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 year ended December 31, 1999 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 Section12(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 will not 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 20, 2000, was $20,936,892 (based on the closing sales price on such
date, as reported by the Wall Street Journal).
6,304,965
Number of shares of common stock outstanding as of March 20, 2000
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,
1999, 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
<PAGE>
PART 1
------
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 that 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 years ended December 31, 1999, and December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1999 1998
----------------------- -----------------------
Percent of Percent of
Total Total
Total Company Total Company
Revenues Revenues Revenues Revenues
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Insurance Company Revenues $33,888,077 83.2% $40,661,632 85.5%
Other Revenues from Insurance Operations
- ----------------------------------------
Health and life insurance program commission income 2,668,582 6.6% 2,216,446 4.6%
Service fee income 1,677,223 4.1% 1,896,258 4.0%
Daily automobile rental insurance program commission
and claim administration fees 760,619 1.9% 807,503 7.7%
Association operations membership and fee income 396,958 1.0% 355,781 0.8%
Workers' compensation program commission income 81,919 0.2% 329,465 0.7%
Other commission and fee income 49,241 0.1% 2,085 -
--------- ---- --------- ----
Total gross commission and fee income 5,634,542 13.9% 5,607,538 11.8%
Insurance premium financing operation finance
charges and late fees 915,940 2.2% 1,033,479 2.2%
Non-insurance company investment income 283,942 0.7% 234,580 0.5%
Other income 11,756 - 7,041 -
---------- ---- --------- ----
Total Other Revenues from Insurance Operations 6,846,180 16.8% 6,882,638 14.5%
---------- ------ ---------- -----
Total Revenues $40,734,257 100.0% $47,544,270 100.0%
========== ====== ========== =====
</TABLE>
INSURANCE COMPANY OPERATION
---------------------------
General
- -------
The insurance company operation is conducted through Crusader, which as of
December 31, 1999, was licensed as an admitted insurance carrier in the states
of Arizona, California, Colorado, 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, 1999, 97% of
Crusader's business was commercial multiple peril business package insurance
policies. 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.
2
<PAGE>
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.
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. In 1999, Crusader had reinsurance agreements with General
Reinsurance Corporation, a California admitted reinsurer. In 1998, Crusader had
reinsurance agreements with National Reinsurance Corporation (acquired by
General Reinsurance Corporation in 1996) and NAC Reinsurance Corporation, both
California admitted reinsurers. These reinsurance agreements help protect
Crusader against liabilities in excess of certain retentions, including major or
catastrophic losses that 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 79% of the premium
is ceded to participating catastrophe reinsurers that are admitted in
California.
The aggregate amount of earned premium ceded to the reinsurers was $6,583,752
for the fiscal year ended December 31, 1999, and $5,700,222 for the fiscal year
ended December 31, 1998.
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. Prior to January 1, 1998, National Reinsurance Corporation charged a
provisional rate on exposures up to $500,000 that is subject to adjustment and
is based on the amount of losses ceded, limited by a maximum percentage that
could be charged. That provisional rated treaty was cancelled and replaced by a
flat rated treaty on January 1, 1998.
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 15 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 1990 through 1999. 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.
3
<PAGE>
The table reflects redundancies in Crusader's net loss and loss adjustment
expense reserves in all years except 1994 and 1995. 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 15 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
standards and averages into its estimates. When Crusader establishes its IBNR
reserves, although historically conservative, it is still well below industry
average. The Company believes that its IBNR reserves are 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
-------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $23,601,435 $22,918,442 $21,249,902 $20,824,039 $21,499,778 $27,633,304 $32,682,153
Paid Cumulative as of
- ---------------------
1 Year Later 6,204,559 6,425,329 6,368,554 8,904,427 7,687,180 8,814,611 7,019,175
2 Years Later 10,357,708 10,946,318 9,583,885 10,824,024 13,453,833 13,502,224 15,292,415
3 Years Later 12,935,827 12,409,499 11,814,445 13,178,262 16,597,366 18,911,104 20,898,580
4 Years Later 13,561,987 12,951,511 12,667,989 14,462,911 19,073,442 22,631,450 24,932,922
5 Years Later 13,768,277 13,357,941 13,093,970 15,821,444 21,452,429 25,509,618
6 Years Later 13,866,654 13,459,123 13,385,215 16,936,140 23,900,335
7 Years Later 13,923,206 13,422,013 14,067,010 17,729,857
8 Years Later 13,797,865 13,630,780 14,479,299
9 Years Later 13,996,301 13,742,084
10 Years Later 14,086,574
Reserves Reestimated as of
- --------------------------
1 Year Later 20,990,669 20,153,906 18,562,116 19,599,695 20,912,743 25,666,251 31,232,388
2 Years Later 18,566,956 17,136,498 15,021,149 15,742,478 20,289,699 24,984,032 28,636,286
3 Years Later 15,846,416 14,788,046 13,802,009 15,463,566 21,217,766 24,575,023 28,074,691
4 Years Later 14,631,554 13,961,555 13,620,235 16,174,111 21,843,632 26,146,874 29,774,762
5 Years Later 14,115,281 13,833,745 13,790,786 16,888,885 23,767,472 28,687,265
6 Years Later 14,063,578 13,754,304 13,878,797 17,762,615 26,193,900
7 Years Later 14,063,080 13,529,769 14,374,473 18,692,720
8 Years Later 13,853,735 13,730,935 15,132,286
9 Years Later 14,037,964 13,951,604
10 Years Later 14,219,558
Cumulative
Redundancy
(Deficiency) $9,381,877 $8,966,838 $6,117,616 $2,131,319 $(4,694,122) $(1,053,961) $2,907,391
========= ========= ========= ========= ========= ========= =========
Gross Liability for Unpaid Losses and Loss Adjustment Expenses $23,011,868 $26,294,199 $32,370,752 $37,006,458
Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (2,187,829) (4,794,421) (4,737,448) (4,324,305)
---------- ---------- ---------- ----------
Net Liability for Unpaid Losses and Loss Adjustment Expenses $20,824,039 $21,499,778 $27,633,304 $32,682,153
========== ========== ========== ==========
Gross Liability Reestimated $24,942,631 $27,682,874 $31,590,579 $32,358,791
Ceded Liability Reestimated (6,249,911) (1,488,974) (2,903,314) (2,584,029)
---------- ---------- ---------- ----------
Net Liability Reestimated $18,692,720 $26,193,900 $28,687,265 $29,774,762
========== ========== ========== ==========
Gross Reserve Redundancy (Deficiency) $(1,930,763) $(1,388,675) $780,173 $4,647,667
========= ========= ======== =========
</TABLE>
5
<PAGE>
CRUSADER INSURANCE COMPANY
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
------------------------------------------------
1996 1997 1998 1999
(Nine Months) ---- ---- ----
-----------
<S> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Loss
Adjustment Expenses $37,111,846 $40,591,248 $40,374,232 $37,628,165
Paid Cumulative as of
- ---------------------
1 Year Later 10,996,896 12,677,646 15,393,167
2 Years Later 19,488,853 23,740,181
3 Years Later 25,552,756
Reserves Reestimated as of
- --------------------------
1 Year Later 32,838,369 35,730,603 39,132,945
2 Years Later 31,086,210 36,032,215
3 Years Later 32,347,788
Cumulative
Redundancy
(Deficiency) $4,764,058 $4,559,033 $1,241,287
========= ========== =========
Gross Liability for Unpaid Losses and Loss Adjustment Expenses $39,740,865 $42,004,851 $41,513,945 $41,592,489
Ceded Liability for Unpaid Losses and Loss Adjustment Expenses (2,629,019) (1,413,603) (1,139,713) (3,964,324)
---------- ---------- ---------- ----------
Net Liability for Unpaid Losses and Loss Adjustment Expenses $37,111,846 $40,591,248 $40,374,232 $37,628,165
========== ========== ========== ==========
Gross Liability Reestimated $36,764,993 $45,850,756 $44,930,625
Ceded Liability Reestimated (4,417,205) (9,818,541) (5,797,680)
---------- ---------- ----------
Net Liability Reestimated $32,347,788 $36,032,215 $39,132,945
========== ========== ==========
Gross Reserve Redundancy (Deficiency) $2,975,872 $(3,845,905) $(3,416,680)
========= ========= =========
</TABLE>
5
<PAGE>
The following table provides an analysis of the roll forward of Crusader's
losses and loss adjustment expenses, including a reconciliation of the ending
balance sheet liability for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $40,374,232 $40,591,248 $37,111,846
Incurred losses and loss adjustment expenses
Provision for insured events of current year 18,268,710 22,454,229 23,564,325
(Decrease) in provision for events of prior years (*) (1,241,520) (4,860,647) (4,275,759)
---------- ---------- ----------
Total losses and loss adjustment expenses 17,027,190 17,593,582 19,288,566
---------- ---------- ---------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 4,380,090 5,132,952 4,812,268
Losses and loss adjustment expenses attributable to
insured events of prior year 15,393,167 12,677,646 10,996,896
---------- ---------- ----------
Total payments 19,773,257 17,810,598 15,809,164
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $37,628,165 $40,374,232 $40,591,248
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 3,964,324 1,139,713 1,413,603
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet , gross of reinsurance (**) $41,592,489 $41,513,945 $42,004,851
========== ========== ==========
</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. The
above table shows favorable loss development decreased to $1,241,520 in
1999 from $4,860,647 in 1998. The decrease was primarily due to an
increase in prior years losses incurred in 1999, which was greater than
the prior years losses experienced in 1998. The methodology used by the
Company in determining 1999 case reserves and IBNR is consistent with
prior years.
(**) 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 GAAP adjustments for written premium on policies which do not become
effective in the year written, 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 that 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. This ratio has been
declining since 1996 due to declining written premium and increasing
policyholders' surplus.
<TABLE>
<CAPTION>
Twelve months ended
------------------------------------------------------------------------------------
December 31 March 31
---------------------------------------------------------------- ----------------
Statutory: 1999 1998 1997 1996 1996
- --------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Premiums Written $26,209,180 $34,203,908 $36,059,086 $36,652,776 $32,915,964
Policyholders' Surplus $40,952,456 $37,611,089 $30,899,761 $25,748,757 $22,721,183
Ratio .6 to 1 .9 to 1 1.2 to 1 1.4 to 1 1.4 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 that was filed with the
insurance department on December 23, 1998, reported no adjustments 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, 1999, 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 1999 or 1998 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 constitute 10% or
more of the voting securities of a California insurance company or a person that
controls a
7
<PAGE>
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's most recent rating by A. M. Best, issued in
November 1999, was A (Excellent). This rating was an upgrade from an A-
(Excellent) rating the Company had received annually 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, workers' compensation, and commercial earthquake
insurance policies. Unifax's workers' compensation, commercial earthquake, and
some of the commercial liability insurance policies are sold primarily in
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.
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 that 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. AAC provides premium financing primarily to Crusader policies produced
by Unifax in California.
Health and Life Insurance Operations
- ------------------------------------
The Company's subsidiaries National Insurance Brokers, Inc., ("NIB") and
American Insurance Brokers, Inc., ("AIB") market medical, dental, life, vision,
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 California.
Association Operation
- ---------------------
The Company's subsidiary Insurance Club, Inc., DBA The American Association for
Quality Health Care ("AAQHC"), is a membership association that provides various
consumer benefits to its members, including participation in group health care
and life insurance policies that 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 $2,000,000. 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
-------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
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 $ 200 $ 200 $ 500 $ 500
U.S. treasury securities 10,056 10,076 9,610 10,098 15,480 15,794
Industrial and miscellaneous
taxable bonds 60,807 58,974 52,404 54,011 31,765 32,489
State and municipal tax-exempt bonds 28,079 28,344 34,144 35,164 38,361 39,183
------ ------ ------ ------ ------ ------
Total fixed maturity investments 99,142 97,594 96,358 99,473 86,106 87,966
Short-term cash investments 5,968 5,968 6,574 6,574 6,137 6,137
Equity investments 164 66 504 481 230 223
------- ------- ------- ------- ------ ------
Total investments $105,274 $103,628 $103,436 $106,528 $92,473 $94,326
======= ======= ======= ======= ====== ======
</TABLE>
9
<PAGE>
At December 31, 1999, the Company had net unrealized losses on all investments
of $1,646,311 before income taxes. The amortized cost and estimated market value
of fixed maturity investments at December 31, 1999, 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.
(Amounts in Thousands)
As of December 31, 1999
-----------------------
Amortized Market
Fixed maturities due Cost Value
-------------------- ---- -----
Within 1 year $11,794 $11,830
Beyond 1 year but within 5 years 73,088 72,137
Beyond 5 years but within 10 years 14,260 13,627
------ ------
Total $99,142 $97,594
====== ======
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 and 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 the Company. 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. Additional information regarding competition in the insurance
marketplace is discussed in the Management Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations.
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 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 93% of the Company's present health and life insurance business is
from the CIGNA HealthCare medical and dental plan programs. This percentage is
slightly lower 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 10, 2000, the Company employed 139 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 that
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 that 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.
State of Washington Regulatory Proceeding
- -----------------------------------------
In August 1999 the Insurance Commissioner of the State of Washington announced
that she would seek to suspend Crusader's Certificate of Authority to do
business in the State of Washington for a period of 120 days, impose a $307,000
fine, and seek repayment of policy fees to Washington policyholders. The
Insurance Commissioner alleges that a service fee of $250 per policy, which was
charged by a Washington agent, is premium and subject to rate filing
requirements and premium taxes. The Company does not believe it has done
anything improper and intends to defend vigorously these charges and does not
believe that the outcome of this matter will have a materially adverse effect on
its financial statements. No amounts have been accrued in the financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
11
<PAGE>
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
declared during the last two comparable twelve month periods are as follows:
High Low Dividend
Quarter Ended Price Price Declared
------------- ----- ----- --------
March 31, 1998 18 1/8 12
June 30, 1998 16 3/8 14 5/8 $0.07
September 30, 1998 15 1/4 9
December 31, 1998 14 1/8 10
March 31, 1999 13 3/4 9 3/4 $0.25
June 30, 1999 10 3/4 8 5/8
September 30, 1999 10 1/2 8 3/13
December 31, 1999 8 5/8 6 3/8
As of December 31, 1999, 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 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. On March 1, 2000, the Company
declared an annual cash dividend of $0.15 per common share payable on May 19,
2000, to shareholders of record on April 28, 2000. 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 $5,404,526 as of December 31, 1999.
From January 1, 1999, to December 31, 1999, the Company issued an aggregate of
93,131 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 four employees of the Company.
Of these shares, an aggregate of 58,497 shares were issued in exchange for
$202,656.19 in cash and 34,634 shares were issued in exchange for 11,602 shares
of the Company's common stock and an aggregate of $30.56 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.
On August 26, 1999, the Company granted incentive stock options to 17 employees
covering an aggregate of 135,000 shares of its common stock exercisable at $9.25
per share. These options expire ten years from the date of the grant and are not
exercisable prior to September 1, 2000. Options covering 10,000 or less shares
become exercisable at the rate of 2,500 shares per year commencing September 1,
2000; and options covering more than 10,000 shares become exercisable at the
rate of 5,000 shares per year commencing September 1, 2000. All of these options
were granted to employees having the title of manager or higher. Each person who
was granted an option represented that he or she was acquiring the option, and
any shares issuable upon exercise thereof, for investment and without a view to
distribution or resale in violation of the Securities Act of 1933, as amended.
These options were granted in reliance upon the exemption from the registration
requirements under the Securities Act of 1933, as amended, under Section 4(2)
thereof as transactions not involving a public offering.
12
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Fiscal year ended
----------------------------------------------------------------------------------------
December 31 March 31
---------------------------------------------------------------------- -------------
1999 1998 1997 1996 1996
---- ---- ---- (Nine Months) ----
-----------
<S> <C> <C> <C> <C> <C>
Total revenues $40,734,257 $47,544,270 $48,290,721 $34,884,657 $42,468,474
Total costs and expenses 33,609,368 34,789,372 37,301,688 27,505,670 34,060,183
---------- ---------- ---------- ---------- ----------
Income before taxes $7,124,889 $12,754,898 $10,989,033 $7,378,987 $8,408,291
Net income $5,131,366 $8,708,669 $7,654,362 $5,174,510 $5,947,481
Basic earnings per share $0.82 $1.41 $1.25 $0.87 $1.00
Diluted earnings per share $0.81 $1.36 $1.20 $0.83 $0.97
Cash dividends per share $0.25 $0.07 $0.07 $0.07 $0.07
Total assets $121,978,756 $121,717,643 $112,942,384 $104,451,322 $95,817,377
Stockholders' equity $54,840,797 $54,168,082 $45,060,784 $37,355,419 $32,387,158
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
--------------
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, its 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 net unrealized losses) at December 31, 1999, were
$105,380,057 compared to $103,713,721 at December 31, 1998, a 2% increase.
Crusader's cash and investments at December 31, 1999, was $97,452,621 or 92% of
the total held by the Company, compared to $97,597,956 or 94% of the total held
by the Company at December 31, 1998.
The Company's investments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Fixed maturities (at amortized cost)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit $ 200,000 - $ 200,000 - $ 500,000 1
U.S. treasury securities 10,056,163 10 9,610,487 10 15,480,258 18
Industrial and miscellaneous (taxable) 60,807,507 62 52,403,981 54 31,765,034 37
State and municipal (tax exempt) 28,078,605 28 34,144,344 36 38,361,279 44
---------- --- ---------- --- ---------- ---
Total fixed maturity investments 99,142,275 100 96,358,812 100 86,106,571 100
---------- --- ---------- --- ---------- ---
Short-term cash investments (at cost)
Certificates of deposit 425,000 7 425,000 6 225,000 4
Commercial paper 2,675,000 45 3,425,000 52 4,750,000 77
Bank money market accounts 2,055,254 35 694,834 11 368,743 6
U.S. gov't obligation money market fund 78,799 1 1,290,108 20 58,032 1
Short-term U.S. treasury 731,281 12 735,346 11 732,216 12
Bank savings accounts 2,839 - 3,574 - 3,504 -
--------- --- --------- --- --------- ---
Total short-term cash investments 5,968,173 100 6,573,862 100 6,137,495 100
--------- --- --------- --- --------- ---
Equity investments (at cost) 164,170 503,503 230,460
----------- ----------- ----------
Total investments $105,274,618 $103,436,177 $92,474,526
=========== =========== ==========
</TABLE>
13
<PAGE>
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 tax-exempt interest income earned (net of bond premium and discount
amortization) during the year ended December 31, 1999, was $1,473,922 compared
to $1,698,211 in the year ended December 31, 1998. In the year ended December
31, 1997, tax-exempt interest income earned totaled $1,809,043.
The Company's investment policy limits investments in any one issuer. This limit
was raised from $1,500,000 to $2,000,000 in 1999. 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.
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 5, 2000, at which time it is expected to be renewed. Unico did
not borrow against its line of credit in 1999 or 1998.
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 $3,071,696, 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 $2,000,000 in 1999 and $1,500,000 in
1998. 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, 1999, was
$40,952,456, an increase of $3,341,367 (9%) over December 31, 1998. Crusader's
statutory capital and surplus as of December 31, 1998, was $37,611,253, an
increase of $6,711,328 (22%) over December 31, 1997.
Cash flow from operations for the year ended December 31, 1999, was $3,700,026,
a decrease of $8,358,253 from the year ended December 31, 1998. This decrease
was primarily due to a decrease in net income of $3,577,303; a decrease in the
change in accrued expenses and other liabilities of $2,315,747; a decrease in
the change in loss reserves (net of reinsurance recoverable) of $2,312,870; and
a decrease in the change in premium, notes and investment income receivable of
$879,505. These decreases were partially offset by a decrease in the change in
the unearned premium reserve, net of prepaid reinsurance premiums of $1,043,265.
There are no material commitments for capital expenditures as of the date of
this report.
YEAR 2000
- ---------
Subsequent to December 31, 1999, the Company has not experienced adverse effects
as a result of Year 2000 issues from either internal or external sources.
However, due to the unusual nature of the problem and lack of historical
experience with Year 2000 issues, it is difficult to predict with certainty if
there may be other computer or infrastructure problems which may occur and
affect the Company and its' customers or suppliers.
Due to the fact that the Company has not experienced any adverse effects of Year
2000 issues through the date of this report, the Company does not anticipate it
will be materially adversely affected by any future Year 2000 events from its
internal operations or from others with whom the Company directly or indirectly
does business.
14
<PAGE>
Results of Operations:
General
- -------
The Company had net income of $5,131,366 for the year ended December 31, 1999,
compared to $8,708,669 for the year ended December 31, 1998, and $7,654,362 for
the year ended December 31, 1997. Total revenue for the year ended December 31,
1999, was $40,734,257 compared to $47,544,270 for the year ended December 31,
1998, and $48,290,721 for the year ended December 31, 1997.
For the year ended December 31, 1999, income before taxes decreased by
$5,630,009 (44%) and net income decreased by $3,577,303 (41%) compared to the
year ended December 31, 1998. The decrease in pre-tax income was primarily due
to a decrease of $5,104,399 (65%) in the underwriting profit (net earned premium
less losses and loss adjustment expenses and policy acquisition costs) from
Crusader.
For the 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
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).
The effect of inflation on the net income of the Company during the year ended
December 31, 1999, 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>
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross written premium $33,139,361 $37,079,303 $42,273,990
Net written premium $26,543,921 $34,126,963 $35,586,046
Earned premium before reinsurance $34,693,113 $40,615,417 $42,721,222
Earned premium net of reinsurance $28,109,361 $34,915,195 $36,326,894
Losses and loss adjustment expenses $17,027,190 $17,593,582 $19,288,566
Unpaid losses and loss adjustment expenses $41,592,489 $41,513,945 $42,004,851
</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, 1999
and 1998.
Crusader's gross written premium by state is as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
California $28,636,676 $31,323,804 $33,048,085
Washington 1,086,815 1,958,179 4,704,286
Arizona 976,872 1,095,922 1,346,589
Oregon 697,033 1,289,054 2,779,691
Pennsylvania 565,628 416,485 41,511
Ohio 489,266 526,004 242,751
Montana 436,390 98,612 -
Texas 118,066 239,563 -
Kentucky 98,095 82,584 -
Nevada 34,520 49,096 111,077
---------- ---------- ----------
Total gross written premium $33,139,361 $37,079,303 $42,273,990
========== ========== ==========
</TABLE>
15
<PAGE>
In the year ended December 31, 1999, gross written premium decreased by
$3,939,942 (11%) compared to the year ended December 31, 1998. Intense price
competition in the property casualty insurance market has adversely affected the
premium written in nearly all states that the Company does business. The
increase in 1999 written premium in the states of Kentucky, Montana and
Pennsylvania was not sufficient to offset the decrease in the other states in
which the Company writes business. 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 commenced marketing directly to
all retail agents and brokers. The Company anticipated that this change would
result in a short-term decrease in written premium with long-term benefits of
increased revenues with reduced acquisition expense and less dependency on any
one large producer. Because intense price competition during 1999 and 1998
continued to adversely affect written premium in those states, the Company
cannot determine how much of the decrease in written premium was applicable to
the change in marketing strategy, but still anticipates a long-term benefit from
the change. The foregoing statement is a forward looking statement and actual
results may differ materially. Factors that 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.
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.
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.
In the year ended December 31, 1998, gross written premium decreased $5,194,687
(12%) compared to the year ended December 31, 1997. This decrease in written
premium was primarily due to a decrease in premiums written in the states of
Oregon and Washington of $4,236,744 (56%) and represented 82% of the total
decrease. This decrease in premium in Washington and Oregon, as previously
discussed, resulted from the Company's change in its marketing strategy in these
states to reduce its dependency on a single large producer. In addition, the
intense price competition in the marketplace has contributed to a reduction in
premium in all states that the Company writes business.
Premium earned before reinsurance decreased $5,922,304 (15%) in the year ended
December 31, 1999, compared to the year ended December 31, 1998, and decreased
$2,105,805 (5%) in the year ended December 31, 1998, compared to the year ended
December 31, 1997. The decrease in earned premium before reinsurance was
directly related to the decrease in written premium discussed above.
16
<PAGE>
Earned premium ceded increased $883,530 (16%) to $6,583,752 or 19% of earned
premium before reinsurance in the year ended December 31, 1999, compared to
$5,700,222 or 14% of earned premium before reinsurance for the year ended
December 31, 1998. Earned premium ceded decreased $694,106 (11%) to $5,700,222
or 14% of earned premium before reinsurance for the year ended December 31,
1998, compared to $6,394,328 or 15% of earned premium before reinsurance for the
year ended December 31, 1997. Ceded premiums increased in the year ended
December 31, 1999, primarily due to higher than anticipated loss experience on
prior accident years that was subject to the Company's provisionally rated
reinsurance contract. Premium ceded under this contract, which was canceled on a
runoff basis effective December 31, 1997, is subject to adjustments based on the
amount of losses ceded, limited by a maximum percentage that can be charged by
the reinsurer. The decrease in earned ceded premium (excluding provisionally
rated ceded premium) in 1999 and 1998 was primarily due to decreased earned
premium before reinsurance.
The following table shows the changes in ceded premium:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in earned ceded premium (excluding
provisionally rated ceded premium) $(800,074) $(818,860) $ 353,438
Increase in provisionally rated ceded premium 1,683,604 124,754 1,653,440
--------- ------- ---------
Net increase (decrease) in earned ceded premium $ 883,530 $(694,106) $2,006,878
======= ======= =========
</TABLE>
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 increased
to 60.6% in 1999 from 50.4% in 1998. This increase in the loss ratio was
primarily due to a decrease in favorable loss development due to an increase in
the prior years losses incurred in 1999, which was greater than the prior years
losses experienced in 1998. Favorable loss development of prior year losses were
$1,241,520 in 1999, $4,860,647 in 1998, and $4,275,759 in 1997. The methodology
used by the Company in determining case reserves and IBNR is consistent with
prior years. In addition, the increase in provisionally rated earned ceded
premium in 1999 over 1998 of $1,558,850 also contributed to the increase in loss
ratio. 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.
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Loss ratio 60.6% 50.4% 53.1%
Expense ratio 29.8% 27.2% 29.1%
---- ---- ----
Combined ratio 90.4% 77.6% 82.2%
==== ==== ====
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, 1999, Crusader was licensed
as an admitted insurance company in the states of Arizona, California, Colorado,
Montana, Nevada, Oregon, and Washington and is approved as a non-admitted
surplus lines writer in several other states.
Other Insurance Operations
--------------------------
Health and Life Insurance Program
- ---------------------------------
Commission income from the health and life insurance sales of NIB and AIB is as
follows:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Commission income $2,668,582 $2,216,446 $2,083,782
17
<PAGE>
NIB and AIB market health and life insurance through non-affiliated insurance
companies for individuals and groups. Approximately 93% of the health and life
commission income in the year ended December 31, 1999, was from the CIGNA
HealthCare medical and dental plan programs compared to approximately 95% in the
same period of the prior year. Revenues for the year ended December 31, 1999,
increased $452,136 (20%) compared to the year ended December 31, 1998. Revenues
for the year ended December 31, 1998, increased $132,664 (6%) compared the year
ended December 31, 1997.
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 for CIGNA, an increase in the number of
small business accounts administered by the Company for CIGNA, and a bonus
commission of $143,191 received from CIGNA. The Company has increased the number
of CIGNA products available to small groups, including life insurance 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.
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:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Service fee income $1,677,223 $1,896,258 $2,182,074
Policies written 17,225 18,306 19,305
Service fee income is primarily related to the number of policies written by
Unifax and has decreased as the number of policies written by Unifax has
decreased.
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:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Daily auto rental program commission
and claim administration fee $731,884 $758,073 $757,098
Contingent commission 28,735 49,430 -
------- ------- -------
Total commission and fee income $760,619 $807,503 $757,098
======= ======= =======
Revenues during the year ended December 31, 1999, were $760,619, a decrease of
$46,884 (6%) compared to the same period of the prior year. Revenue for the year
ended December 31, 1998, increased by $50,405 (7%) compared to the year ended
December 31, 1997.
The daily automobile rental insurance program commission and fee income
(excluding contingent commission) decreased in 1999 primarily due to continued
price competition in the daily automobile insurance market. To avoid
underwriting losses for the non-affiliated insurance company that 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.
18
<PAGE>
Association Operation
- ---------------------
Membership and fee income from the association program of AAQHC is as follows:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Membership and fee income $396,958 $355,781 $336,968
Membership and fee income in the year ended December 31, 1999, increased $41,177
(12%) compared to the year ended December 31, 1998. Membership income increased
$18,813 (6%) in the year ended December 31, 1998, compared to the year ended
December 31, 1997. AAQHC recognized a greater increase in group memberships in
1999 compared to the increase in group memberships in 1998 and has continued to
increase individual and family memberships.
Workers' Compensation Program
- -----------------------------
Unifax produces workers' compensation policies primarily in California for
non-affiliated insurers and receives a commission from them based on premium
written. Unifax discontinued writing new business with one of its non-affiliated
insurers in 1998.
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Commission income $81,919 $329,465 $298,006
Commission income for the year ended December 31, 1999, decreased $247,546 (75%)
compared to the year ended December 31, 1998. For the year ended December 31,
1998, commission income increased $31,459 (11%) compared to the year ended
December 31, 1997. Commission income in this program decreased in 1999, as a
result of the discontinuance of writing new business with one of the
non-affiliated insurers in October of 1998. In addition, the non-affiliated
insurance company Unifax is currently writing with does not write all of the
classes of business that were written by the previous company. Unifax is
currently attempting to increase the classes of business that it is authorized
to write through its current carrier and through affiliation with another
carrier. Commission income for the year ended December 31, 1998, increased over
the prior year primarily as the result of increased sales of workers'
compensation insurance and incentive bonus commissions earned as a result of the
increased sales.
Other Commission and Fee Income
- -------------------------------
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 a non-affiliated third party in June 1997. As
consideration for the sale of this book of business, Unifax received a
percentage of the commission earned for a two-year period on policies which were
in force at the time of sale. Revenue for the years ended December 31, 1999 and
December 31, 1998, represents net commissions received on the sale of the
commercial auto program.
Unifax began producing commercial earthquake and commercial liability insurance
policies for unaffiliated insurance companies in 1999. Unifax receives a
commission from the insurance company based on premium written and a service fee
from the policyholder.
Other commission and fee income are as follows:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Commercial and personal auto
program commission and fee income $4,363 $1,843 $82,439
Earthquake program commission income $22,421 - -
Commercial liability program
commission and fee income $22,280 - -
Miscellaneous fee income 177 242 222
------ ----- ------
Total commission and fee income $49,241 $2,085 $82,661
====== ===== ======
19
<PAGE>
Premium Finance Program
- -----------------------
Premium finance charges and late fees earned from financing policies are as
follows:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Premium finance charges and
late fees earned $915,940 $1,033,479 $1,191,503
New loans 7,597 8,092 8,615
AAC provides premium financing primarily to Crusader policies produced by Unifax
in California. 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. Due to the intense
competition in the market place Unifax has produced fewer policies which has
resulted in fewer policies being financed by AAC.
Premium finance charges and late fees earned on loans decreased $117,539 (11%)
in the year ended December 31, 1999, compared to the year ended December 31,
1998. 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 year ended December 31,
1998, premium finance charges and late fees earned on loans decreased $158,024
(13%) compared to the year ended December 31, 1997, also as a result of fewer
policies being written by Crusader.
Investment Income and Net Realized Gains
- -------------------------------------------
Investment income and net realized gains are as follows:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Interest and dividend income
Insurance company operations $5,706,945 $5,497,323 $4,855,580
Other operations 283,942 234,580 140,681
--------- --------- --------
Total interest and dividend income 5,990,887 5,731,903 4,996,261
Net realized investment gains 64,793 247,931 25,093
--------- -------- --------
Total investment income and
realized gains $6,055,680 $5,979,834 $5,021,354
========= ========= =========
Investment interest and dividends earned (excluding net realized gains)
increased $258,984 (5%) in the year ended December 31, 1999, compared to the
year ended December 31, 1998, primarily as a result of additional invested
assets from operating activities. Average invested assets in the year ended
December 31, 1999, (at amortized value) increased $6,400,046 (7%) compared to
the year ended December 31, 1998. Investment income return based on average
invested assets was 5.74% for the year ended December 31, 1999, compared to
5.85% for the year ended December 31, 1998. 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 $28,078,605 (27% of total investments) at
December 31, 1999, compared to $34,144,344 (33% of total investments) at
December 31, 1998.
Investment interest and dividends earned (excluding net realized gains)
increased $735,642 (15%) in the year ended December 31, 1998, compared to the
year ended December 31, 1997, primarily as a result of additional invested
assets from operating activities. Average invested assets in the year ended
December 31, 1998, (at amortized value) increased $11,294,733 (13%) compared to
the year ended December 31, 1997. Investment income return based on average
invested assets was 5.85% for the year ended December 31, 1998, compared to
5.77% for the year ended December 31, 1997. Tax-exempt 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.
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>
Policy Acquisition Costs consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs that 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
that represents a reimbursement of the acquisition costs related to the premium
ceded. No ceding commission is received on provisionally rated ceded premium.
Policy acquisition costs, net of ceding commission, are deferred and amortized
as the related premiums are earned. The ratio of policy acquisition cost to net
earned premium increased in 1999 primarily due to an increase in provisionally
rated ceded premium. The provisionally rated reinsurance contract was cancelled
on a run off basis on December 31, 1997. Policy acquisition costs, net of ceding
commission, are as follows:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Policy acquisition costs $8,362,814 $9,497,857 $10,562,191
Ratio to net earned premium (GAAP ratio) 30% 27% 29%
Salaries and Employee Benefits increased $135,797 (3%) for the year ended
December 31, 1999, compared to the year ended December 31, 1998. Salaries and
employee benefits increased $457,794 (12%) in the year ended December 31, 1998,
compared to the year ended December 31, 1997.
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Salaries and employee benefits $4,351,550 $4,215,753 $3,757,959
Commissions to Agents/Brokers (not including commissions on Crusader policies
that are reflected in policy acquisition costs) are generally related to gross
commission income. Commissions to agents and brokers increased $261,833 (25%)
for the year ended December 31, 1999, compared to the year ended December 31,
1998. The increase was primarily due to a $225,390 (26%) increase in the
commission expense for the health and life programs and is directly related to
the 20% increase in sales in the health and life programs discussed above.
During the year ended December 31, 1998, commission expense increased $8,087
(1%) compared to the year ended December 31, 1997. This increase was primarily
related to the 10% increase in the commission expense in the daily automobile
program and a 3% increase in commission expense in the health and life insurance
program and was offset by a decrease in commission expense as a result of the
discontinuance of the commercial auto program.
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Commission to agents/brokers $1,305,519 $1,043,686 $1,035,599
Other Operating Expenses generally do not change significantly with changes in
production. This is true for both increases and decreases in production.
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Other operating expenses $2,562,295 $2,438,494 $2,657,373
21
<PAGE>
Forward Looking Statements
- --------------------------
Certain statements contained herein, including the Sections entitled "Business,"
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," that are not historical facts are forward
looking. These statements, which may be identified by forward-looking words or
phrases such as "anticipate," "believe," "expect," "intend" "may," "should," and
"would," involve risks and uncertainties, many of which are beyond the control
of the Company. Such risks and uncertainties could cause actual results to
differ materially from these forward looking statements. Factors which could
cause actual results to differ materially include 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, 1999 and 1998, consisted of the
following:
1999 1998
---- ----
Fixed maturity bonds (at amortized cost ) $98,942,275 $96,158,812
Short-term cash investments (at cost) 5,968,173 6,573,862
Equity securities (at cost) 164,170 503,503
Certificates of deposit -over 1 year (at cost) 200,000 200,000
----------- -----------
Total invested assets $105,274,618 $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 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 statements of operations. Unrealized gains
and losses are reported as separate components of stockholders' equity, net of
any deferred tax effect. As of December 31, 1999, the Company's unrealized
losses (net of unrealized gains) before income taxes on its fixed maturity bond
portfolio was $1,548,141. As of December 31, 1998, the Company's unrealized gain
(net of unrealized losses) 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 $2.6 million. This
decrease would not be reflected in the statements 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 (approximately one half of one percent of total invested assets), the
Company has only minimal exposure to equity price risk.
Item 8. Financial Statements and Supplementary Data
22
<PAGE>
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
Independent Auditors' Report 24
Consolidated Balance Sheets as of December 31, 1999, and
December 31, 1998 25
Consolidated Statements of Operations for the years ended
December 31, 1999, December 31, 1998, and December 31, 1997 26
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1999, December 31, 1998, and December 31, 1997 27
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, December 31, 1998 and
December 31, 1997 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, December 31, 1998, and December 31, 1997 29
Notes to Consolidated Financial Statements 30
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, 1999 and 1998, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 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 financial position of Unico American
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG LLP
March 8, 2000
24
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
---- ----
ASSETS
------
Investments
<S> <C> <C>
Available for sale:
Fixed maturities, at market value (amortized cost: December 31,
1999 $99,142,275; December 31, 1998 $96,358,812) $97,594,134 $99,472,720
Equity securities at market ( cost: December 31, 1999
$164,170; December 31, 1998 $503,503) 66,000 481,500
Short-term investments, at cost 5,968,173 6,573,862
----------- -----------
Total Investments 103,628,307 106,528,082
Cash 105,439 277,544
Accrued investment income 2,060,471 2,022,197
Premiums and notes receivable, net 5,496,890 5,922,716
Reinsurance recoverable:
Paid losses and loss adjustment expenses 19,850 146,205
Unpaid losses and loss adjustment expenses 3,964,324 1,139,713
Prepaid reinsurance premiums 32,438 19,452
Deferred policy acquisition costs 4,338,217 4,665,772
Property and equipment (net of accumulated depreciation) 148,667 205,369
Deferred income taxes 1,541,242 208,976
Other assets 642,911 581,617
----------- -----------
Total Assets $121,978,756 $121,717,643
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Unpaid losses and loss adjustment expenses $41,592,489 $41,513,945
Unearned premiums 16,583,143 18,136,895
Advance premium and premium deposits 2,571,190 2,329,356
Accrued expenses and other liabilities 6,391,137 5,418,459
Income taxes payable - 150,906
---------- ----------
Total Liabilities $67,137,959 $67,549,561
---------- ----------
STOCKHOLDERS' EQUITY
- ---------------------
Common stock, no par - authorized 10,000,000 shares, issued and
outstanding shares 6,304,953 at December 31, 1999, and 6,223,424
at December 31, 1998 $3,098,389 $2,895,702
Accumulated other comprehensive income (loss) (1,086,565) 1,998,536
Retained earnings 52,828,973 49,273,844
---------- ----------
Total Stockholders' Equity $54,840,797 $54,168,082
---------- ----------
Total Liabilities and Stockholders' Equity $121,978,756 $121,717,643
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
REVENUES
- --------
Insurance Company Revenues
<S> <C> <C> <C>
Premium earned $34,693,113 $40,615,417 $42,721,222
Premium ceded 6,583,752 5,700,222 6,394,328
---------- --------- ----------
Net premium earned 28,109,361 34,915,195 36,326,894
Net investment income 5,706,945 5,497,323 4,855,580
Net realized investment gains 64,793 247,931 25,093
Other income 6,978 1,183 428
---------- --------- ----------
Total Insurance Company Revenues 33,888,077 40,661,632 41,207,995
Other Revenues from Insurance Operations
Gross commissions and fees 5,634,542 5,607,538 5,740,589
Investment income 283,942 234,580 140,681
Finance charges and late fees earned 915,940 1,033,479 1,191,503
Other income 11,756 7,041 9,953
---------- --------- ----------
Total Revenues 40,734,257 47,544,270 48,290,721
---------- --------- ----------
EXPENSES
- --------
Losses and loss adjustment expenses 17,027,190 17,593,582 19,288,566
Policy acquisition costs 8,362,814 9,497,857 10,562,191
Salaries and employee benefits 4,351,550 4,215,753 3,757,959
Commissions to agents/brokers 1,305,519 1,043,686 1,035,599
Other operating expenses 2,562,295 2,438,494 2,657,373
---------- --------- ----------
Total Expenses 33,609,368 34,789,372 37,301,688
---------- --------- ----------
Income Before Taxes 7,124,889 12,754,898 10,989,033
Income Tax Provision 1,993,523 4,046,229 3,334,671
--------- --------- ---------
Net Income $5,131,366 $8,708,669 $7,654,362
========= ========= =========
PER SHARE DATA:
Basic Shares Outstanding 6,268,069 6,194,133 6,132,096
Basic Earnings Per Share $0.82 $1.41 $1.25
Diluted Shares Outstanding 6,358,607 6,420,580 6,401,359
Diluted Earnings Per Share $0.81 $1.36 $1.20
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $5,131,366 $8,708,669 $7,654,362
Other changes in comprehensive income
net of tax:
Unrealized gains (losses) on securities
classified as available-for-sale arising
during the period (3,060,091) 839,134 480,091
Less: reclassification adjustment for
gains included in net income (25,010) (62,693) -
---------- --------- ---------
Comprehensive Income $2,046,265 $9,485,110 $8,134,453
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Common Shares Income Comprehensive
----------------------------- Income
Issued and Gains and Retained
Outstanding Amount (Losses) Earnings Total
----------- ------ ------ -------- -----
<S> <C> <C> <C> <C> <C>
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 comprehensive
income, 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 comprehensive
income, 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
Net shares issued for exercise
of stock options 81,529 202,687 - - 202,687
Cash dividend paid ($0.25
per share) - - - (1,576,237) (1,576,237)
Change in comprehensive
income (loss),net of deferred
income tax - (3,085,101) - (3,085,101)
Net income - - - 5,131,366 5,131,366
--------- --------- --------- ---------- ----------
Balance - December 31, 1999 6,304,953 $3,098,389 $(1,086,565) $52,828,973 $54,840,797
========= ========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $5,131,366 $8,708,669 $7,654,362
Adjustments to reconcile net income to net cash from operations
Depreciation and amortization 97,087 98,585 104,029
Bond amortization, net 684,548 644,726 579,228
Net realized (gain) on sale of securities (64,793) (247,931) (25,093)
Changes in assets and liabilities
Premium, notes and investment income receivable 387,552 1,267,057 1,130,420
Reinsurance recoverable (2,698,256) 184,064 1,611,980
Prepaid reinsurance premiums (12,986) 926,111 702,243
Deferred policy acquisitions costs 327,555 220,912 66,401
Other assets (61,293) 255,041 (197,802)
Reserve for unpaid losses and loss adjustment expenses 78,544 (490,906) 2,263,986
Unearned premium reserve (1,553,752) (3,536,114) (447,232)
Advance premium and premium deposits 241,834 238,176 2,083
Accrued expenses and other liabilities 989,912 3,305,659 (300,129)
Income taxes current/deferred 152,708 484,230 267,463
--------- ---------- ----------
Net Cash Provided from Operations 3,700,026 12,058,279 13,411,939
--------- ---------- ----------
Investing Activities
Purchase of fixed maturity investments (12,341,754) (24,797,224) (19,934,951)
Proceeds from maturity of fixed maturity investments 8,839,250 12,898,500 8,198,000
Proceeds from sale of fixed maturity investments - 1,041,250 996,856
Purchase of equity securities - cost (3,758,378) (3,583,913) (1,019,500)
Proceeds from sale of equity securities 4,162,504 3,480,043 814,132
Net increase in short-term investments 640,182 (397,102) (1,236,490)
Additions to property and equipment (40,385) (100,245) (77,766)
--------- ---------- ----------
Net Cash (Used) by Investing Activities (2,498,581) (11,458,691) (12,259,719)
--------- ---------- ----------
Financing Activities
Proceeds from issuance of common stock 202,687 57,644 1,636
Repayment of note payable - bank - - (750,001)
Dividends paid to shareholders (1,576,237) (435,456) (430,724)
--------- -------- ---------
Net Cash (Used) by Financing Activities (1,373,550) (377,812) (1,179,089)
--------- -------- ---------
Net increase (decrease) in cash (172,105) 221,776 (26,869)
Cash at beginning of year 277,544 55,768 82,637
------- ------- ------
Cash at End of Year $105,439 $277,544 $55,768
======= ======= ======
Supplemental cash flow information Cash paid during the period for:
Interest $1,492 $60,116 $21,950
Income taxes $2,114,042 $3,430,000 $2,970,000
</TABLE>
See accompanying notes to consolidated financial statements.
29
<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.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Unico American
Corporation and its subsidiaries. All significant intercompany 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 that 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 of certain assets and liabilities and disclosure of
contingent 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 accumulated other comprehensive income
(loss) which is 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 losses of $1,086,565 as of December
31, 1999, and net unrealized investment gains of $1,998,536 as of December 31,
1998.
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.
30
<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 their fair values.
Earnings Per Share
- ------------------
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 liability for unpaid losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period plus estimates based on experience and industry data
for unreported losses and loss adjustment expenses.
There is a high level of uncertainty inherent in the evaluation of the required
loss and loss adjustment expense reserves for the Company. The long-tailed
nature of liability claims exacerbates that uncertainty. Management has selected
target loss and loss expense ratios that it believes are reasonable and
reflective of anticipated ultimate experience. The ultimate cost of claims is
dependent upon future events, the outcomes of which are affected by many
factors. Company claim reserving procedures and settlement philosophy, current
and perceived social and economic inflation, current and future court rulings
and jury attitudes, improvements in medical technology, and many other economic,
scientific, legal, political, and social factors all can have significant
effects on the ultimate costs of claims. Changes in Company operations and
management philosophy also may cause actual developments to vary from the past.
Since the emergence and disposition of claims are subject to uncertainties, the
net amounts that will ultimately be paid to settle the liability may vary
significantly from the estimated amounts provided for in the accompanying
consolidated financial statements. Any adjustments to reserves are reflected in
the operating results of the periods in which they are made. 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.
31
<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:
Year ended December 31
----------------------
1999 1998
---- ----
Restricted Funds:
Premium trust funds (1) $3,071,696 $2,867,099
Assigned to state agencies (2) 2,725,000 2,725,000
--------- ---------
Total restricted funds $5,796,696 $5,592,099
========= =========
(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 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.
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 83.2% 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.
The insurance company operation is conducted through Crusader, which as of
December 31, 1999, is licensed as an admitted insurance carrier in the states of
Arizona, California, Colorado, 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, 1999, 97% of
Crusader's business was commercial multiple peril business package insurance
policies. 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,
32
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
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 are as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1999 1998 1997
Revenues ---- ---- ----
- -------
<S> <C> <C> <C>
Insurance company operation $33,888,077 $40,661,632 $41,207,995
---------- ---------- ----------
Other insurance operations 16,717,884 17,962,867 19,699,853
Intersegment elimination (1) (9,871,704) (11,080,229) (12,617,127)
--------- --------- ---------
Total other insurance operations 6,846,180 6,882,638 7,082,726
----------- ---------- ----------
Total revenues $40,734,257 $47,544,270 $48,290,721
========== ========== ==========
Income before income taxes
- --------------------------
Insurance company operation $6,921,533 $11,753,137 $9,086,143
Other insurance operations 203,356 1,001,761 1,902,890
---------- ---------- ----------
Total income before income taxes $7,124,889 $12,754,898 $10,989,033
========== ========== ==========
Assets
- ------
Insurance company operation $103,450,995 $104,779,787 $97,075,764
Intersegment eliminations (2) (479,933) (150,097) (1,475,299)
----------- ----------- ----------
Total Insurance company operation 102,971,062 104,629,690 95,600,465
Other insurance operations 19,007,694 17,087,953 17,341,919
----------- ----------- -----------
Total assets $121,978,756 $121,717,643 $112,942,384
=========== =========== ===========
(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>
Stock-Based Compensation
- ------------------------
Stock-Based Compensation" ("SFAS No. 123"), which is effective for fiscal years
beginning after December 15, 1995. The Company accounts for stock-based
compensation under the accounting methods prescribed by Accounting Principles
Board (APB) Opinion No. 25, as allowed by SFAS No. 123. Disclosure of
stock-based compensation determined in accordance with SFAS No. 123 is presented
in Footnote 15. The adoption of this pronouncement did not have a material
effect on the financial statements of the Company.
Reclassifications
- -----------------
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
33
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
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. There were no costs incurred for
software purchased or developed in the year ending December 31, 1999, which were
required to be capitalized.
Statement of Position 97-3 (SOP 97-3), "Accounting by Insurance and Other
Enterprises for Insurance Related Assessments," is effective for financial
statements beginning after December 15, 1998. SOP 97-3 requires that a liability
for insurance related assessments be recognized when an assessment is probable,
the event obligating the assessment has occurred, and the assessment can be
reasonably estimated. The adoption of SOP 97-3 has no material effect on the
financial statements.
Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting
for Derivative Instruments and Hedging Activities" became effective for fiscal
years beginning after June 15, 1999. Statement of Financial Accounting Standards
No. 137 (SFAS No. 137) "Accounting for Derivative Instruments and Hedging
Activities -Deferral of the Effective Date of FASB Statement No. 133" defers the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The
Company is currently evaluating the impact that it will have on the consolidated
financial statements. The Company will adopt this new Standard on January 1,
2001.
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:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Fixed maturities $5,752,154 $5,463,418 $4,694,838
Equity securities 1,380 8,095 48,960
Short-term investments 238,017 260,725 253,053
--------- --------- ---------
Total investment income 5,991,551 5,732,238 4,996,851
Less investment expenses 664 335 590
--------- --------- ---------
Net investment income $5,990,887 $5,731,903 $4,996,261
========= ========= =========
Net realized investment gains and (losses) are summarized as follows:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Gross realized gains:
Fixed maturities $ - $ 78,758 $ -
Equity securities 190,169 170,540 25,093
Gross realized (losses):
Equity securities (125,376) (1,367) -
------- ------- ------
Net realized investment gains $64,793 $247,931 $25,093
====== ======= ======
34
<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>
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Gross unrealized appreciation:
<S> <C> <C> <C>
Fixed maturities $363,627 $3,181,405 $1,878,723
Gross unrealized (depreciation):
Fixed maturities (1,911,768) (67,497) (19,704)
Equity securities (98,170) (39,238) (7,360)
--------- --------- ---------
Net unrealized appreciation (depreciation) on investments (1,646,311) 3,074,670 1,851,659
Deferred federal income taxes 559,746 (1,076,134) (629,564)
Net unrealized appreciation (depreciation) --------- --------- ---------
net of deferred income taxes $(1,086,565) $1,998,536 $1,222,095
========= ========= =========
</TABLE>
The amortized cost and estimated market value of fixed maturity investments at
December 31, 1999, 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 $ 11,794,279 $11,830,167
Due after one year through five years 73,087,609 72,137,455
Due after five years through ten years 14,260,387 13,626,512
---------- ----------
Total fixed maturities $99,142,275 $97,594,134
========== ==========
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
---- ----- ------ ------
December 31, 1999
- -----------------
Available for sale:
Fixed maturities
----------------
<S> <C> <C> <C> <C>
Certificates of deposit $ 200,000 $ - $ - $ 200,000
U.S. treasury securities 10,056,163 43,845 24,045 10,075,963
State and municipal tax-exempt bonds 28,078,605 266,568 583 28,344,590
Industrial and miscellaneous taxable bonds 60,807,507 53,214 1,887,140 58,973,581
---------- ------- --------- ----------
Total fixed maturities $99,142,275 $363,627 $1,911,768 $97,594,134
========== ======= ========= ==========
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
========== ========= ====== ==========
</TABLE>
35
<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:
Year ended December 31
----------------------
1999 1998
---- ----
Certificates of deposit 425,000 $ 425,000
Commercial paper 2,675,000 3,425,000
Commercial bank money market accounts 2,055,254 694,834
U.S. government obligation money market fund 78,799 1,290,108
Short-term U.S. treasury note 731,281 735,346
Savings account 2,839 3,574
--------- ---------
Total short-term investments $5,968,173 $6,573,862
========= =========
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION)
- ----------------------------------------------------------------
Property and equipment consist of the following:
Year ended December 31
----------------------
1999 1998
---- ----
Furniture, fixtures, computer, office,
and transportation equipment $2,329,113 $2,304,799
Accumulated depreciation 2,180,446 2,099,430
--------- ---------
Net property and equipment $ 148,667 $ 205,369
======= =======
NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET
- -------------------------------------------
Premiums and notes receivable are substantially secured by unearned premiums and
funds held as security for performance.
Year ended December 31
----------------------
1999 1998
---- ----
Premiums receivable $1,615,238 $1,553,977
Premium finance notes receivable 3,903,586 4,388,900
--------- ---------
Total premiums and notes receivable 5,518,824 5,942,877
Less allowance for doubtful accounts 21,934 20,161
--------- ---------
Net premiums and notes receivable $5,496,890 $5,922,716
========= =========
Bad debt expense for the fiscal year ended December 31, 1999, and the fiscal
year ended December 31, 1998, was $20,736 and $25,736, 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 consist of commissions (net of ceding
commission), 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.
36
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DEFERRED POLICY ACQUISITION COSTS (continued)
- ------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred policy acquisition costs at beginning of year $4,665,772 $4,886,684 $4,953,085
Policy acquisition costs incurred during year 8,035,259 9,276,945 10,495,790
Policy acquisition costs amortized during year (8,362,814) (9,497,857) (10,562,191)
--------- --------- ----------
Deferred policy acquisition costs at end of year $4,338,217 $4,665,772 $4,886,684
========= ========= =========
</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>
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Reserve for unpaid losses and loss adjustment expenses
at beginning of year - net of reinsurance $40,374,232 $40,591,248 $37,111,846
--------- ---------- ----------
Incurred losses and loss adjustment expenses
Provision for insured events of current year 18,268,710 22,454,229 23,564,325
(Decrease) in provision for events of prior years (*) (1,241,520) (4,860,647) (4,275,759)
---------- ---------- ----------
Total losses and loss adjustment expenses 17,027,190 17,593,582 19,288,566
---------- ---------- ----------
Payments
Losses and loss adjustment expenses attributable to
insured events of the current year 4,380,090 5,132,952 4,812,268
Losses and loss adjustment expenses attributable to
insured events of prior years 15,393,167 12,677,646 10,996,896
---------- ---------- ----------
Total payments 19,773,257 17,810,598 15,809,164
---------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses
at end of year - net of reinsurance $37,628,165 $40,374,232 $40,591,248
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of year 3,964,324 1,139,713 1,413,603
--------- ---------- ----------
Reserve for unpaid losses and loss adjustment expenses at
end of year per balance sheet - gross of reinsurance (**) $41,592,489 $41,513,945 $42,004,851
========== ========== ==========
</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. The
above table shows favorable loss development decreased to $1,241,520 in
1999 from $4,860,647 in 1998. The decrease was primarily due to an
increase in prior years losses incurred in 1999, which was greater than
the prior years losses experienced in 1998. The methodology used by the
Company in determining 1999 case reserves and IBNR is consistent with
prior years.
(**) 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.
37
<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 also 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:
Year ended December 31
----------------------
1999 1998
---- ----
Premium payable $5,208,491 $3,994,888
Unearned claim adjusting income 300,000 300,000
Profit sharing contributions 406,667 359,948
Accrued salaries 469,721 441,427
Other 6,258 322,196
--------- ---------
Total accrued expenses and other liabilities $6,391,137 $5,418,459
========= =========
NOTE 10 - NOTE PAYABLE - BANK
- -----------------------------
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 5, 2000, at which time it is expected to be renewed. As of
December 31, 1999 and 1998, 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 year ended December 31, 1999; $1,025,952 for the year ended December 31,
1998; and $1,025,952 for the year ended December 31, 1997.
The lease provides for the following minimum annual rental commitments:
Year ending
December 31, 2000 $1,025,952
December 31, 2001 $1,025,952
December 31, 2002 $1,025,952
December 31, 2003 $1,025,952
December 31, 2004 (through March 31, 2007) $3,334,344
---------
Total minimum payments $7,438,152
=========
38
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - LEASE COMMITMENT (continued)
- -------------------------------------
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.
In 1999, Crusader had reinsurance agreements with General Reinsurance
Corporation, a California admitted reinsurer. In 1998, Crusader had reinsurance
agreements with National Reinsurance Corporation (acquired by General
Reinsurance Corporation in 1996) and NAC Reinsurance Corporation, both
California admitted reinsurers. These reinsurance agreements help protect
Crusader against liabilities in excess of certain retentions, including major or
catastrophic losses that 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 79% of the premium
is ceded to participating catastrophe reinsurers that 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. Prior to January 1, 1998, National
Reinsurance Corporation charged a provisional rate on exposures up to $500,000
that is subject to adjustment and is based on the amount of losses ceded,
limited by a maximum percentage that could be charged. That provisional rated
treaty was canceled and replaced by a flat rated treaty on January 1, 1998.
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.
The effect of reinsurance on premiums written, premiums earned, and incurred
losses is as follows:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Premiums written:
Direct business $33,139,361 $37,079,303 $42,273,990
Reinsurance assumed - - -
Reinsurance ceded $(6,595,440) $(2,952,340) $(6,687,944)
Premiums earned:
Direct business $34,693,113 $40,615,417 $42,721,222
Reinsurance assumed - - -
Reinsurance ceded $(6,583,752) $(5,700,222) $(6,394,328)
Incurred losses and loss
adjustment expenses:
Direct $23,189,173 $20,557,887 $26,415,828
Assumed - - -
Ceded $(6,161,983) $(2,964,305) $(7,127,262)
39
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Year ended December 31, 1999 $653,389
Year ended December 31, 1998 $563,160
Year ended December 31, 1997 $545,906
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.
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 are as follows:
As of December 31, 1999 $40,952,456
As of December 31, 1998 $37,611,089
Crusader Insurance Company statutory net income is as follows:
Year ended December 31, 1999 $5,404,526
Year ended December 31, 1998 $8,243,434
Year ended December 31, 1997 $6,658,352
The Company believes that Crusader's statutory capital and surplus were
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, 1999, is $5,404,526. After taking into
account the dividends paid by Crusader to its parent in 1999 of $2,000,000, the
remaining dividend which may be made without prior approval as of December 31,
1999, was $3,404,526.
40
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCENTIVE STOCK PLANS
- -------------------------------
The Company's 1985 stock option plan provided for the grant of incentive stock
options to officers and key employees. The plan covered an aggregate of
1,500,000 shares of the Company's common stock (subject to adjustment in the
case of stock splits, reverse stock splits, stock dividends, etc.). As of
December 31, 1999, there were 101,415 options outstanding, and all are currently
exercisable. Options granted under this plan had a life of either 5 or 10 years
and had a vesting period of from immediate to 9 years. All options were
granted at fair market value. There are no additional options available for
future grant under the 1985 plan.
The Company's 1999 Omnibus Stock Plan that covers 500,000 shares of the
Company's common stock (subject to adjustment in the case of stock splits,
reverse stock splits, stock dividends, etc.) was approved by shareholders June
4, 1999. On August 26, 1999, the Company granted 135,000 options which are all
outstanding as of December 31, 1999. These options expire ten years from the
date of the grant and are not exercisable prior to September 1, 2000. Options
covering 10,000 or less shares become exercisable at the rate of 2,500 share per
year commencing September 1, 2000; and options covering more than 10,000 shares
become exercisable at the rate of 5,000 share per year commencing September 1,
2000. None of the 135,000 options outstanding under the 1999 stock option plan
are currently exercisable.
As explained in Note 1, the Company applies APB Opinion No. 25 in accounting for
its incentive stock option plan. Accordingly, no compensation cost has been
recognized in the statements of operations. Had compensation cost for the
Company Plans been determined based on the fair value at the grant dates
consistent with the method of SFAS No. 123, the Company's 1999 net income would
have been reduced by $135,453. Net income for 1998 and 1997 were not affected.
In addition, 1999 earnings per share (basic and diluted) would have been reduced
by $0.02. Calculations of the fair value under the method prescribed by SFAS No.
123 were made using the Black-Scholes option-price model with the following
weighted average assumptions used for the 1999 grant: dividend yield 2.46%,
expected volatility of 43%, expected lives of 10 years, and risk-free interest
rates of 6.09%.
The changes in the number of common shares under option are summarized as
follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at December 31, 1996 560,699 $3.632
Options granted - -
Options exercised (186,751) $3.495
Options terminated - -
-------
Outstanding at December 31, 1997 373,948 $3.700
Options granted - -
Options exercised (90,082) $3.455
Options terminated (89,320) $3.500
------
Outstanding at December 31, 1998 194,546 $3.592
Options granted 135,000 $9.250
Options exercised (93,131) $3.691
Options terminated - -
-------
Outstanding at December 31, 1999 236,415 $6.780
=======
The weighted average fair value of options granted during 1999 was $4.30. No
options were granted in 1998 or 1997. Options exercisable were 101,415 at
December 31, 1999, at a weighted average exercise price of $3.50; 194,546 at
December 31, 1998, at a weighted average exercise price of $3.59; and 275,046 at
December 31, 1997, at a weighted average exercise price of $3.69.
41
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCENTIVE STOCK PLANS (continued)
- -------------------------------------------
The following table summarizes information regarding the stock options
outstanding at December 31, 1999:
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Number of Contractual Price of Number of Price of
Exercise Options Life Options Options Options
Price Outstanding (Years) Outstanding Exercisable Exercisable
----- ----------- ----- ----------- ----------- -----------
$3.50 101,415 1.46 $3.50 101,415 $3.50
$9.25 135,000 9.65 $9.25 - -
NOTE 16 - TAXES ON INCOME
- -------------------------
The provision for taxes on income consists of the following:
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Current provision:
Federal $1,668,332 $3,516,390 $2,900,181
State 21,577 179,521 184,020
--------- --------- ---------
Total federal and state 1,689,909 3,695,911 3,084,201
Deferred 303,614 350,318 250,470
--------- --------- ---------
Provision for taxes $1,993,523 $4,046,229 $3,334,671
========= ========= =========
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:
Year ended December 31
-----------------------
1999 1998 1997
---- ---- ----
Computed tax expense $2,422,462 $4,336,665 $3,736,270
Tax effect of:
Tax exempt income (425,963) (490,783) (522,813)
Dividend exclusion (279) (1,638) (9,905)
Other (23,334) 23,525 (54,971)
State income tax expense 20,637 178,460 186,090
--------- --------- ---------
Tax per financial statement $1,993,523 $4,046,229 $3,334,671
========= ========= =========
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:
Year ended December 31
----------------------
1999 1998
---- ----
Deferred tax assets:
Discount on loss reserves $1,371,087 $1,682,596
Unearned premiums 1,125,191 1,291,298
Unrealized loss on investments 559,745 -
Other 153,968 -
--------- ---------
Total deferred tax assets $3,209,991 $2,973,894
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs $1,474,995 $1,633,021
Discount on salvage and subrogation 7,944 8,493
Unrealized gain on investments - 1,076,135
Other 185,810 47,269
--------- ---------
Total deferred tax liabilities $1,668,749 $2,764,918
--------- ---------
Net deferred tax assets $1,541,242 $208,976
========= =======
42
<PAGE>
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - TAXES ON INCOME (continued)
- ------------------------------------
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, Colorado, 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.
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>
Year ended December 31
----------------------
1999 1998 1997
---- ---- ----
Basic Earnings Per Share
- ------------------------
<S> <C> <C> <C>
Net income numerator $5,131,366 $8,708,669 $7,654,362
========= ========= =========
Weighted average shares outstanding
denominator 6,268,069 6,194,133 6,132,096
========= ========= =========
Per share amount $0.82 $1.41 $1.25
Diluted Earnings Per Share
- --------------------------
Net income numerator $5,131,366 $8,708,669 $7,654,362
========= ========= =========
Weighted average shares outstanding 6,268,069 6,194,133 6,132,096
Effect of diluted securities 90,538 226,447 269,263
--------- --------- ---------
Diluted shares outstanding denominator 6,358,607 6,420,580 6,401,359
========= ========= =========
Per share amount $0.81 $1.36 $1.20
</TABLE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------
Summarized unaudited quarterly financial data for each of the calendar years
1999 and 1998 is set forth below:
<TABLE>
<CAPTION>
Comparable Period by Quarter Ended
-----------------------------------
March 31 June 30 September 30 December 31
Calendar Year 1999 -------- ------- ------------ -----------
------------------
<S> <C> <C> <C> <C>
Total revenues $10,600,597 $10,091,867 $9,543,628 $10,498,165
Income before taxes 2,909,628 1,973,378 1,473,196 768,687
Net income 2,031,762 1,435,128 1,057,642 606,834
Earnings per share:
Basic $0.33 $0.23 $0.17 $0.10
Diluted $0.32 $0.23 $0.17 $0.10
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
</TABLE>
43
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
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.
44
<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, 1999, 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 to 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).
10.6 1999 Omnibus Stock Plan of Unico American Corporation (Incorporated
herein by reference to Exhibit A to Registrant's Proxy Statement for
its Annual Meeting of Shareholders hold June 4, 1999). (*)
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.
45
<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, 2000 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, 2000
----------------- President and Chief
Erwin Cheldin Executive Officer,
(Principal Executive Officer)
/s/ LESTER A. AARON Treasurer, Chief Financial March 23, 2000
------------------- Officer and Director
Lester A. Aaron (Principal Accounting and
Principal Financial Officer)
/s/ CARY L. CHELDIN Executive Vice President March 23, 2000
------------------- and Director
Cary L. Cheldin
/s/ GEORGE C. GILPATRICK Vice President, Secretary March 23, 2000
------------------------ and Director
George C. Gilpatrick
/s/ ROGER H. PLATTEN Vice President and Director March 23, 2000
--------------------
Roger H. Platten
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Unico American Corporation
Under date of March 8, 2000, we reported on the consolidated balance sheets of
Unico American Corporation and subsidiaries as of December 31, 1999 and 1998,
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 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
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, the financial statements referred to above present fairly, when
considered in relation to the basic consolidated financial statements taken as a
whole, in all material respects, the information set forth therein.
KPMG LLP
March 8, 2000
47
<PAGE>
SCHEDULE I
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
<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 $ 10,056,163 $ 10,075,963 $ 10,075,963
State and municipal tax exempt bonds 28,078,605 28,344,590 28,344,590
Industrial and miscellaneous bonds 60,807,507 58,973,581 58,973,581
Certificates of deposit 200,000 200,000 200,000
---------- ---------- ----------
Total fixed maturities 99,142,275 97,594,134 97,594,134
Equity securities 164,170 66,000 66,000
Short-term investments 5,968,173 5,968,173 5,968,173
----------- ----------- -----------
Total investments $105,274,618 $103,628,307 $103,628,307
=========== =========== ===========
</TABLE>
48
<PAGE>
SCHEDULE II
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - PARENT COMPANY ONLY
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
---- ----
ASSETS
------
<S> <C> <C>
Investments
Available for sale:
Short-term investments 100,000 1,750,000
Total Investments 2,584,687 2,752,401
Cash 27,736 20,864
Accrued investment income 46,081 28,967
Investments in subsidiaries 65,443,692 60,382,968
Property and equipment (net of accumulated depreciation) 148,667 205,369
Other assets 85,557 104,129
---------- ----------
Total Assets $68,336,420 $63,494,698
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Accrued expenses and other liabilities $793,758 $797,019
Payables to subsidiaries (net of receivables) 12,701,865 8,378,991
Income taxes payable - 150,606
---------- ----------
Total Liabilities $13,495,623 $9,326,616
---------- ---------
STOCKHOLDERS' EQUITY
- --------------------
Common stock $3,098,389 $2,895,702
Net unrealized investment gains (losses) (1,086,565) 1,998,536
Retained earnings 52,828,973 49,273,844
---------- ----------
Total Stockholders' Equity $54,840,797 $54,168,082
---------- ----------
Total Liabilities and Stockholders' Equity $68,336,420 $63,494,698
========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
49
<PAGE>
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
REVENUES
- --------
<S> <C> <C> <C>
General and administrative expenses
allocated to subsidiaries $5,273,146 $4,863,910 $5,036,332
Net investment income 143,215 210,071 150,292
Other income 10,755 6,031 9,401
--------- --------- ---------
Total Revenue 5,427,116 5,080,012 5,196,025
--------- --------- ---------
EXPENSES
- --------
General and administrative expenses 5,356,474 5,018,162 5,109,898
--------- --------- ---------
Income before equity in net income
of subsidiaries 70,642 61,850 86,127
Equity in net income of subsidiaries 5,060,724 8,646,819 7,568,235
--------- --------- ---------
Net Income $5,131,366 $8,708,669 $7,654,362
========= ========= =========
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax return.
Unico received cash dividends from Crusader of $2,000,000 in the year ended
December 31, 1999; $1,500,000 in the year ended December 31, 1998; and
$1,500,000 in the year ended December 31, 1997.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
50
<PAGE>
SCHEDULE II (continued)
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $5,131,366 $8,708,669 $7,654,362
Adjustments to reconcile net income to net cash
from operations
Undistributed equity in net (income) of subsidiaries (5,060,724) (8,646,819) (7,568,235)
Depreciation and amortization 96,334 98,030 104,029
Accrued expenses and other liabilities (153,869) (159,081) (7,941)
Accrued investment income (17,114) (23,624) (5,343)
Other assets 18,575 1,474 (2,353)
------ ------ -------
Net cash provided (used) from operations 14,568 (21,351) 174,519
------ ------ -------
Cash flows from investing activities
Purchase of fixed maturity investments (1,498,875) (998,781) -
(Increase) decrease in short-term investments 1,650,000 (550,000) (1,200,000)
Additions to property and equipment (40,385) (100,245) (77,766)
------- --------- ---------
Net cash provided (used) by investing activities 110,740 (1,649,026) (1,277,766)
------- --------- ---------
Cash flows from financing activities
Proceeds from issuance of common stock 202,687 57,644 1,636
Dividends paid to shareholders (1,576,237) (435,456) (430,724)
Net change in payables and receivables from subsidiaries 1,255,114 2,049,114 1,522,949
--------- --------- ---------
Net cash provided (used) by financing activities (118,436) 1,671,302 1,093,861
-------- --------- ---------
Net increase (decrease) in cash 6,872 925 (9,386)
Cash at beginning of year 20,864 19,939 29,325
------ ------ ------
Cash at end of year $27,736 $20,864 $19,939
====== ====== ======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes.
51
<PAGE>
SCHEDULE III
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future Beneifts, Amortization
Deferred Benefits, Claims, of Deferred
Policy Losses, Net Losses and Policy
Acquisition and Loss Unearned Premium Investment Settlement Acquisition
Cost Expenses Premiums Revenue Income Expenses Costs
---- ------- -------- ------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1999
Property &
Casualty $4,338,217 $41,592,489 $16,583,143 $28,109,361 $5,706,945 $17,027,190 $8,362,814
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 $9,497,857
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 $10,562,191
<CAPTION>
Other
Operating Premium
Costs Written
----- -------
<S> <C> <C>
Year Ended
December 31, 1999
Property &
Casualty $1,949,865 $26,543,921
Year Ended
December 31, 1998
Property &
Casualty $1,663,214 $34,126,963
Year Ended
December 31, 1997
Property &
Casualty $1,855,589 $35,586,046
</TABLE>
52
<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>
Year Ended
December 31, 1999
Property & Casualty $34,693,113 $6,583,752 - $28,109,361 -
Year Ended
December 31, 1998
Property & Casualty $40,615,417 $5,700,222 - $34,915,195 -
Year Ended
December 31, 1997
Property & Casualty $42,721,222 $6,394,328 - $36,326,894 -
</TABLE>
53
<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)
- -----------------------------------------------------------------------------------------------------------------------------
Company &
Consolidated
Subsidiaries
Year Ended
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999 $4,338,217 $41,592,489 - $16,583,143 $28,109,361 $5,706,945 $18,268,710 (1)
$(1,241,520) (2)
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)
<CAPTION>
Amortization
of Deferred Paid Claims
Policy and Claim
Acquisition Adjustment Premiums
Costs Expenses Written
(I) (J) (K)
- -----------------------------------------------------------------
Company &
Consolidated
Subsidiaries
Year Ended
<S> <C> <C> <C>
December 31, 1999 $8,362,814 $19,773,257 $26,543,921
December 31,1998 $9,497,857 $17,810,598 $34,126,963
December 31,1997 $10,562,191 $15,809,164 $35,586,046
</TABLE>
54
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 103,562,307
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 66,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 103,628,307
<CASH> 105,439
<RECOVER-REINSURE> 3,984,174
<DEFERRED-ACQUISITION> 4,338,217
<TOTAL-ASSETS> 121,978,756
<POLICY-LOSSES> 41,592,489
<UNEARNED-PREMIUMS> 16,583,143
<POLICY-OTHER> 2,571,190
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,098,389
<OTHER-SE> 51,742,408
<TOTAL-LIABILITY-AND-EQUITY> 121,978,756
28,109,361
<INVESTMENT-INCOME> 5,990,887
<INVESTMENT-GAINS> 64,793
<OTHER-INCOME> 6,569,216
<BENEFITS> 17,027,190
<UNDERWRITING-AMORTIZATION> 8,362,814
<UNDERWRITING-OTHER> 8,219,364
<INCOME-PRETAX> 7,124,889
<INCOME-TAX> 1,993,523
<INCOME-CONTINUING> 5,131,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,131,366
<EPS-BASIC> 0.82
<EPS-DILUTED> 0.81
<RESERVE-OPEN> 40,374,232
<PROVISION-CURRENT> 18,268,710
<PROVISION-PRIOR> (1,241,520)
<PAYMENTS-CURRENT> 4,380,090
<PAYMENTS-PRIOR> 15,393,167
<RESERVE-CLOSE> 37,628,165
<CUMULATIVE-DEFICIENCY> 1,241,287
</TABLE>
