or 94% of the total held
by the Company compared to $88,456,803 or 96% of the total held by the Company
at December 31, 1997.
In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
is required to classify its investments in debt and equity securities into one
of three categories: held-to-maturity, available-for-sale or trading securities.
Although all of the Company's investments are classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments to maturity.
The Company's investments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Amount % Amount % Amount %
------ -- ------ -- ------ --
Fixed maturities (at amortized cost)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit $ 200,000 - $ 500,000 1 $ 798,000 1
U.S. treasury securities 9,610,487 10 15,480,258 18 22,447,391 30
Industrial and miscellaneous (taxable) 52,403,981 54 31,765,034 37 13,105,416 17
State and municipal (tax exempt) 34,144,344 36 38,361,279 44 39,634,159 52
---------- -- ---------- -- ---------- --
Total fixed maturity investments 96,358,812 100 86,106,571 100 75,984,966 100
---------- === ---------- === ---------- ===
Short-term cash investments (at cost)
Certificates of deposit 425,000 6 225,000 4 125,000 3
Commercial paper 3,425,000 52 4,750,000 77 2,810,000 58
Bank money market accounts 694,834 11 368,743 6 329,597 7
U.S. gov't obligation money market fund 1,290,108 20 58,032 1 814,713 16
Short-term U.S. treasury 735,346 11 732,216 12 757,653 15
Bank savings accounts 3,574 - 3,504 - 24,800 1
--------- --- --------- --- --------- ---
Total short-term cash investments 6,573,862 100 6,137,495 100 4,861,745 100
--------- === --------- === --------- ===
Equity investments (at cost) 503,502 230,460 -
----------- ---------- ----------
Total investments $103,436,176 $92,474,526 $80,846,711
=========== ========== ==========
</TABLE>
The tax exempt interest income earned (net of bond premium and discount
amortization) during the fiscal year ended December 31, 1998, was $1,698,211
compared to $1,809,043 in the fiscal year ended December 31, 1997. In the twelve
month period ended December 31, 1996, tax exempt interest income earned totaled
$1,770,382.
The Company's investment policy limits investments in any one issuer. This limit
was raised from $1,000,000 to $1,500,000 in 1997. This limitation excludes bond
premiums paid in excess of par value and U.S. government or U.S. government
guaranteed issues.
All of the Company's fixed maturity investments are high-grade investment
quality, all state and municipal tax exempt fixed maturity investments are
pre-refunded issues, and all certificates of deposit are FDIC insured.
13
<PAGE>
AAC had a bank line of credit with a variable rate of interest referenced to the
bank's LIBOR rate. The bank note payable was paid in full on July 3, 1997,
resulting in no amounts being outstanding under the bank credit line. The credit
line matured on September 2, 1998, and was not renewed. AAC did not borrow
against its line of credit in 1998 or 1997.
The maximum and average bank note payable and weighted average interest rate are
as follows:
Fiscal Year Ended December 31
--------------------------------
1998 1997
---- ----
Maximum bank note payable - $750,001
Average bank note payable - $296,576
Weighted average interest rate - 7.3%
In addition to the AAC line of credit, Unico has a $2,000,000 line of credit
with Union Bank. Interest on this line is referenced to LIBOR and is payable
monthly. The agreement contains certain covenants including maintenance of
certain financial ratios. This credit line expires September 2, 1999, at which
time it is expected to be renewed. As of December 31, 1998 and 1997, no amounts
were borrowed.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments at year end, net
of trust restriction of $2,867,099, statutory deposits of $2,725,000, and
dividend restriction between Crusader and Unico (See Item 1 - Business -
Insurance Company Operation - Holding Company Act) plus the cash to be generated
from operations, should be sufficient to meet its operating requirements during
the next twelve months without the necessity of borrowing funds.
Dividends paid by Crusader to Unico were $1,500,000 in 1998 and $1,500,000 in
1997. These funds were invested by Unico in U.S. treasury notes and high grade
commercial paper.
Crusader's statutory capital and surplus as of December 31, 1998, was
$37,611,089, an increase of $6,711,328 (22%) over December 31, 1997. Crusader's
statutory capital and surplus as of December 31, 1997, was $30,899,761, an
increase of $5,151,004 (20%) over December 31, 1996.
There are no material commitments for capital expenditures as of the date of
this report.
YEAR 2000
- - ---------
The Company has initiated a review of all computer programs to ensure that all
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Year 2000 issue is the result of computer programs being
written utilizing two digits rather than four digits to define a year. Any
computer programs which have date sensitive software utilizing a two digit year
would recognize a year of "00" as 1900 rather than 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar activities. The Company has assessed its Year
2000 issues and has made and tested the necessary modifications to its computer
system. The project to review and correct all programs was completed and tested
at December 31, 1998, prior to any anticipated impact on its operating systems.
The costs of the project has been charged to current operations as incurred and
did not have a material effect on the Company's results of operations or
financial position.
Crusader anticipates that any claims from its policyholders due to Year 2000
events will not be material. Any business interruption losses resulting from
Year 2000 events which Crusader policyholders may incur, would not be provided
any coverage unless such events also caused physical damage to the insureds
property, which the Company believes is not a material exposure.
The Company does business with thousands of licensed agents and brokers and does
not anticipate it would be materially adversely affected if some of them are
temporarily unable to function due to Year 2000 problems. The Company has
requested and received information from its bank and reinsurers as to their Year
2000 readiness. Based on the information received to date, the Company believes
that it will not be materially adversely affected by its bank or its reinsurers.
Due to the nature of the Company's business, it is not dependent on any specific
suppliers, and therefore, does not expect to be adversely materially affected by
them.
14
<PAGE>
Due to the unusual nature of the problem and lack of historical experience with
Year 2000 issues, it is difficult to predict with certainty what will happen
after December 31, 1999. As stated above, the Company does not anticipate it
will be adversely materially affected by Year 2000 events from its internal
operations or from others with whom the Company directly or indirectly does
business. However, other events such as general public infrastructure failures,
may adversely materially affect the Company's ability to operate during such
failures. The Company has no formal contingency plans for Year 2000.
Results of Operations:
General
- - -------
The Company had net income after taxes of $8,708,669 for the fiscal year ended
December 31, 1998, compared to $7,654,362 for the fiscal year ended December 31,
1997, and $6,849,327 for the twelve month period ended December 31, 1996. Total
revenue for the fiscal year ended December 31, 1998, was $47,544,270 compared to
$48,290,721 for the fiscal year ended December 31, 1997, and $45,880,272 for the
twelve month period ended December 31, 1996.
For the fiscal year ended December 31, 1998, income before taxes increased by
$1,765,865 (16%) and net income increased by $1,054,307 (14%) compared to the
fiscal year ended December 31, 1997. The increase in pre-tax income was
primarily due to an increase of $1,347,619 (21%) in the underwriting profit (net
earned premium less losses and loss adjustment expenses and policy acquisition
costs) from Crusader and an increase in investment income of $735,642 (15%)
(excluding realized investment gains).
For the fiscal year ended December 31, 1997, income before taxes increased by
$1,212,956 (12%) and net income increased by $805,035 (12%) compared to the
twelve month period ended December 31, 1996. The increase in pre-tax income was
primarily due to an increase of $499,418 (8%) in the underwriting profit from
Crusader, an increase in investment income of $762,891 (18%) (excluding realized
investment gains).
The effect of inflation on the net income of the Company during the fiscal year
ended December 31, 1998, was not significant.
The Company derives revenue from various sources as discussed below:
Insurance Company Operation
---------------------------
Premium and loss information of Crusader are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Gross written premium $37,079,303 $42,273,990 $41,425,715
Net written premium $34,126,963 $35,586,046 $36,643,457
Earned premium before reinsurance $40,615,417 $42,721,222 $38,667,566
Earned premium net of reinsurance $34,915,195 $36,326,894 $34,280,116
Losses and loss adjustment expenses $17,593,582 $19,288,566 $19,201,095
Unpaid losses and loss adjustment expenses $41,513,945 $42,004,851 $39,740,865
</TABLE>
Crusader's primary line of business is commercial multiple peril "business
package" policies. This line of business represented approximately 97% of
Crusader's total written premium for both fiscal years ended December 31, 1998
and 1997.
15
<PAGE>
Crusader's written premium by state is as follows:
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
California $31,323,804 $33,048,085 $32,396,631
Washington 1,958,179 4,704,286 5,024,276
Oregon 1,289,054 2,779,691 3,052,379
Arizona 1,095,922 1,346,589 862,352
Ohio 526,004 242,751 -
Pennsylvania 416,485 41,511 -
Texas 239,563 - -
Montana 98,612 - -
Kentucky 82,584 - -
Nevada 49,096 111,077 90,077
---------- ---------- ----------
Total $37,079,303 $42,273,990 $41,425,715
========== ========== ==========
In the fiscal year ended December 31, 1998, gross written premium decreased by
$5,194,687 (12%) compared to the fiscal year ended December 31, 1997. In 1998,
the Company changed its marketing strategy in the states of Washington and
Oregon by discontinuing marketing through an exclusive agent in those states and
commencing marketing directly to all retail agents and brokers. This change
resulted in a decrease of $4,236,744 or 82% of the total decrease. The Company
anticipates that the long-term results of this change will be increased revenues
with reduced acquisition expense and less dependence on any one large producer.
The foregoing statement is a forward looking statement and actual results may
differ materially. Factors which would cause the results to differ include
economic conditions in the states of Washington and Oregon, willingness of
retail agents and brokers to deal directly with the Company, and competitive
conditions.
In 1998, the Company began writing business in the states of Texas, Montana, and
Kentucky and increased its writings in the states of Ohio and Pennsylvania;
however, it was not enough to offset the decreases in the states of California,
Arizona, and Nevada. The decrease in gross written premium in these states was
primarily due to intense price competition in the marketplace.
Although the Company attempts to be competitive on price, it believes that
maintaining adequate rates and a favorable loss ratio is a better business
strategy than increasing premiums at inadequate rates. The validity of this
strategy is reflected by the continued profitable loss ratio discussed below.
The Company cannot determine how long this "soft market" condition will
continue. In order to grow its premium in this "soft market," the Company is
attempting to increase its activities in its existing states by new marketing
and incentive programs and by offering new and improved products to its agents
and brokers. The Company's geographical expansion plan is based on cloning its
California business in other states with similar demographics and
legal/regulatory environments. The Company's business package program has been
written in California since it began writing business in 1985, and it has proved
to be successful. When the Company enters a new state, it initially does so on a
limited basis in terms of agent contracts, products, and premium. As the Company
develops experience in those states, it then places an emphasis on growth by
expanding products and distribution activity. The Company plans to begin writing
business in Colorado in 1999 and Illinois in 2000.
Currently, agents and brokers who call for quotes on policies sold by the
Company may also have to call competitors for quotes on products which the
Company does not offer. Thus, Crusader competes with not only other insurance
companies, but with general agents who produce business for other insurance
companies. Many of these general agents offer more products than the Company and
thus make it easier for the agents and brokers because they can do more business
with fewer telephone calls. To provide better service to the Company's agents
and brokers, the Company is currently working on additional non-affiliated
insurance company products to be offered by its General Agency Operations. In
addition to generating additional commission and fee income, the expansion of
the General Agency Operation should benefit Crusader because more agents and
brokers may do business with the Company.
16
<PAGE>
In the fiscal year ended December 31, 1997, gross written premium increased
$848,275 (2%) compared to the twelve month period ended December 31, 1996. This
slight increase in written premium was primarily due to increased price
competition in the marketplace.
In the fiscal year ended December 31, 1998, Crusader's direct earned premium
decreased $2,105,805 (5%) and net premium earned decreased $1,411,699 (4%) from
the fiscal year ended December 31, 1997. The decrease in earned premium is
directly related to the decrease in written premium in the current fiscal year.
In the fiscal year ended December 31, 1997, Crusader's direct earned premium
increased $4,053,656 (10%) and net premium earned increased $2,046,778 (6%) over
the twelve month period ended December 31, 1996. The percentage of earned ceded
premium to gross premium earned was 14% for the fiscal year ended December 31,
1998, 15% for the fiscal year ended December 31, 1997, and 11% for the twelve
month period ended December 31, 1996.
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment
expenses incurred (including a provision for incurred but not reported losses)
to net premiums earned (the "loss ratio") and (2) the ratio of policy
acquisition and general operating costs to net premiums earned (the "expense
ratio"). The following table shows the loss ratios, expense ratios, and combined
ratios of Crusader as derived from data prepared in accordance with generally
accepted accounting principles. As shown on the table, the loss ratio continued
to improve primarily due to favorable development of prior year losses.
Generally, if the combined ratio is below 100%, an insurance company has an
underwriting profit; if it is above 100%, a company has an underwriting loss.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Loss ratio 50.4% 53.1% 56.0%
Expense ratio 27.2% 29.1% 26.5%
----- ---- ----
Combined ratio 77.6% 82.2% 82.5%
===== ==== ====
</TABLE>
The Company's future writings and growth are dependent on market conditions,
competition, the Company's ability to introduce new profitable products, and its
ability to expand geographically. As of December 31, 1998, Crusader was licensed
as an admitted insurance company in the states of California, Arizona, Montana,
Nevada, Oregon, and Washington and is approved as a non-admitted surplus lines
writer in several other states.
Other Insurance Operations
--------------------------
Daily Automobile Rental Insurance Program
- - -----------------------------------------
The daily automobile rental insurance program is produced by Bedford. Bedford
receives a commission and a claim administration fee from a non-affiliated
insurance company based on premium written. Commission and fee income from the
daily automobile rental insurance program are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Daily auto rental program commission
and claim administration fee $807,503 $757,098 $797,481
</TABLE>
Revenues during the fiscal year ended December 31, 1998, were $807,503 an
increase of $50,405 (7%) compared to the same period of the prior year. Revenue
for the fiscal year ended December 31, 1997, decreased by $40,383 (5%) compared
to the twelve month period ended December 31, 1996.
The daily automobile rental insurance program commission and fee income increase
for the current fiscal year was primarily the result of contingent commission
income of $49,430. Excluding this contingent commission, revenues increased only
$975. This slight increase is due to continued price competition in the daily
automobile insurance market. To avoid underwriting losses for the non-affiliated
insurance company which Bedford represents, it continues to produce business
only at rates which it believes to be adequate. The Company cannot determine how
long this "soft market" condition will continue.
17
<PAGE>
Commercial and Personal Automobile Insurance Program
- - ----------------------------------------------------
Unifax produced commercial auto policies in California for a non-affiliated
insurer and received a commission from them based on premium written. Unifax
also received a policy service fee from the insured. In February 1997,
management decided to discontinue writing new policies in the Unifax commercial
automobile program and only serviced and renewed existing policies until the
book of business was sold to an non-affiliated third party in June 1997. As
consideration for the sale of this book of business, Unifax will receive a
percentage of the commission earned for a two year period on policies which were
in force at the time of sale.
NCC renewed and serviced existing commercial and personal automobile policies in
California for a non-affiliated insurer until August 31, 1996, when the NCC
program was discontinued. NCC received a commission and claim administration fee
from the non-affiliated insurance company based on premium written and a policy
service fee from the insured.
Commercial and personal auto program commission, service fee, and claim
administration income are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commercial and personal auto
program commission, service fee,
and claim administration income $1,843 $82,439 $212,909
</TABLE>
Revenue for the fiscal year ended December 31, 1998, represents net commissions
received on the sale of the commercial auto program. Revenue for the fiscal year
ended December 31, 1997, decreased $130,470 (61%) compared to the twelve month
period ended December 31, 1996, due to the discontinuance of the commercial
automobile programs.
Health and Life Insurance Program
- - ---------------------------------
Commission income from the health and life insurance sales of NIB and AIB is as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commission income $2,216,446 $2,083,782 $2,432,208
</TABLE>
NIB and AIB market health and life insurance through non-affiliated insurance
companies for individuals and groups. Approximately 95% of the health and life
commission income in the fiscal year ended December 31, 1998, was from the CIGNA
HealthCare medical and dental plan programs compared to approximately 90% in the
same period of the prior year. Revenues for the fiscal year ended December 31,
1998, increased $132,664 (6%) compared to the fiscal year ended December 31,
1997. Revenues for the fiscal year ended December 31, 1997, decreased $348,426
(14%) compared the twelve month period ended December 31, 1996.
Group health and life insurance programs - The increase in commission income in
the health and life insurance programs is primarily a result of an increase in
sales of small business group accounts and to a rate increase implemented by
CIGNA in July 1998. The Company has increased the number of CIGNA products
available to small groups, including life insurance, vision and dental plans, in
order to acquire new accounts and retain existing accounts.
Individual medical and dental programs - Commission income from the individual
medical and dental programs continues to increase due to aggressive marketing
and the quality of the Company's customer service.
18
<PAGE>
Workers' Compensation Program
- - -----------------------------
Unifax produces workers' compensation policies in California and Arizona for
non-affiliated insurers and receives a commission from them based on premium
written.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commission income $329,465 $298,006 $81,775
</TABLE>
Commission income for the fiscal year ended December 31, 1998, increased $31,459
(11%) compared to the fiscal year ended December 31, 1997. For the fiscal year
ended December 31, 1997 commission income increased $216,231 (264%) compared to
the twelve month period ended December 31, 1996. Commission income in this
program has continued to increase primarily as the result of increased sales of
workers' compensation insurance and incentive bonus commissions earned as a
result of the increased sales.
Association Operation
- - ---------------------
Membership and fee income from the association program of AAQHC is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Membership and fee income $355,781 $336,968 $326,491
</TABLE>
Membership and fee income in the fiscal year ended December 31, 1998, increased
$18,813 (6%) compared to the fiscal year ended December 31, 1997. Membership
income increased $10,477 (3%) in the fiscal year ended December 31, 1997,
compared to the twelve month period ended December 31, 1996. AAQHC recognized an
increase in group memberships in 1998 compared to a decrease in group
memberships in 1997 and has continued to increase individual and family
memberships.
Premium Finance Program
- - -----------------------
Premium finance charges and late fees earned from financing policies are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Premium finance charges and
late fees earned $1,033,479 $1,191,503 $1,191,796
New loans 8,092 8,615 9,256
</TABLE>
AAC, the Company's insurance premium finance subsidiary, provides premium
financing to Crusader, and until February 1997 a non-affiliated insurer on
commercial auto policies produced by Unifax. In February 1997, the commercial
auto program with the non-affiliated insurer was discontinued. The growth of
this program is dependent and directly related to the growth of Crusader's
written premium and AAC's ability to market its competitive rates and service to
finance those policies. AAC finances policies primarily in California.
Premium finance charges and late fees earned on loans decreased $158,024 (13%)
in the fiscal year ended December 31, 1998, compared to the fiscal year ended
December 31, 1997. The decrease was primarily a result of fewer policies being
financed due to a decrease in policies being written by Crusader and an overall
decrease in the number of policyholders financing policies. For the fiscal year
ended December 31, 1997, premium finance charges and late fees earned on loans
decreased $293 compared to the twelve month period ended December 31, 1996.
19
<PAGE>
Service Fee Income
- - ------------------
Unifax sells and services insurance policies for Crusader. The service fee
charged to the policyholder by Unifax is recognized as income in the
consolidated financial statements. The commissions paid by Crusader to Unifax
are eliminated as intercompany transactions and are not reflected in commission
income or commission expense.
Service fee income from Unifax is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Service fee income $1,896,258 $2,182,074 $2,105,851
Policies written 18,306 19,305 18,359
</TABLE>
Service fee income is primarily related to the number of policies written by
Unifax.
Investment Income and Net Realized Gains
- - -------------------------------------------
Investment income and net realized gains are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Interest and dividend income
Insurance company operations $5,497,323 $4,855,580 $4,073,066
Other operations 234,580 140,681 160,304
--------- --------- ---------
Total interest and dividend income 5,731,903 4,996,261 4,233,370
On investments
Net realized investment gains 247,931 25,093 210,033
--------- --------- ---------
Total $5,979,834 $5,021,354 $4,443,403
========= ========= =========
</TABLE>
Investment interest and dividends earned (excluding net realized gains)
increased $735,642 (15%) in the fiscal year ended December 31, 1998, compared to
the fiscal year ended December 31, 1997, primarily as a result of additional
invested assets from operating activities. Average invested assets in the fiscal
year ended December 31, 1998, (at amortized value) increased $11,294,733 (13%)
compared to the fiscal year ended December 31, 1997. Investment income return
based on average invested assets was 5.85% for the fiscal year ended December
31, 1998, compared to 5.77% for the fiscal year ended December 31, 1997. The mix
of taxable and tax exempt securities in the portfolio affect the above
investment income return percentage. Tax exempt securities, which generally
carry a lower yield than taxable securities, decreased to $34,144,344 (33% of
total investments) at December 31, 1998, compared to $38,361,279 (41% of total
investments) at December 31, 1997.
Investment interest and dividends earned (excluding net realized gains)
increased $762,891 (18%) in the fiscal year ended December 31, 1997, compared to
the twelve month period ended December 31, 1996, primarily as a result of
additional invested assets from operating activities. Average invested assets in
the fiscal year ended December 31, 1997 (at amortized value) increased
$10,979,066 (15%) compared to the twelve month period ended December 31, 1996.
Investment income return based on average invested assets was 5.77% for the
fiscal year ended December 31, 1997, compared to 5.59% for the twelve month
period ended December 31, 1996. Tax exempt securities decreased to $38,361,279
(41% of total investments) at December 31, 1997, compared to $39,634,159 (49% of
total investments) at December 31, 1996.
Additional information regarding investments and investment income is described
in the "Management Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
20
<PAGE>
Operating Expenses
- - ------------------
Policy Acquisition Costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs which are related to and vary with the
production of Crusader insurance policies. These costs include both Crusader
expenses and allocated expenses of other Unico subsidiaries. On certain
reinsurance treaties, Crusader receives a ceding commission from its reinsurer
which represents a reimbursement of the acquisition costs related to the premium
ceded. Policy acquisition costs, net of ceding commission, are deferred and
amortized as the related premiums are earned. Policy acquisition costs, net of
ceding commission, are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Policy acquisition costs $9,497,857 $10,562,191 $9,102,302
Ratio to net earned premium 27% 29% 27%
</TABLE>
Salaries and Employee Benefits increased $457,794 (12%) for the fiscal year
ended December 31, 1998, compared to the fiscal year ended December 31, 1997.
Salaries and employee benefits decreased $5,707 in the fiscal year ended
December 31, 1997, compared to the twelve month period ended December 31, 1996.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Salaries and employee benefits $4,215,753 $3,757,959 $3,763,666
</TABLE>
Commissions to Agents/Brokers (not including commissions on Crusader policies
which are reflected in policy acquisition costs) are generally related to gross
commission income. Commissions to agents and brokers increased $8,087 (1%) for
the fiscal year ended December 31, 1998, compared to the fiscal year ended
December 31, 1997. An increase of 10% in the commission expense for the daily
automobile program and an increase of 3% in commission expense for the health
and life programs was offset by a decrease in commission expense as a result of
the discontinuance of the commercial auto program. During the fiscal year ended
December 31, 1997, commission expense decreased $217,776 (17%) compared to
twelve month period ended December 31, 1996. This decrease was primarily related
to the 14% decrease in health and life insurance commission income.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Commission to agents/brokers $1,043,686 $1,035,599 $1,253,375
</TABLE>
Other Operating Expenses generally do not change significantly with changes in
production. This is true for both increases and decreases in production. Other
operating expenses decreased $218,879 (8%) for the fiscal year ended December
31, 1998, compared to the fiscal year ended December 31, 1997. This decrease was
primarily due to a $240,155 reduction in interest expense payable due to a
settlement of federal income tax issues for the fiscal years ended March 31,
1990, through March 31, 1994, which were under appeal. Other operating expenses
decreased $126,384 (5%) during the fiscal year ended December 31, 1997, compared
to the twelve month period ended December 31, 1996. The decrease was primarily
due to a decrease in interest expense of $101,425 as a result of the reduction
in the Company's bank note payable.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended 12 Months Ended
December 31 December 31 December 31
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Other operating expenses $2,438,494 $2,657,373 $2,783,757
</TABLE>
21
<PAGE>
Forward Looking Statements
- - --------------------------
Certain statements contained herein that are not historical facts are forward
looking. These statements involve risks and uncertainties, many of which are
beyond the control of the Company. Such risks and uncertainties could cause
actual results to differ materially from these forward looking statements.
Factors which could cause actual results to differ materially include those
described under Item 1 - Business - "Competition," premium rate adequacy
relating to competition or regulation, actual versus estimated claim experience,
regulatory changes or developments, unforeseen calamities, general market
conditions, the Company's ability to introduce new profitable products, and the
Company's ability to expand geographically.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- - --------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk.
The Company's invested assets at December 31, 1998, consisted of the following:
Fixed maturity bonds (at amortized value) $96,158,812
Short-term cash investments (at cost) 6,573,862
Equity securities (at cost) 503,503
Certificates of deposit (over 1 year) (at cost) 200,000
-----------
Total invested assets $103,436,177
===========
The Company's interest rate risk is primarily in its fixed maturity bond
portfolio. As market interest rates decrease, the value of the portfolio
increases with the opposite holding true in rising interest rate environments.
In addition, the longer the maturity, the more sensitive the asset is to market
interest rate fluctuations. The Company limits this risk by investing in
securities with maturities no greater than eight years. In addition, although
fixed maturity bonds are classified as available-for-sale, the Company's
investment guidelines place primary emphasis on buying and holding high-quality
bonds to maturity. Since inception of the Company, only nine bonds issues have
been sold prior to their maturity or call date. Because fixed maturity bonds are
primarily held to maturity, the change in the market value of these bonds
resulting from interest rate movements are unrealized, and no gains or losses
are recognized in the consolidated statement of operations. Unrealized gains and
losses are reported as a separate component of stockholders' equity, net of any
deferred tax effect. As of December 31, 1998, the Company's unrealized gains
(net of unrealized losses) before income taxes on its fixed maturity bond
portfolio was $3,113,908. Given a hypothetical parallel increase of 100 basis
points in interest rates, the fair value of the fixed maturity bond portfolio
would decrease by approximately $3.2 million. This decrease would not be
reflected in the statement of operations except to the extent that the
securities are sold.
The Company's short-term investments and certificates of deposit have only
minimal interest rate risk. Due to the Company's small investment in equity
securities of (approximately one half of one percent of total invested assets)
the Company has only minimal exposure to equity price risk.
22
<PAGE>
Item 8. Financial Statements and Supplementary Data
- - ----------------------------------------------------
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Independent Auditors' Reports 24-25
Consolidated Balance Sheets as of December 31, 1998, and December 31, 1997 26
Consolidated Statements of Operations for the fiscal year ended December 31, 27
1998, the fiscal year ended December 31, 1997, the twelve months ended
December 31, 1996 (unaudited), and the nine month fiscal year ended December 31,
1996.
Consolidated Statement of Comprehensive Income for the fiscal year ended 28
December 31, 1998, the fiscal year ended December 31, 1997, the twelve months
ended December 31, 1996 (unaudited), and the nine month fiscal year ended
December 31, 1996.
Consolidated Statements of Changes in Stockholders' Equity for the fiscal year 29
ended December 31, 1998, the fiscal year ended December 31, 1997, and the nine
month fiscal year ended December 31, 1996.
Consolidated Statements of Cash Flows for the fiscal year ended December 31, 30
1998, the fiscal year ended December 31, 1997, and the nine month fiscal year
ended December 31, 1996.
Notes to Consolidated Financial Statements 31
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Unico American Corporation
We have audited the accompanying consolidated balance sheets of Unico American
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unico American
Corporation and subsidiaries as of December 31, 1998, and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
February 24, 1999
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Unico American Corporation
We have audited the accompanying consolidated balance sheets of Unico American
Corporation and its subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the nine months ended December 31, 1996, and the year ended March 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Unico
American Corporation and its subsidiaries as of December 31, 1996, and the
consolidated results of operations and cash flows for the nine months ended
December 31, 1996 and the year ended March 31, 1996 in conformity with generally
accepted accounting principles.
GETZ, KRYCLER & JAKUBOVITS
Sherman Oaks, California
March 20, 1997
25
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 December 31
1998 1997
---- ----
ASSETS
------
Investments
<S> <C> <C>
Available for sale:
Fixed maturities, at market value (amortized cost: December 31,
1998 $96,358,812; December 31, 1997 $86,106,571) $99,472,720 $87,965,590
Equity securities at market ( cost: December 31, 1998
$503,503; December 31, 1997 $230,460) 481,500 223,100
Short-term investments, at cost 6,573,862 6,137,495
----------- ----------
Total Investments 106,528,082 94,326,185
Cash 277,544 55,768
Accrued investment income 2,022,197 1,807,364
Premiums and notes receivable, net 5,922,716 7,404,606
Reinsurance recoverable:
Paid losses and loss adjustment expenses 146,205 56,379
Unpaid losses and loss adjustment expenses 1,139,713 1,413,603
Prepaid reinsurance premiums 19,452 945,563
Deferred policy acquisition costs 4,665,772 4,886,684
Property and equipment (net of accumulated depreciation) 205,369 203,709
Deferred income taxes 208,976 1,005,865
Other assets 581,617 836,658
----------- -----------
Total Assets $121,717,643 $112,942,384
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- - -----------
Unpaid losses and loss adjustment expenses $41,513,945 $42,004,851
Unearned premiums 18,136,895 21,673,009
Advance premium and premium deposits 2,329,356 2,091,180
Accrued expenses and other liabilities 5,418,459 2,095,567
Income taxes payable 150,906 16,993
---------- ----------
Total Liabilities $67,549,561 $67,881,600
---------- ----------
STOCKHOLDERS' EQUITY
- - ---------------------
Common stock, no par - authorized 10,000,000 shares, issued and outstanding
shares 6,223,424 at December 31, 1998, and 6,153,706
at December 31, 1997 $2,895,702 $2,838,058
Accumulated other comprehensive income 1,998,536 1,222,095
Retained earnings 49,273,844 41,000,631
---------- ----------
Total Stockholders' Equity $54,168,082 $45,060,784
---------- ----------
Total Liabilities and Stockholders' Equity $121,717,643 $112,942,384
=========== ===========
</TABLE>
See accompanying notes to consolidate financial statements.
26
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
12 Months Fiscal Year
Fiscal Year Ended Ended Ended
December 31 December 31 December 31
1998 1997 1996 1996
---- ---- ---- ----
(Unaudited) (Nine Months)
REVENUES
Insurance Company Revenues
<S> <C> <C> <C> <C>
Premium earned $40,615,417 $42,721,222 $38,667,566 $29,373,374
Premium ceded 5,700,222 6,394,328 4,387,450 3,307,085
---------- ---------- ---------- ----------
Net premium earned 34,915,195 36,326,894 34,280,116 26,066,289
Net investment income 5,497,323 4,855,580 4,073,066 3,115,110
Net realized investment gains 247,931 25,093 210,033 190,491
Other income 1,183 428 215 185
---------- ---------- ---------- ----------
Total Insurance Company Revenues 40,661,632 41,207,995 38,563,430 29,372,075
Other Revenues from Insurance Operations
Gross commissions and fees 5,607,538 5,740,589 5,956,941 4,488,601
Investment income 234,580 140,681 160,304 117,774
Finance charges and late fees earned 1,033,479 1,191,503 1,191,796 898,171
Other income 7,041 9,953 7,801 8,036
---------- ---------- ---------- ----------
Total Revenues 47,544,270 48,290,721 45,880,272 34,884,657
---------- ---------- ---------- ----------
EXPENSES
Losses and loss adjustment expenses 17,593,582 19,288,566 19,201,095 14,801,734
Policy acquisition costs 9,497,857 10,562,191 9,102,302 6,887,173
Salaries and employee benefits 4,215,753 3,757,959 3,763,666 2,850,985
Commissions to agents/brokers 1,043,686 1,035,599 1,253,375 946,791
Other operating expenses 2,438,494 2,657,373 2,783,757 2,018,987
---------- ---------- ---------- ----------
Total Expenses 34,789,372 37,301,688 36,104,195 27,505,670
---------- ---------- ---------- ----------
Income Before Taxes 12,754,898 10,989,033 9,776,077 7,378,987
Income Tax Provision 4,046,229 3,334,671 2,926,750 2,204,477
--------- --------- --------- ---------
Net Income $8,708,669 $7,654,362 $6,849,327 $5,174,510
========= ========= ========= =========
PER SHARE DATA:
Basic Shares Outstanding 6,194,133 6,132,096 5,967,667 5,970,977
Basic Earnings Per Share $1.41 $1.25 $1.15 $0.87
Diluted Shares Outstanding 6,420,580 6,401,359 6,240,855 6,250,930
Diluted Earnings Per Share $1.36 $1.20 $1.10 $0.83
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
12 Months Fiscal Year
Fiscal Year Ended Ended Ended
December 31 December 31 December 31
1998 1997 1996 1996
---- ---- ---- ----
(Unaudited) (Nine Months)
<S> <C> <C> <C> <C>
Net income $8,708,669 $7,654,362 $6,849,327 $5,174,510
Other changes in comprehensive income
net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period 839,134 480,091 (438,196) 210,217
Less: reclassification adjustment for
gains included in net income (62,693) - - -
--------- --------- --------- ---------
Comprehensive Income $9,485,110 $8,134,453 $6,411,131 $5,384,727
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, THE FISCAL YEAR ENDED
DECEMBER 31, 1997, AND THE NINE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Common Shares Unrealized
------------------------ Investment
Issued and Gains & Retained
Outstanding Amount (Losses) Earnings Total
----------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1996 5,957,738 $2,834,801 $531,787 $29,020,570 $32,387,158
Net shares issued for exercise
of stock options 71,043 1,621 - - 1,621
Cash dividend paid ($0.07
per share) - - - (418,087) (418,087)
Change in market value of
investments, net of deferred
income tax - - 210,217 - 210,217
Net income - - - 5,174,510 5,174,510
--------- --------- ------- ---------- ----------
Balance - December 31, 1996 6,028,781 2,836,422 742,004 33,776,993 37,355,419
Net shares issued for exercise
of stock options 124,787 1,636 - - 1,636
Shares canceled or adjusted 138 - - - -
Cash dividend paid ($0.07
per share) - - - (430,724) (430,724)
Change in market value of
investments, net of deferred
income tax - - 480,091 - 480,091
Net income - - - 7,654,362 7,654,362
--------- --------- --------- ---------- ----------
Balance - December 31, 1997 6,153,706 2,838,058 1,222,095 41,000,631 45,060,784
Net shares issued for exercise
of stock options 69,439 57,644 57,644
Shares canceled or adjusted 279
Cash dividend paid ($0.07
per share) (435,456) (435,456)
Change in market value of
investments, net of deferred
income tax 776,441 776,441
Net income - - - 8,708,669 8,708,669
--------- --------- --------- ---------- ----------
Balance - December 31, 1998 6,223,424 $2,895,702 $1,998,536 $49,273,844 $54,168,082
========= ========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $8,708,669 $7,654,362 $5,174,510
Adjustments to reconcile net income to net cash from
operations
Depreciation and amortization 98,585 104,029 83,488
Bond amortization, net 644,726 579,228 431,502
Net realized (gain) on sale of securities (247,931) (25,093) (190,491)
Changes in assets and liabilities
Premium, notes and investment income receivable 1,267,057 1,130,420 (940,098)
Reinsurance recoverable 184,064 1,611,980 1,454,711
Prepaid reinsurance premiums 926,111 702,243 (284,182)
Deferred policy acquisitions costs 220,912 66,401 (619,377)
Other assets 255,041 (197,802) 232,479
Reserve for unpaid losses and loss adjustment expenses (490,906) 2,263,986 2,734,407
Unearned premium reserve (3,536,114) (447,232) 2,473,739
Advance premium and premium deposits 238,176 2,083 (257,666)
Accrued expenses and other liabilities 3,305,659 (300,129) 63,301
Income taxes current/deferred 484,230 267,463 (185,648)
---------- ---------- ----------
Net Cash Provided from Operations 12,058,279 13,411,939 10,170,675
---------- ---------- ----------
Investing Activities
Purchase of fixed maturity investments (24,797,224) (19,934,951) (12,981,849)
Proceeds from maturity of fixed maturity investments 12,898,500 8,198,000 4,628,378
Proceeds from sale of fixed maturity investments 1,041,250 996,856 -
Purchase of equity securities - cost (3,583,913) (1,019,500) (2,253,112)
Proceeds from sale of equity securities 3,480,043 814,132 3,438,841
Net increase in short-term investments (397,102) (1,236,490) (1,373,335)
Additions to property and equipment (100,245) (77,766) (34,841)
------------ ------------ -----------
Net Cash (Used) by Investing Activities (11,458,691) (12,259,719) (8,575,918)
---------- ---------- ---------
Financing Activities
Proceeds from issuance of common stock 57,644 1,636 1,621
Repayment of note payable - bank - (750,001) (1,250,000)
Dividends paid to shareholders (435,456) (430,724) (418,087)
--------- ----------- -----------
Net Cash (Used) by Financing Activities (377,812) (1,179,089) (1,666,466)
------- --------- ---------
Net increase (decrease) in cash 221,776 (26,869) (71,709)
Cash at beginning of year 55,768 82,637 154,346
-------- ------ -------
Cash at End of Year $277,544 $55,768 $82,637
======= ====== ======
Supplemental cash flow information
Cash paid during the period for:
Interest $60,116 $21,950 $76,312
Income taxes $3,430,000 $2,970,000 $2,515,000
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - ---------------------------------------------------
Nature of Business
- - ------------------
Unico American Corporation is an insurance holding company. Unico American
Corporation and its subsidiaries (the "Company"), all of which are wholly owned
provides primarily in California, property, casualty, health and life insurance,
and related premium financing.
Change of Fiscal Year
- - ---------------------
On December 16, 1996, the Board of Directors approved a change in the Company's
fiscal year end from March 31 to December 31 effective December 31, 1996. As a
result of the change, the Company's Consolidated Statements of Operations and
Consolidated Statements of Cash Flows for the fiscal year ended December 31,
1996, covers nine months.
Principles of Consolidation
- - ---------------------------
The consolidated financial statements include the accounts of Unico American
Corporation and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
- - ---------------------
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). As described in Note 14, the
Company's insurance subsidiary also files financial statements with regulatory
agencies prepared on a statutory basis of accounting which differs from
generally accepted accounting principles.
Use of Estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosure of certain assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. While every effort is made to ensure the
integrity of such estimates, actual results could differ from those estimates.
Investments
- - -----------
All of the Company's fixed maturity investments are classified as available-for
sale and are stated at market value. Although classified as available-for-sale,
the Company's investment guidelines place primary emphasis on buying and holding
high-quality investments to maturity. Short-term investments are carried at
cost, which approximates market value. Investments in equity securities are
carried at market value. The unrealized gains or losses from fixed maturities
and equity securities are reported as a separate component of stockholders'
equity, net of any deferred tax effect. When a decline in value of a fixed
maturity or equity security is considered other than temporary, a loss is
recognized in the consolidated statements of operations. Realized gains and
losses are included in the consolidated statements of operations based on the
specific identification method.
The Company had net unrealized investment gains of $1,998,536 as of December 31,
1998, and net unrealized investment gains of $1,222,095 as of December 31, 1997.
Property and Equipment
- - ----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using accelerated depreciation methods over the
estimated useful lives of the related assets.
Income Taxes
- - ------------
The provision for federal income taxes is computed on the basis of income as
reported for financial reporting purposes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes and are measured using the enacted tax rates and laws expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. Income tax expense provisions increase or decrease
in the same period in which a change in tax rates is enacted.
31
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- - ---------------------------------------------------------------
Fair Value of Financial Instruments
- - -----------------------------------
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investment Securities - Fair values for fixed maturity securities are
obtained from a national quotation service. The fair values for equity
securities are based on quoted market prices.
Cash and Short-Term Investments - The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Premiums and Notes Receivable - The carrying amounts reported in the
balance sheet for these instruments approximate the fair values.
Earnings Per Share
- - ------------------
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share,"
which requires presentation of basic and diluted earnings per share for all
publicly traded companies effective for fiscal years ending after December 15,
1997.
Basic earnings per share excludes the impact of common share equivalents and is
based upon the weighted average common shares outstanding. Diluted earnings per
share utilizes the average market price per share when applying the treasury
stock method in determining common share equivalents. Outstanding stock options
are treated as common share equivalents for purposes of computing diluted
earnings per share and represent the difference between basic and diluted
weighted average shares outstanding.
Revenue Recognition
- - -------------------
a. General Agency Operations
-----------------------------
Commissions and service fees due the Company are recognized as income on
the effective date of the insurance policies.
b. Insurance Company Operations
--------------------------------
Premiums are earned on a pro-rata basis over the terms of the policies.
Premiums applicable to the unexpired terms of policies in force are
recorded as unearned premiums. The Company earns a commission on policies
that are ceded to its reinsurers. This commission is considered earned on a
pro-rata basis over the terms of the policies.
c. Insurance Premium Financing Operations
------------------------------------------
Premium finance interest is charged to policyholders who choose to finance
insurance premiums. Interest is charged at rates that vary with the amount
of premium financed. Premium finance interest is recognized using a method
which approximates the interest (actuarial) method.
Losses and Loss Adjustment Expenses
- - -----------------------------------
The process of establishing loss reserves involves significant judgment. The
reserves for unpaid losses and loss adjustment expenses are based on estimates
of ultimate claim cost, including claims incurred but not reported. These
estimates are reviewed regularly, and as experience develops and new information
becomes known, the reserves are adjusted as necessary. Such adjustments are
reflected in results of operations in the period in which they become known.
Management believes that the aggregate reserves for losses and loss adjustment
expenses are reasonable and adequate to cover the cost of claims, both reported
and unreported.
32
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- - ---------------------------------------------------------------
Restricted Funds
- - ----------------
Restricted funds are as follows:
Fiscal Year Ended December 31
-----------------------------
1998 1997
---- ----
Restricted Funds:
Premium trust funds (1) $2,867,099 $2,668,472
Assigned to state agencies (2) 2,725,000 2,725,000
--------- ---------
Total restricted funds $5,592,099 $5,393,472
========= =========
(1) As required by law, the Company segregates from its operating
accounts the premiums collected from insurers which are payable to
insurance companies into separate trust accounts. These amounts are
included in cash and short-term investments.
(2) Included in fixed maturity investments are statutory deposits
assigned to and held by the California State Treasurer and the
Insurance Commissioner of the state of Nevada. These deposits are
required for writing certain lines of business in California and for
admission in states other than California.
Deferred Policy Acquisition Costs
- - ---------------------------------
Policy acquisition costs consist of direct and indirect costs associated with
the production of insurance policies such as commissions, premium taxes, and
certain other underwriting expenses which vary with and are primarily related to
the production of the insurance policy. Policy acquisition costs are deferred
and amortized as the related premiums are earned and are limited to their
estimated realizable value based on the related unearned premiums plus
investment income less anticipated losses and loss adjustment expenses. Ceding
commission applicable to the unexpired terms of policies in force are recorded
as unearned ceding commission which is included in deferred policy acquisition
costs.
Reinsurance
- - -----------
The Company cedes reinsurance to provide for greater diversification of
business, to allow management to control exposure to potential losses arising
from large risks by reinsuring certain levels of risk in various areas of
exposure, to reduce the loss that may arise from catastrophes, and to provide
additional capacity for growth. Prepaid reinsurance premiums and reinsurance
receivables are reported as assets and represent ceded unearned premiums and
reinsurance recoverable on both paid and unpaid losses, respectively. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policies.
Comprehensive Income
- - --------------------
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997, was adopted by the Company in 1998. The Company is reporting comprehensive
income for the same periods as presented on the Consolidated Statements of
Operations. The implementation of SFAS No. 130 had no effect on the financial
position or results of operations of the Company.
Segment Reporting
- - -----------------
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures
about Segments of an Enterprise and Related Information," became effective for
fiscal years effective after December 15, 1997. SFAS No. 131 establishes
standards for the way information about operating segments is reported in
financial statements. The Company has adopted SFAS No. 131 for the fiscal year
ended December 31, 1998, and has identified its insurance company operation as
its primary reporting segment. Revenues from this segment comprise 85.5% of
consolidated revenues. The Company's remaining operations constitute a variety
of specialty insurance services, each with unique characteristics and
individually insignificant to consolidated revenues.
33
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- - ---------------------------------------------------------------
The insurance company operation is conducted through Crusader, which as of
December 31, 1998, is licensed as an admitted insurance carrier in the states of
Arizona, California, Montana, Nevada, Oregon and Washington. Crusader is a
multiple line property and casualty insurance company which began transacting
business on January 1, 1985. As of December 31, 1998, 97% of Crusader's business
was commercial multiple peril "business package" insurance policies. This
business is written in all of the states in which it is licensed. Commercial
multiple peril policies provide a combination of property and liability coverage
for businesses and business property. Commercial property coverages insure
against loss or damage to buildings, inventory and equipment from natural
disasters, including hurricanes, windstorms, hail, water, explosions, severe
winter weather and other events such as theft and vandalism, fires and storms
and financial loss due to business interruption resulting from covered property
damage. Commercial liability coverages insure against third party liability from
accidents occurring on the insured's premises or arising out of its operations,
such as injuries sustained from products sold. Crusader also writes separate
commercial property and commercial liability policies.
Revenues, income before income taxes and assets by segment were as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year 12 Months Fiscal Year
Ended Ended Ended Ended
December 31 December 31 December 31 December 31
1998 1997 1996 1996
---- ---- ---- ----
(Unaudited) (Nine Months)
Revenues
<S> <C> <C> <C> <C>
Insurance company operation $40,661,632 $41,207,995 $38,563,430 $29,372,075
---------- ---------- ---------- ----------
Other insurance operations 17,962,867 19,699,853 19,659,943 15,020,813
Intersegment elimination (1) (11,080,229) (12,617,127) (12,343,101) (9,508,231)
---------- ---------- ----------- -----------
Total other insurance operations 6,882,638 7,082,726 7,316,842 5,512,582
--------- --------- --------- ---------
Total revenues $47,544,270 $48,290,721 $45,880,272 $34,884,657
========== ========== ========== ==========
Income before income taxes
Insurance company operation $11,753,137 $9,086,143 $7,045,273 $5,123,899
Other insurance operations 1,001,761 1,902,887 2,730,804 2,255,088
--------- --------- --------- ---------
Total income before income taxes $12,754,898 $10,989,030 $9,776,077 $7,378,987
========== ========== ========= =========
Assets
Insurance company operation $104,779,787 $97,075,764 $89,277,712 $89,277,712
Intersegment eliminations (2) (150,097) (1,475,299) (3,244,509) (3,244,509)
----------- ---------- ---------- ----------
Total Insurance company operation 104,629,690 95,600,465 86,033,203 86,033,203
Other insurance operations 17,087,953 17,341,919 18,418,119 18,418,119
---------- ---------- ---------- ----------
Total assets $121,717,643 $112,942,384 $104,451,322 $104,451,322
=========== =========== =========== ===========
(1) Intersegment revenue eliminations reflect commissions paid by Crusader to
Unifax.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
</TABLE>
34
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- - --------------------------------------------------------------
Reclassifications
- - -----------------
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
Recently Issued Accounting Standards
- - ------------------------------------
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" is effective for financial
statements beginning after December 15, 1998. SOP 98-1 requires that the cost of
internally developed software be capitalized. The Company will implement this
standard during the first quarter of 1999 and is currently evaluating the impact
that it will have on the consolidated financial statements.
NOTE 2 - ADVANCE PREMIUM AND PREMIUM DEPOSITS
- - ---------------------------------------------
Some of the Company's health and life programs require payments of premium prior
to the effective date of coverage, and accordingly, invoices are sent out as
early as two months prior to the coverage effective date. Insurance premiums
received for coverage months effective after the balance sheet date are recorded
as advance premiums.
Deposit premiums represent funds received from the Company's daily automobile
rental program which guarantee the payment of premiums for past coverage months.
These deposits are required when information such as gross receipts or number of
rental cars is required to compute the actual premium due, but is not available
until after the coverage month.
NOTE 3 - INVESTMENTS
- - ---------------------
A summary of net investments and related income is as follows:
Investment income is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Fixed maturities $5,463,418 $4,694,838 $3,041,485
Equity securities 8,095 48,960 46,144
Short-term investments 260,725 253,053 145,855
--------- --------- ---------
Total investment income 5,732,238 4,996,851 3,233,484
Less investment expenses 335 590 600
--------- --------- ---------
Net investment income $5,731,903 $4,996,261 $3,232,884
========= ========= =========
</TABLE>
Net realized investment gains and (losses) are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1996 1996
---- ---- ----
(Nine Months)
Gross realized gains:
<S> <C> <C> <C>
Fixed maturities $ 78,758 $ - $ -
Equity securities 170,540 25,093 196,413
Gross realized (losses):
Equity securities (1,367) - ( 5,922)
------- ------ -------
Net realized investment gains $247,931 $25,093 $190,491
======= ====== =======
</TABLE>
35
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS (continued)
- - --------------------------------
A summary of the unrealized appreciation (depreciation) on investments carried
at market and the applicable deferred federal income taxes is shown below:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Gross unrealized appreciation:
Fixed maturities $3,181,405 $1,878,723 $1,183,881
Equity securities - - -
Gross unrealized (depreciation):
Fixed maturities (67,497) (19,704) (59,633)
Equity securities (39,238) (7,360) -
--------- --------- ---------
Net unrealized appreciation on investments 3,074,670 1,851,659 1,124,248
Deferred federal income taxes (1,076,134) (629,564) (382,244)
--------- --------- -------
Net unrealized appreciation, net of deferred income taxes $1,998,536 $1,222,095 $ 742,004
========= ========= =======
</TABLE>
The amortized cost and estimated market value of fixed maturity investments at
December 31, 1998, by contractual maturity are as follows. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Amortized Estimated
Cost Market Value
---------- ------------
Due in one year or less $ 8,887,129 $ 8,934,493
Due after one year through five years 60,551,170 62,555,458
Due after five years through ten years 26,920,513 27,982,769
---------- ----------
Total fixed maturities $96,358,812 $99,472,720
========== ==========
The amortized cost and estimated market values of investments in fixed
maturities by categories are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1998
- - -----------------
Available for sale:
Fixed maturities
Certificates of deposit $ 200,000 $ - $ - $ 200,000
U.S. treasury securities 9,610,487 487,783 10,098,270
State and municipal tax exempt bonds 34,144,344 1,028,944 9,379 35,163,909
Industrial and miscellaneous taxable bonds 52,403,981 1,664,678 58,118 54,010,541
---------- --------- ------ ----------
Total fixed maturities $96,358,812 $3,181,405 $67,497 $99,472,720
========== ========= ====== ==========
December 31, 1997
- - -----------------
Available for sale:
Fixed maturities
Certificates of deposit $ 500,000 $ - $ - $ 500,000
U.S. treasury securities 15,480,258 313,491 224 15,793,525
State and municipal tax exempt bonds 38,361,279 822,093 - 39,183,372
Industrial and miscellaneous taxable bonds 31,765,034 743,139 19,480 32,488,693
---------- --------- ------ ----------
Total fixed maturities $86,106,571 $1,878,723 $19,704 $87,965,590
========== ========= ====== ==========
</TABLE>
36
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS (continued)
- - --------------------------------
Short-term investments have an initial maturity of one year or less and consist
of the following:
Fiscal Year Ended December 31
-----------------------------
1998 1997
---- ----
Certificates of deposit $ 425,000 $ 225,000
Commercial paper 3,425,000 4,750,000
Commercial bank money market accounts 694,834 368,743
U.S. government obligation money market fund 1,290,108 58,032
Short-term U.S. treasury note 735,346 732,216
Savings account 3,574 3,504
--------- ---------
Total short-term investments $6,573,862 $6,137,495
========= =========
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
- - ----------------------------------------------------------------
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997
<S> <C> <C>
Furniture, fixtures, computer, office, and transportation equipment $2,304,799 $2,204,554
Accumulated depreciation 2,099,430 2,000,845
--------- ---------
Net property and equipment $ 205,369 $ 203,709
======== =======
</TABLE>
NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET
- - -------------------------------------------
Premiums and notes receivable are substantially secured by unearned premiums and
funds held as security for performance.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Premiums receivable $1,553,977 $2,525,588
Premium finance notes receivable 4,388,900 4,902,269
--------- ---------
Total premiums and notes receivable 5,942,877 7,427,857
Less allowance for doubtful accounts 20,161 23,251
--------- ---------
Net premiums and notes receivable $5,922,716 $7,404,606
========= =========
</TABLE>
Bad debt expense for the fiscal year ended December 31, 1998, and the fiscal
year ended December 31, 1997, was $25,736 and $28,903, respectively. Premium
finance notes receivable represent the balance due to the Company's premium
finance subsidiary from policyholders who elect to finance their premiums over
the policy term. These notes are net of unearned finance charges.
NOTE 6 - DEFERRED POLICY ACQUISITION COSTS
- - ------------------------------------------
Deferred policy acquisition costs, net of ceding commission, consist of
commissions, premium taxes, inspection fees, and certain other underwriting
costs which are related to and vary with the production of Crusader Insurance
Company policies. These costs are incurred by Crusader and include allocated
expenses of other Unico subsidiaries. Policy acquisition costs are deferred and
amortized as the related premiums are earned. Deferred acquisition costs are
reviewed to determine if they are recoverable from future income, including
investment income.
37
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DEFERRED POLICY ACQUISITION COSTS (continued)
- - -----------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Deferred policy acquisition costs at beginning of year $4,886,684 $4,953,085 $4,333,708
Policy acquisition costs incurred during year 9,276,945 10,495,790 7,506,550
Policy acquisition costs amortized during year (9,497,857) (10,562,191) (6,887,173)
---------- --------- ---------
Deferred policy acquisition costs at end of year $4,665,772 $4,886,684 $4,953,085
========= ========= =========
</TABLE>
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
- - ---------------------------------------------------
The following table provides an analysis of the rollforward of Crusader's losses
and loss adjustment expenses, including a reconciliation of the ending balance
sheet liability for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $40,591,248 $37,111,846 $32,682,153
---------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 22,454,229 23,564,325 16,251,499
(Decrease) in provision for events of prior years (*) (4,860,647) (4,275,759) (1,449,765)
---------- ----------- -----------
Total losses and loss adjustment expenses 17,593,582 19,288,566 14,801,734
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 5,132,952 4,812,268 3,352,866
Losses and loss adjustment expenses attributable to
insured events of prior years 12,677,646 10,996,896 7,019,175
---------- ---------- ---------
Total payments 17,810,598 15,809,164 10,372,041
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $40,374,232 $40,591,248 $37,111,846
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 1,139,713 1,413,603 2,629,019
--------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet - gross of reinsurance (**) $41,513,945 $42,004,851 $39,740,865
========== ========== ==========
</TABLE>
(*) Decreases in incurred losses and loss adjustment expenses related to the
indicated prior years reflect favorable loss experience during these years
attributable to a number of combined factors which have produced favorable
frequency and severity trends in recent years. In addition, actuarial
assumptions based on historical trends have proven to be conservative.
(**) In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, reinsurance recoverable on unpaid losses and loss
adjustment expenses are reported for generally accepted accounting
practices as assets rather than netted against the corresponding liability
for such items on the balance sheet.
38
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CLAIMS AND LITIGATION
- - ------------------------------
The Company, by virtue of the nature of the business conducted by it, becomes
involved in numerous legal proceedings as either plaintiff or defendant. The
Company is required to resort to legal proceedings from time to time in order to
enforce collection of premiums, commissions, or fees for the services rendered
to customers or to their agents. These routine items of litigation do not
materially affect the Company and are handled on a routine basis by the Company
through its general counsel.
Likewise, the Company is sometimes named as a cross-defendant in litigation
which is principally directed against that insurer who has issued a policy of
insurance directly or indirectly through the Company. Incidental actions are
sometimes brought by customers or others which relate to disputes concerning the
issuance or non-issuance of individual policies. These items are also handled on
a routine basis by the Company's general counsel, and they do not materially
affect the operations of the Company. Management is confident that the ultimate
outcome of pending litigation should not have an adverse effect on the Company's
consolidated operation or financial position.
NOTE 9 - ACCRUED EXPENSES AND OTHER LIABILITIES
- - -----------------------------------------------
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Premium payable $3,994,888 $ 525,839
Unearned claim adjusting income 300,000 300,000
Profit sharing contributions 359,948 395,000
Accrued contingent interest expense - 300,000
Accrued salaries 441,427 406,117
Other 322,196 168,611
---------- ----------
Total accrued expenses and other liabilities $5,418,459 $2,095,567
========= =========
</TABLE>
NOTE 10 - NOTE PAYABLE - BANK
- - -----------------------------
American Acceptance Corporation ("AAC"), the Company's premium finance
subsidiary, had a line of credit with Union Bank which was used only to fund its
premium finance operation. Interest on the note is referenced to the London
Interbank Offered Rate ("LIBOR"). The note amount was collateralized by the
assets of AAC and is guaranteed by the Company. The credit line matured
September 2, 1998, and was not renewed. AAC did not borrow against this line of
credit in 1998 or 1997. The loan agreement contained certain covenants including
restrictions on certain transactions between AAC and the Company and the
maintenance of certain financial ratios. AAC was in compliance with all terms of
its loan agreement.
Fiscal Year Ended December 31
-----------------------------
1998 1997
---- ----
Note payable - bank $ - $ -
====== =======
Maximum bank note payable - $750,001
Average bank note payable - $296,576
Weighted average interest rate - 7.3%
39
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - NOTE PAYABLE - BANK (continued)
- - ----------------------------------------
In addition to the AAC line of credit, Unico has a $2,000,000 line of credit
with Union Bank. Interest on this line is referenced to LIBOR and is payable
monthly. The agreement contains certain covenants including maintenance of
certain financial ratios. This credit line expires September 2, 1999, at which
time it is expected to be renewed. As of December 31, 1998 and 1997, no amounts
were borrowed.
NOTE 11 - LEASE COMMITMENT
- - --------------------------
The Company presently occupies a 46,000 square foot building located at 23251
Mulholland Drive, Woodland Hills, California, under a master lease expiring
March 31, 2007. The total rent expense under this lease agreement was $1,025,952
for the fiscal year ended December 31, 1998, $1,025,952 for the fiscal year
ended December 31, 1997, and $769,464 for the nine month period ended December
31, 1996.
The lease provides for the following minimum annual rental commitments:
Fiscal Year Ending
December 31, 1999 $1,025,952
December 31, 2000 $1,025,952
December 31, 2001 $1,025,952
December 31, 2002 $1,025,952
December 31, 2003 (through March 31, 2007) $4,360,296
---------
Total minimum payments $8,464,104
=========
Erwin Cheldin, the Company's president, chairman, and principal stockholder, is
the owner of the building. On February 22, 1995, the Company signed an extension
to the lease with no increase in rent to March 31, 2007. The Company believes
that the terms of the lease at inception and at the time the lease extension was
signed were at least as favorable to the Company as could have been obtained
from non-affiliated third parties. The Company utilizes for its own operations
100% of the space it leases.
NOTE 12 - REINSURANCE
- - ---------------------
A reinsurance transaction occurs when an insurance company transfers ("cedes") a
portion of its exposure on business written by it to a reinsurer which assumes
that risk for a premium ("ceded premium"). Reinsurance does not legally
discharge the Company from primary liability under its policies. If the
reinsurer fails to meet its obligations, the Company must nonetheless pay its
policy obligations. The Company's reinsurance agreements help protect Crusader
against liabilities in excess of certain retentions, including major or
catastrophic losses which may occur from any one or more of the property and/or
casualty risks which Crusader insures. The Company continually monitors and
evaluates the liquidity and financial strength of its reinsurers to determine
their ability to fulfill obligations assumed under the reinsurance contracts.
Crusader has reinsurance agreements with National Reinsurance Corporation and
NAC Reinsurance Corporation, both California admitted reinsurers. National
Reinsurance Corporation was acquired by General Reinsurance Corporation in 1996.
Crusader also has additional catastrophe reinsurance from various other
reinsurance companies of which 78% of the participating catastrophe reinsurers
are admitted in California. Any catastrophe loss ceded to the reinsurer not
admitted in California requires the reinsurer to immediately obtain a
non-cancelable (Evergreen) letter of credit covering their ceded outstanding
loss including any IBNR. Crusader's retention increased from $150,000 to
$250,000 per risk on July 1, 1997. This retention is subject to a maximum dollar
amount and to catastrophe and clash covers. The catastrophe and clash covers
(subject to a maximum occurrence and annual aggregate amount) help protect the
Company from one loss occurrence affecting multiple policies. On most of the
premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to
Crusader, which includes a reimbursement of the cost of acquiring the portion of
the premium that is ceded. Crusader does not currently assume any reinsurance
from other insurance companies. The Company intends to continue obtaining
reinsurance although the availability and cost may vary from time to time.
40
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - REINSURANCE (continued)
- - --------------------------------
The effect of reinsurance on premiums written, premiums earned, and incurred
losses is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Premiums written:
Direct business $37,079,303 $42,273,990 $31,847,113
Reinsurance assumed - - -
Reinsurance ceded $(2,952,340) $(6,687,944) $(3,701,766)
Premiums earned:
Direct business $40,615,417 $42,721,222 $29,373,374
Reinsurance assumed - - -
Reinsurance ceded $(5,700,222) $(6,394,328) $(3,307,085)
Incurred losses and loss adjustment expenses:
Direct $20,557,887 $26,415,828 $16,777,799
Assumed - - -
Ceded $(2,964,305) $(7,127,262) $(1,976,065)
</TABLE>
NOTE 13 - PROFIT SHARING PLAN
- - -----------------------------
During the fiscal year ended March 31, 1986, the Company adopted the Unico
American Corporation Profit Sharing Plan. Employees who are at least 21 years of
age and have been employed by the Company for at least two years are
participants in the Plan. Pursuant to the terms of the Plan, the Company
annually contributes to the account of each participant an amount equal to a
percentage of the participant's eligible compensation as determined by the Board
of Directors. Participants are entitled to receive benefits under the plan upon
the later of the following: the date 60 days after the end of the plan year in
which the participant's retirement occurs or one year and 60 days after the end
of the plan year following the participant's termination with the Company.
However, the participant's interest must be distributed in its entirety no later
than April 1 of the calendar year following the calendar year in which the
participant attains age 70 1/2 or otherwise in accordance with the Treasury
Regulations promulgated under the Internal Revenue Code of 1954 as amended.
Contributions to the plan were as follows:
Fiscal year ended December 31, 1998 $563,160
Fiscal year ended December 31, 1997 $545,906
Fiscal year ended December 31, 1996 (nine months) $364,226
NOTE 14 - STATUTORY CAPITAL AND SURPLUS
- - ---------------------------------------
Crusader is required to file an annual statement with insurance regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities ("statutory"). Statutory accounting practices differ in certain
respects from generally accepted accounting principles. The more significant of
these differences for statutory accounting are (a) premium income is taken into
earnings over the periods covered by the policies, whereas the related
acquisition and commission costs are expensed when incurred; (b) all bonds are
recorded at amortized cost, regardless of trading activity; (c) non-admitted
assets are charged directly against surplus; (d) loss reserves and unearned
premium reserves are stated net of reinsurance; and (e) federal income taxes are
recorded when payable. Additionally, the cash flow presentation is not
consistent with generally accepted accounting principles and a reconciliation
from net income to cash provided by operations is not presented.
41
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STATUTORY CAPITAL AND SURPLUS (continued)
- - --------------------------------------------------
In 1998, the National Association of Insurance Commissioners ("NAIC") approved
codified accounting practices that changed the definition of what constitutes
prescribed statutory accounting practices and will result in changes to the
accounting policies that insurance enterprises use to prepare statutory
financial statements commencing in 2001. The Company is currently evaluating the
impact of these rules. No assurance can be given that future legislation or
regulatory changes resulting from such activities will not adversely affect the
Company.
Crusader Insurance Company statutory capital and surplus is as follows:
As of December 31, 1998 $37,611,089
As of December 31, 1997 $30,899,761
Crusader Insurance Company statutory net income is as follows:
Fiscal year ended December 31, 1998 $8,243,434
Fiscal year ended December 31, 1997 $6,658,352
Fiscal year ended December 31, 1996 (nine months) $3,526,515
The Company believes that Crusader's statutory capital and surplus was
sufficient to support the insurance premiums written based on guidelines
established by the NAIC.
Crusader is restricted in the amount of dividends it may pay to its parent in
any twelve (12) month period without prior approval of the California Department
of Insurance. Presently, without prior approval, Crusader may pay a dividend in
any twelve (12) month period to its parent equal to the greater of (a) 10% of
Crusader's statutory policyholders' surplus or (b) Crusader's statutory net
income for the preceding calendar year. The maximum dividend that may be made
without prior approval as of December 31, 1998, is $8,243,434. After taking into
account the dividends paid by Crusader to its parent in 1998 of $1,500,000, the
remaining dividend which may be made without prior approval as of December 31,
1998, is $6,743,434.
NOTE 15 - INCENTIVE STOCK OPTION PLAN
- - -------------------------------------
The Company under its 1985 stock option plan provides for the grant of
"incentive stock options" to officers and key employees. The options and prices
set forth below have been adjusted, where applicable, for all subsequent stock
splits, reverse stock splits, and stock dividends. All options were granted at
fair market value. As of December 31, 1998, all options outstanding were
exercisable. There are no additional options available for future grant under
the 1985 plan. The changes in the number of common shares under option are
summarized as follows:
Options Exercise Price
Outstanding at March 31, 1996 680,000 $3.4375 to $4.375
Options granted -
Options exercised (114,651) $3.4375 to $3.85
Options terminated (4,650) $3.50
-------
Outstanding at December 31, 1996 560,699 $3.4375 to $4.375
Options granted -
Options exercised (186,751) $3.4375 to $3.50
Options terminated -
-------
Outstanding at December 31, 1997 373,948 $3.4375 to $4.375
Options granted -
Options exercised (90,082) $3.50 to $4.375
Options terminated (89,320) $3.50
-------
Outstanding at December 31, 1998 194,546 $3.4375 to $4.375
=======
42
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - TAXES ON INCOME
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Current provision:
Federal $3,516,390 $2,900,181 $2,133,283
State 179,521 184,020 159,364
--------- --------- ---------
Total federal and state 3,695,911 3,084,201 2,292,647
Deferred 350,318 250,470 (88,170)
--------- --------- ---------
Provision for taxes $4,046,229 $3,334,671 $2,204,477
========= ========= =========
</TABLE>
The income tax provision reflected in the consolidated statements of operations
is less than the expected federal income tax on income as shown in the table
below:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Computed tax expense $4,336,665 $3,736,270 $2,508,855
Tax effect of:
Tax exempt income (490,783) (522,813) (393,009)
Dividend exclusion (1,638) (9,905) (9,335)
Other 23,525 (54,971) (56,354)
State income tax expense 178,460 186,090 154,320
--------- --------- ---------
Tax per financial statement $4,046,229 $3,334,671 $2,204,477
========= ========= =========
</TABLE>
The components of the net federal income tax asset included in the financial
statements as required by the assets and liability method are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Discount on loss reserves $1,682,596 $1,900,368
Unearned premiums 1,291,298 1,285,242
Other - 118,668
--------- ---------
Total deferred tax assets $2,973,894 $3,304,278
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs $1,633,021 $1,661,474
Discount on salvage & subrogation 8,493 7,376
Unrealized gain on investments 1,076,135 629,563
Other 47,269 -
--------- ---------
Total deferred tax liabilities $2,764,918 $2,298,413
--------- ---------
Net deferred tax assets $208,976 $1,005,865
======= =========
</TABLE>
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. The amount of the
deferred tax assets considered realizable could be reduced in the near term if
estimates of future taxable income during the carry forward period are reduced.
As a California insurance company, Crusader is obligated to pay a premium tax on
gross premiums written in the states of Arizona, California, Montana, Nevada,
Oregon, and Washington. The premium tax is in lieu of state franchise taxes;
thus, the above provision for state taxes does not include the premium tax.
43
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - EARNINGS PER SHARE
- - ----------------------------
A reconciliation of the numerator and denominator used in the basic and diluted
earnings per share calculation is presented below:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year 12 Months Fiscal Year
Ended Ended Ended Ended
December 31 December 31 December 31 December 31
1998 1997 1996 1996
---- ---- ---- ----
(Unaudited) (Nine Months)
<S> <C> <C> <C> <C>
Basic Earnings Per Share
- - ------------------------
Net income numerator $8,708,669 $7,654,362 $6,849,327 $5,174,510
========= ========= ========= =========
Weighted average shares outstanding
denominator 6,194,133 6,132,096 5,967,667 5,970,977
========= ========= ========= =========
Per share amount $1.41 $1.25 $1.15 $0.87
Diluted Earnings Per Share
- - --------------------------
Net income numerator $8,708,669 $7,654,362 $6,849,327 $5,174,510
========= ========= ========= =========
Weighted average shares outstanding 6,194,133 6,132,096 5,967,667 5,970,977
Effect of diluted securities 226,447 269,263 273,188 279,953
--------- --------- --------- ---------
Diluted shares outstanding denominator 6,420,580 6,401,359 6,240,855 6,250,930
========= ========= ========= =========
Per share amount $1.36 $1.20 $1.10 $0.83
</TABLE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- - ------------------------------------------------------
Summarized unaudited quarterly financial data for each of the calendar years
1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
Comparable Period by Quarter Ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Calendar Year 1998
------------------
Total revenues $12,477,544 $11,811,421 $11,804,173 $11,451,132
Income before taxes 3,125,463 3,291,037 3,177,009 3,161,389
Net income 2,163,710 2,184,110 2,179,796 2,181,053
Earnings per share:
Basic $0.35 $0.35 $0.35 $0.35
Diluted $0.34 $0.34 $0.34 $0.34
Calendar Year 1997
------------------
Total revenues $12,043,649 $12,100,854 $12,166,012 $11,980,206
Income before taxes 2,496,230 2,729,840 2,812,198 2,950,765
Net income 1,765,154 1,884,584 1,950,806 2,053,818
Earnings per share:
Basic $0.29 $0.31 $0.32 $0.33
Diluted $0.28 $0.30 $0.30 $0.32
</TABLE>
44
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure
- - ------------------------
Change in accountants was previously reported.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- - ------------------------------------------------------------
Information in response to Item 10 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 11. Executive Compensation
- - --------------------------------
Information in response to Item 11 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- - ------------------------------------------------------------------------
Information in response to Item 12 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
- - --------------------------------------------------------
Information in response to Item 13 is incorporated by reference from the
Company's definitive proxy statement to be used in connection with the Company's
Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
45
<PAGE>
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- - ------------------------------------------------------------------------
(a) Financial Statements and Schedules Filed as a Part of this Report:
1. Financial statements:
The consolidated financial statements for the fiscal year ended December
31, 1998, are contained herein as listed in the index to consolidated
financial statements on page 23.
2. Financial schedules:
Index to Consolidated Financial Statements
Independent Auditors' Report on Financial Statement Schedules
Schedule I - Summary of Investments Other than
Investments in Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplemental Insurance Information
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning
Property/Casualty Insurance Operations
Schedules other than those listed above are omitted, since they are not
applicable, not required, or the information required to be set forth is
included in the consolidated financial statements or notes.
3. Exhibits:
3.1 Articles of Incorporation of Registrant, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1984).
3.2 By-Laws of Registrant, as amended. (Incorporated herein by reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1991).
10.1 Unico American Corporation Profit Sharing Plan & Trust.
(Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985). (*)
10.2 Unico American Corporation Employee Incentive Stock Option Plan (1985)
(Incorporated herein by reference to Exhibit 10.3 the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31,1985).(*)
10.3 Amendment to Unico American Corporation Incentive Stock Option Plan
(1985). (Incorporated herein by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the fiscal year ended March
31, 1987). (*)
10.4 The Lease dated July 31, 1986, between Unico American Corporation and
Cheldin Management Company. (Incorporated herein by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1987).
10.5 The Lease Amendment #1 dated February 22, 1995, between Unico American
Corporation and Cheldin Management amending the lease dated July 31,
1986. (Incorporated herein by reference to Exhibit 10.5 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
21 Subsidiaries of Registrant. (Incorporated herein by reference to
Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1984).
27 Financial Data Schedule
(*) Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
None.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 23, 1999
UNICO AMERICAN CORPORATION
By: /s/ ERWIN CHELDIN
-----------------
Erwin Cheldin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ ERWIN CHELDIN Chairman of the Board, March 23, 1999
------------- President and Chief
Erwin Cheldin Executive Officer,
(Principal Executive Officer)
/s/ LESTER A. AARON Treasurer, Chief Financial March 23, 1999
--------------- Officer and Director
Lester A. Aaron (Principal Accounting and
Principal Financial Officer)
/s/ CARY L. CHELDIN Executive Vice President March 23, 1999
--------------- and Director
Cary L. Cheldin
/s/ GEORGE C. GILPATRICK Vice President, Secretary March 23, 1999
-------------------- and Director
George C. Gilpatrick
/s/ ROGER H. PLATTEN Vice President and Director March 23, 1999
----------------
Roger H. Platten
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Unico American Corporation
Under date of February 24, 1999, we reported on the consolidated balance sheets
of Unico American Corporation and subsidiaries as of December 31, 1998, and
1997, and the related consolidated statements of operations, comprehensive
income, changes in stockholders' equity, and cash flows, as contained in the
annual report on the Form 10-K for the year 1998. In connection with our audit
of the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules as listed under Item 14(a)2.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
February 24, 1999
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
Board of Directors
Unico American Corporation
Under date of March 20, 1997, we reported on the consolidated balance sheet of
Unico American Corporation and subsidiaries as of December 31, 1996, and the
related consolidated statement of operations, shareholders' equity and cash
flows for the nine months ended December 31, 1996, and the year ended March 31,
1996, as contained in the annual report of Form 10-K for the nine months ended
December 31, 1996. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules as listed under Item 14(a)2. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
GETZ, KRYCLER & JAKUBOVITS
Sherman Oaks, California
March 20, 1997
49
<PAGE>
SCHEDULE I
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- - -------- -------- -------- --------
Amount at which
shown in the
Type of Investment Cost Value Balance Sheet
- - ------------------ ---- ----- -------------
<S> <C> <C> <C>
Fixed maturities:
U.S. treasury securities $ 9,610,487 $10,098,270 $10,098,270
State and municipal tax exempt bonds 34,144,344 35,163,909 35,163,909
Industrial and miscellaneous bonds 52,403,981 54,010,541 54,010,541
Certificates of deposit 200,000 200,000 200,000
---------- ---------- ----------
Total fixed maturities 96,358,812 99,472,720 99,472,720
Equity securities 503,503 481,500 481,500
Short-term investments 6,573,862 6,573,862 6,573,862
----------- ----------- -----------
Total investments $103,436,177 $106,528,082 $106,528,082
=========== =========== ===========
</TABLE>
50
<PAGE>
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997
---- ----
ASSETS
------
<S> <C> <C>
Investments
Available for sale:
Fixed maturities, at market value (amortized cost December 31, 1998
$999,335 ; December 31, 1997 $0) $1,002,401 $ -
Short-term investments 1,750,000 1,200,000
--------- ---------
Total Investments 2,752,401 1,200,000
Cash 20,864 19,939
Accrued investment income 28,967 5,343
Investments in subsidiaries 60,382,968 51,736,149
Property and equipment (net of accumulated depreciation) 205,369 203,709
Other assets 104,129 105,604
---------- ----------
Total Assets $63,494,698 $53,270,744
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- - -----------
Accrued expenses and other liabilities $797,019 $1,089,713
Payables to subsidiaries (net of receivables) 8,378,991 7,103,254
Income taxes payable 150,606 16,993
--------- ---------
Total Liabilities $9,326,616 $8,209,960
--------- ---------
STOCKHOLDERS' EQUITY
- - --------------------
Common stock $2,895,702 $2,838,058
Net unrealized investment gains 1,998,536 1,222,095
Retained earnings 49,273,844 41,000,631
---------- ----------
Total Stockholders' Equity $54,168,082 $45,060,784
---------- ----------
Total Liabilities and Stockholders' Equity $63,494,698 $53,270,744
========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
51
<PAGE>
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
12 Months Fiscal Year
Ended Ended
Fiscal Year Ended December 31 December 31 December 31
-----------------------------
1998 1997 1996 1996
---- ---- ---- ----
(Unaudited) (Nine Months)
REVENUES
- - --------
<S> <C> <C> <C> <C>
General and administrative expenses
allocated to subsidiaries $4,863,910 $5,036,332 $4,977,656 $3,870,364
Net investment income 210,071 150,292 92,846 82,569
Other income 6,031 9,401 12,130 7,414
--------- --------- --------- ---------
Total Revenue 5,080,012 5,196,025 5,082,632 3,960,347
EXPENSES
- - --------
General and administrative expenses 5,018,162 5,109,898 5,033,280 3,937,137
--------- --------- --------- ---------
Income before equity in net income
of subsidiaries 61,850 86,127 49,352 23,210
Equity in net income of subsidiaries 8,646,819 7,568,235 6,799,975 5,151,300
--------- --------- --------- ---------
Net Income $8,708,669 $7,654,362 $6,849,327 $5,174,510
========= ========= ========= =========
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received cash dividends from Crusader of $1,500,000 in the fiscal year
ended December 31, 1998, $1,500,000 in the fiscal year ended December 31, 1997,
and $500,000 in the nine month fiscal year ended December 31, 1996.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
52
<PAGE>
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
(Nine Months)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $8,708,669 $7,654,362 $5,174,510
Adjustments to reconcile net income to net cash
from operations
Undistributed equity in net (income) of
subsidiaries (8,646,819) (7,568,235) (5,151,300)
Depreciation and amortization 98,030 104,029 83,488
Accrued expenses and other liabilities (159,081) (7,941) 4,608
Accrued investment income (23,624) (5,343) (2,500)
Other assets 1,474 (2,353) (21,390)
------- ------- ------
Net cash provided (used) from operations (21,351) 174,519 87,416
------- ------- ------
Cash flows from investing activities
Purchase of fixed maturity investments (998,781) - -
Increase in short-term investments (550,000) (1,200,000) -
Purchase of property and equipment (100,245) (77,766) (34,841)
---------- --------- ------
Net cash (used) by investing activities (1,649,026) (1,277,766) (34,841)
---------- --------- ------
Cash flows from financing activities
Proceeds from issuance of common stock 57,644 1,636 1,621
Dividends paid to stockholders (435,456) (430,724) (418,087)
Net change in payables and receivables
from subsidiaries 2,049,114 1,522,949 340,068
--------- --------- -------
Net cash provided (used) by financing activities 1,671,302 1,093,861 (76,398)
--------- --------- ------
Net increase (decrease) in cash 925 (9,386) (23,823)
Cash at beginning of year 19,939 29,325 53,148
------ ------ ------
Cash at end of year $20,864 $19,939 $29,325
====== ====== ======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
53
<PAGE>
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future Benefits,
Deferred Benefits, Claims,
Policy Losses, Net Losses and
Acquisition and Loss Unearned Premium Investment Settlement
Cost Expenses Premiums Revenue Income Expenses
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1998
Property &
Casualty $4,665,772 $41,513,945 $18,136,895 $34,915,195 $5,497,323 $17,593,582
Fiscal Year Ended
December 31, 1997
Property &
Casualty $4,886,684 $42,004,851 $21,673,009 $36,326,894 $4,855,580 $19,288,566
Fiscal Year Ended
March 31, 1996
Property &
Casualty $4,953,085 $39,740,865 $22,120,241 $26,066,289 $3,115,110 $14,801,734
<CAPTION>
Amortization
of Deferred
Policy Other
Acquisition Operating Premium
Cost Costs Written
---------------------------------------------
<S> <C> <C> <C>
Fiscal Year Ended
December 31, 1998
Property &
Casualty $9,497,857 $1,663,214 $34,126,963
Fiscal Year Ended
December 31, 1997
Property &
Casualty $10,562,191 $1,855,589 $35,586,046
Fiscal Year Ended
March 31, 1996
Property &
Casualty $6,887,173 $1,653,077 $28,145,347
</TABLE>
54
<PAGE>
SCHEDULE IV
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
REINSURANCE
<TABLE>
<CAPTION>
Ceded to Assumed Percentage of
Gross Other from Other Net Amount Assumed
Amount Companies Companies Amount to Net
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1998
Property & Casualty $40,615,417 $5,700,222 - $34,915,195 -
Fiscal Year Ended
December 31, 1997
Property & Casualty $42,721,222 $6,394,328 - $36,326,894 -
Fiscal Year Ended
December 31, 1996
(Nine Months)
Property & Casualty $29,373,374 $3,307,085 - $26,066,289 -
</TABLE>
55
<PAGE>
SCHEDULE VI
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY
INSURANCE OPERATIONS
<TABLE>
<CAPTION>
Claims and
Reserves for Claim
Unpaid Discount Adjustment
Deferred Claims if Any, Expenses Incurred
Affiliation Policy and Claim Deducted Net Related to
with Acquisition Adjustment in Unearned Earned Investment (1) Current Year
Registrant Costs Expenses Column C Premiums Premiums Income (2) Prior Year
(A) (B) (C) (D) (E) (F) (G) (H)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Company &
Consolidated
Subsidiaries
Fiscal Year Ended
December 31, 1998 $4,665,772 $41,513,945 - $18,136,895 $34,915,195 $5,497,323 $22,454,229 (1)
$(4,860,647) (2)
December 31,1997 $4,886,684 $42,004,851 - $21,673,009 $36,326,894 $4,855,580 $23,564,325 (1)
$(4,275,759) (2)
December 31,1996 $4,953,085 $39,740,865 - $22,120,241 $26,066,289 $3,115,110 $16,251,499 (1)
(Nine Months) $(1,449,765) (2)
<CAPTION>
Amortization
of Deferred Paid Claims
Policy and Claim
Acquisition Adjustment Premiums
Costs Expenses Written
(I) (J) (K)
---------------------------------------------------------------
<S> <C> <C> <C>
Company &
Consolidated
Subsidiaries
Fiscal Year Ended
December 31, 1998 $9,497,857 $17,810,598 $34,126,963
December 31, 1997 $10,562,191 $15,809,164 $35,586,046
December 31, 1996 $6,887,173 $10,372,041 $28,145,347
(Nine Months)
</TABLE>
56
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<DEBT-HELD-FOR-SALE> 106,046,582
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 481,500
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 106,528,082
<CASH> 277,544
<RECOVER-REINSURE> 1,285,918
<DEFERRED-ACQUISITION> 4,665,772
<TOTAL-ASSETS> 121,717,643
<POLICY-LOSSES> 41,513,945
<UNEARNED-PREMIUMS> 18,136,895
<POLICY-OTHER> 2,329,356
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,895,702
<OTHER-SE> 51,272,380
<TOTAL-LIABILITY-AND-EQUITY> 121,717,643
34,915,195
<INVESTMENT-INCOME> 5,731,903
<INVESTMENT-GAINS> 247,931
<OTHER-INCOME> 6,649,241
<BENEFITS> 17,593,582
<UNDERWRITING-AMORTIZATION> 9,497,857
<UNDERWRITING-OTHER> 7,697,933
<INCOME-PRETAX> 12,754,898
<INCOME-TAX> 4,046,229
<INCOME-CONTINUING> 8,708,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,708,669
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.36
<RESERVE-OPEN> 40,591,248
<PROVISION-CURRENT> 22,454,229
<PROVISION-PRIOR> (4,860,647)
<PAYMENTS-CURRENT> 5,132,952
<PAYMENTS-PRIOR> 12,677,646
<RESERVE-CLOSE> 40,374,232
<CUMULATIVE-DEFICIENCY> 4,860,645
</TABLE>
