SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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, Including Area Code)
No Change
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerator
filer and large accelerator in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
5,592,065
Number of shares of common stock outstanding as of November 7, 2006
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
---------
September 30 December 31
2006 2005
---- ----
ASSETS
------
Investments
Available for sale:
Fixed maturities, at fair value (amortized cost: September 30, 2006
$136,549,491; December 31, 2005 $136,128,428) $136,285,425 $135,549,300
Short-term investments, at cost 10,045,581 4,475,162
----------- -----------
Total Investments 146,331,006 140,024,462
Cash 58,032 13,472
Accrued investment income 1,646,173 1,207,278
Premiums and notes receivable, net 6,169,994 6,740,793
Reinsurance recoverable:
Paid losses and loss adjustment expenses 59,043 1,711,710
Unpaid losses and loss adjustment expenses 24,568,931 25,679,081
Deferred policy acquisition costs 6,592,139 7,356,179
Property and equipment (net of accumulated depreciation) 778,944 824,504
Deferred income taxes 1,643,551 1,769,286
Other assets 652,204 970,414
----------- -----------
Total Assets $188,500,017 $186,297,179
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
Unpaid losses and loss adjustment expenses $100,944,501 $101,914,548
Unearned premiums 26,890,317 30,619,047
Advance premium and premium deposits 1,736,255 1,460,790
Accrued expenses and other liabilities 3,758,619 3,908,421
----------- -----------
Total Liabilities $133,329,692 $137,902,806
----------- ===========
STOCKHOLDERS' EQUITY
--------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,592,065 at September 30, 2006, and 5,496,315 at December 31, 2005 $3,230,083 $2,720,487
Accumulated other comprehensive (loss) (174,284) (382,224)
Retained earnings 52,114,526 46,056,110
---------- ----------
Total Stockholders' Equity $55,170,325 $48,394,373
---------- ----------
Total Liabilities and Stockholders' Equity $188,500,017 $186,297,179
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2006 2005 2006 2005
---- ---- ---- ----
REVENUES
--------
Insurance Company Revenues
Premium earned $14,006,664 $16,046,897 $43,145,433 $49,256,455
Premium ceded 3,330,008 3,508,114 10,449,076 10,900,956
---------- ---------- ---------- ----------
Net premium earned 10,676,656 12,538,783 32,696,357 38,355,499
Net investment income 1,522,453 1,047,537 4,276,772 3,137,272
Other income 22,394 31,081 69,614 75,739
---------- ---------- ---------- ----------
Total Insurance Company Revenues 12,221,503 13,617,401 37,042,743 41,568,510
Other Revenues from Insurance Operations
Gross commissions and fees 1,242,068 1,377,801 3,766,748 4,142,472
Investment income 25,781 15,544 70,781 43,919
Finance charges and fees 168,280 187,889 513,466 579,813
Other income 1,700 5,800 6,415 13,158
---------- ---------- ---------- ----------
Total Revenues 13,659,332 15,204,435 41,400,153 46,347,872
---------- ---------- ---------- ----------
EXPENSES
--------
Losses and loss adjustment expenses 5,718,427 7,900,404 18,289,995 24,456,233
Policy acquisition costs 2,252,267 2,619,682 7,018,530 7,947,104
Salaries and employee benefits 1,434,854 1,309,777 4,117,907 3,868,772
Commissions to agents/brokers 136,787 160,598 447,213 517,901
Other operating expenses 712,350 628,957 2,194,547 1,972,527
---------- ---------- ---------- ----------
Total Expenses 10,254,685 12,619,418 32,068,192 38,762,537
---------- ---------- ---------- ----------
Income Before Taxes 3,404,647 2,585,017 9,331,961 7,585,335
Income tax provision 1,190,501 923,559 3,273,545 2,725,384
--------- --------- --------- ---------
Net Income $2,214,146 $1,661,458 $6,058,416 $4,859,951
========= ========= ========= =========
PER SHARE DATA
--------------
Basic Shares Outstanding 5,590,452 5,496,315 5,559,820 5,495,826
Basic Earnings Per Share $0.40 $0.30 $1.09 $0.88
Diluted Shares Outstanding 5,661,251 5,610,753 5,648,124 5,613,210
Diluted Earnings Per Share $0.39 $0.30 $1.07 $0.87
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2006 2005 2006 2005
---- ---- ---- ----
Net Income $2,214,146 $1,661,458 $6,058,416 $4,859,951
Other changes in comprehensive income, net of tax:
Unrealized gains (losses) on securities classified
as available-for-sale arising during the period 585,200 (292,199) 207,940 (709,421)
--------- --------- --------- ---------
Comprehensive Income $2,799,346 $1,369,259 $6,266,356 $4,150,530
========= ========= ========= =========
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30
2006 2005
---- ----
Cash Flows from Operating Activities:
Net Income $6,058,416 $4,859,951
Adjustments to reconcile net income to net cash from operations
Depreciation 177,600 112,771
Net amortization of bonds and treasury bills (19,041) 90,269
Changes in assets and liabilities
Premium, notes and investment income receivable 131,904 861,857
Reinsurance recoverable 2,762,817 (2,772,053)
Deferred policy acquisitions costs 764,040 707,365
Other assets 72,755 (25,120)
Reserve for unpaid losses and loss adjustment expenses (970,047) 9,006,531
Unearned premium reserve (3,728,730) (3,792,066)
Advance premium and premium deposits 275,465 (115,589)
Accrued expenses and other liabilities (149,802) (925,936)
Tax benefit from disqualified incentive stock options (196,464) -
Income taxes current/deferred 460,533 (41,555)
--------- ---------
Net Cash Provided from Operations 5,639,446 7,966,425
--------- ---------
Investing Activities
Purchase of fixed maturity investments (51,454,624) (35,553,071)
Proceeds from maturity of fixed maturity investments 51,047,000 29,696,090
Net decrease in short-term investments (5,564,818) (1,027,626)
Additions to property and equipment (132,040) (565,353)
--------- ---------
Net Cash (Used) by Investing Activities (6,104,482) (7,449,960)
--------- ---------
Financing Activities
Proceeds from exercise of stock options 313,132 12,440
Tax benefit from disqualified incentive stock options 196,464 -
Repayment of notes payable - related parties - (500,000)
------- -------
Net Cash Provided (Used) by Financing Activities 509,596 (487,560)
------- -------
Net increase in cash 44,560 28,905
Cash at beginning of period 13,472 15,016
------ ------
Cash at End of Period $58,032 $43,921
====== ======
Supplemental Cash Flow Information Cash paid during the period for:
Interest - $6,250
Income taxes $3,050,651 $2,765,872
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Nature of Business
------------------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and through its other subsidiaries provides insurance premium
financing and membership association services. Unico American Corporation is
referred to herein as the "Company" or "Unico" and such references include both
the corporation and its subsidiaries, all of which are wholly owned, unless
otherwise indicated. Unico was incorporated under the laws of Nevada in 1969.
Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Unico American Corporation and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U.S. generally accepted accounting principles (GAAP) for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2006, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006. Quarterly financial statements should be read in conjunction
with the consolidated financial statements and related notes in the Company's
2005 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
Use of Estimates in the Preparation of the Financial Statements
---------------------------------------------------------------
The preparation of financial statements in conformity with GAAP requires the
Company to make estimates and assumptions that affect its reported amounts of
assets and liabilities and its disclosure of any contingent assets and
liabilities at the date of its financial statements, as well as its reported
amounts of revenues and expenses during the reporting period. Actual results
could differ materially from those estimates.
Reclassifications
-----------------
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
NOTE 2 - STOCK-BASED COMPENSATION
---------------------------------
Prior to January 1, 2006, the Company applied the intrinsic-value based method
of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB Opinion No. 25, to
account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. FASB Statement No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," and FASB Statement No. 148,
"Accounting for Stock Based Compensation - Transition and Disclosure," an
amendment of SFAS 123, established accounting and disclosure requirements using
a fair-value based method of accounting for stock-based employee compensation
plans. As permitted by existing accounting standards, the Company had elected to
continue to apply the intrinsic-value based method of accounting described above
and had adopted only the disclosure requirements of SFAS 123, as amended through
December 31, 2005. On January 1, 2006, the Company adopted FASB Statement No.
123 (Revised 2004), "Share-Based Payment" (SFAS 123R), on a modified prospective
basis.
On December 30, 2005, the Company accelerated the vesting of all of its
outstanding stock-based compensation awards granted under the Company's 1999
Omnibus Stock Plan. All accelerated options were "in the money." The number of
shares covered by the options accelerated totaled 67,500 of which 37,500 were
originally scheduled to vest on January 1, 2006, and 30,000 were originally
scheduled to vest on January 1, 2007. The Company accelerated vesting of the
options in order to minimize the compensation costs associated with the adoption
of SFAS 123R.
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
All accelerated options were granted to long-term management employees who were
not expected to leave the Company prior to the originally scheduled vesting
date. The estimated compensation cost that will be excluded from current and
future periods as a result of the acceleration of the vesting of the options is
approximately $89,100.
On adoption of SFAS 123R on the modified prospective basis on January 1, 2006,
there were no unvested stock options or awards; and, therefore, there was no
adjustment recorded upon adoption. Prospectively, grants of share-based payment
awards will be accounted for in accordance with SFAS 123R and compensation
expense will be recognized based on an estimate of the number of awards expected
to actually vest based on the estimate of fair value of the awards.
Had compensation cost for the Company's stock-based compensation plan been
reflected in the accompanying consolidated financial statements based on the
fair value at the grant dates for option awards consistent with the method of
SFAS 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net Income
As reported $1,661,458 $4,859,951
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 12,376 37,126
--------- ---------
Pro forma $1,649,082 $4,822,825
========= =========
Income Per Share - Basic
As reported $0.30 $0.88
Pro forma $0.30 $0.88
Income Per Share - Assuming Dilution:
As reported $0.30 $0.87
Pro forma $0.29 $0.86
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 and 2002 grants:
2002 1999
Grant Grant
----- -----
Dividend yield 1.40% 2.46%
Expected volatility 34% 43%
Expected lives 10 Years 10 Years
Risk-free interest rates 4.05% 6.09%
Fair value of options granted $1.32 $4.30
The Company recognized a federal tax benefit in the amount of $196,464 in the
nine months ended September 30, 2006. This federal tax benefit resulted from the
disqualification of certain previously exercised incentive stock options. The
disqualification is due to the sale of the underlying stock by employees prior
to the required one year holding period under federal tax law. The Company
recognized the federal tax benefit as an equity adjustment, which is also
presented in the Statements of Cash Flows as a financing activity in accordance
with SFAS 123R.
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 3 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY
--------------------------------------------------------------------
The Company previously announced that its Board of Directors had authorized the
repurchase in the open market from time to time of up to an aggregate of 945,000
shares of the common stock of the Company. During the nine months ended
September 30, 2006, the Company did not repurchase any shares of the Company's
common stock. As of September 30, 2006, the Company had purchased and retired
under the Board of Directors' authorization an aggregate of 868,958 shares of
its common stock at a cost of $5,517,465.
NOTE 4 - EARNINGS PER SHARE
---------------------------
The following table represents the reconciliation of the numerators and
denominators of the Company's basic earnings per share and diluted earnings per
share computations reported on the Consolidated Statements of Operations for the
three and nine months ended September 30, 2006 and 2005:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2006 2005 2006 2005
---- ---- ---- ----
Basic Earnings Per Share
-----------------------
Net income numerator $2,214,146 $1,661,458 $6,058,416 $4,859,951
========= ========= ========= =========
Weighted average shares outstanding denominator 5,590,452 5,496,315 5,559,820 5,495,826
========= ========= ========= =========
Basic Earnings Per Share $0.40 $0.30 $1.09 $0.88
Diluted Earnings Per Share
--------------------------
Net income numerator $2,214,146 $1,661,458 $6,058,416 $4,859,951
========= ========= ========= =========
Weighted average shares outstanding 5,590,452 5,496,315 5,559,820 5,495,826
Effect of diluted securities 70,799 114,438 88,304 117,384
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,661,251 5,610,753 5,648,124 5,613,210
========= ========= ========= =========
Diluted Earnings Per Share $0.39 $0.30 $1.07 $0.87
NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
---------------------------------------------
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" (SFAS No. 154). SFAS No. 154
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to a newly adopted accounting principle. The
statement will be effective for the Company for all accounting changes and any
error corrections occurring after January 1, 2006.
FASB Staff Position (FSP) No. 115-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." FSP 115-1 provides
guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss. An
investment is considered impaired if the fair value of the investment is less
than its cost. If, after consideration of all available evidence to evaluate the
realizable value of its investment, impairment is determined to be
other-than-temporary, then an impairment loss should be recognized equal to the
difference between the investment's cost and its fair value. FSP 115-1 nullifies
certain provisions of Emerging Issues Task Force (EITF) Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," while retaining the disclosure requirements of EITF 03-1 which
were adopted in 2003. FSP 115-1 is effective for reporting periods beginning
after December 15, 2005. FSP 115-1 did not significantly impact the Company's
financial statements upon its adoption on January 1, 2006.
8
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
In June 2006, the Financial Accounting Standards Board (FASB) issued
interpretation of FASB Statement No. 109, "Accounting for Uncertainty in Income
Taxes" (FIN 48). This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This interpretation will be effective January 1,
2007. The Company is currently assessing the effect of implementing FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures" (SFAS
157). SFAS 157 provides guidance for using fair value to measure assets and
liabilities and applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the use of fair
value in any new circumstances. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company are currently reviewing the provisions of SFAS 157 to determine the
impact on our financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108").
SAB 108 requires registrants to quantify misstatements by using both the
balance-sheet and income-statement approaches and to determine whether financial
statement restatement is necessary. SAB 108 is effective for annual financial
statements covering the first fiscal year ending after November 15, 2006. The
Company has not completed its analysis to determine the impact on the Company's
consolidated financial statements from adoption of SAB 108.
In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans- an Amendment of FASB
Statement No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires a business
entity that sponsors employer defined benefit plan measure plan assets and
obligations as of the date of the employer's fiscal year-end statement of
financial position and recognize funded status as a component of other
comprehensive income. SFAS 158 is effective for fiscal years ending after
December 15, 2006. There will be no impact on the Company's consolidated
financial statements from adoption of this standard since the Company does not
provide defined benefit plan to its employees.
NOTE 6 - SEGMENT REPORTING
--------------------------
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures
about Segments of an Enterprise and Related Information," became effective for
fiscal years effective after December 15, 1997. SFAS No. 131 establishes
standards for the way information about operating segments is reported in
financial statements. The Company has adopted SFAS No. 131 and has identified
its insurance company operation, Crusader Insurance Company (Crusader), as its
primary reporting segment. Revenues from this segment comprised 89% of
consolidated revenues for the three and nine months ended September 30, 2006.
For the three and nine months ended September 30, 2005, revenues from this
segment comprised 90% 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.
9
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
Revenues, income before income taxes, and assets by segment are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2006 2005 2006 2005
---- ---- ---- ----
Revenues
--------
Insurance company operation $12,221,503 $13,617,401 $37,042,743 $41,568,510
Other insurance operations 5,110,087 5,728,516 15,183,942 17,246,282
Intersegment eliminations (1) (3,672,258) (4,141,482) (10,826,532) (12,466,920)
--------- --------- ---------- ----------
Total other insurance operations 1,437,829 1,587,034 4,357,410 4,779,362
--------- --------- --------- ---------
Total Revenues $13,659,332 $15,204,435 $41,400,153 $46,347,872
========== ========== ========== ==========
Income (Loss) Before Income Taxes
---------------------------------
Insurance company operation $3,540,983 $2,311,592 $10,046,390 $6,909,667
Other insurance operations (136,336) 273,425 (714,429) 675,668
--------- --------- --------- ---------
Total Income Before Income Taxes $3,404,647 $2,585,017 $9,331,961 $7,585,335
========= ========= ========= =========
As of September 30
------------------
2006 2005
---- ----
Assets
------
Insurance company operation $170,387,293 $160,576,857
Intersegment eliminations (2) (1,407,216) (2,047,200)
----------- -----------
Total insurance company operation 168,980,077 158,529,657
Other insurance operations 19,519,940 21,717,059
----------- -----------
Total Assets $188,500,017 $180,246,716
=========== ===========
(1) Intersegment revenue eliminations reflect commission paid by Crusader to
Unifax Insurance Systems, Inc., (Unifax) a wholly owned subsidiary of the
Company.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
--------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
--------
General
-------
Unico American Corporation is an insurance holding company that underwrites
property and casualty insurance through its insurance company subsidiary;
provides property, casualty, health and life insurance through its agency
subsidiaries; and through its other subsidiaries provides insurance premium
financing and membership association services.
The Company had a net income of $2,214,146 for the three months ended September
30, 2006, compared to net income of $1,661,458 for the three months ended
September 30, 2005, an increase in net income of $552,688 (33%). For the nine
months ended September 30, 2006, the Company had a net income of $6,058,416
compared to a net income of $4,859,951 for the nine months ended September 30,
2005, an increase in net income of $1,198,465 (25%).
This overview discusses some of the relevant factors that management considers
in evaluating the Company's performance, prospects, and risks. It is not all
inclusive and is meant to be read in conjunction with the entirety of
management's discussion and analysis, the Company's financial statements and
notes thereto, and all other items contained within the report on this Form
10-Q.
Revenue and Income Generation
-----------------------------
The Company receives its revenue primarily from earned premium derived from the
insurance company operations, commission and fee income generated from the
insurance agency operations, finance charges and fee income from the premium
finance operations, and investment income from cash generated primarily from the
insurance operation. The insurance company operation generated approximately 90%
of consolidated revenues for the three and nine months ended September 30, 2006.
The Company's remaining operations constitute a variety of specialty insurance
services, each with unique characteristics and individually not material to
consolidated revenues.
Insurance Company Operation
---------------------------
The property and casualty insurance industry is highly competitive and includes
many insurers, ranging from large companies offering a wide variety of products
worldwide to smaller, specialized companies in a single state or region offering
only a single product. Many of the Company's existing or potential competitors
have considerably greater financial and other resources, have a higher rating
assigned by independent rating organizations such as A.M. Best Company, have
greater experience in the insurance industry, and offer a broader line of
insurance products than the Company. Currently, Crusader is writing primarily
the Commercial Multiple Peril line of business in California. Crusader's A.M.
Best Company rating is B+ (Very Good) with a rating outlook of stable.
A primary challenge of the property and casualty insurance company operation is
contending with the fact that the Company sells its products before the ultimate
costs are actually known. When pricing its products, the Company projects the
ultimate losses and loss adjustment expenses that it anticipates will be
incurred after the policy is sold. In addition, factors such as changes in,
among other things, regulations, the legal environment, and inflation can all
impact the ultimate cost.
The property and casualty insurance industry is characterized by periods of soft
market conditions, in which premium rates are stable or falling and insurance is
readily available, and by periods of hard market conditions, where rates rise,
coverage may be more difficult to find, and insurers' profits increase. The
Company believes that the "hard market" that existed in California in the past
few years has transitioned to a "soft market." The Company cannot determine how
long the existing market conditions will continue, nor in which direction they
might change.
11
Crusader's underwriting results are as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2006 2005 (Decrease) 2006 2005 (Decrease)
---- ---- -------- ---- ---- --------
Net premium earned $10,676,656 $12,538,783 $(1,862,127) $32,696,357 $38,355,499 $(5,659,142)
Less:
Losses and loss adjustment expenses 5,718,427 7,900,404 (2,181,977) 18,289,995 24,456,233 (6,166,238)
Policy acquisition costs 2,252,267 2,619,682 (367,415) 7,018,530 7,947,104 (928,574)
--------- ---------- ---------- ----------- --------- ----------
Total 7,970,694 10,520,086 (2,549,392) 25,308,525 32,403,337 (7,094,812)
--------- ---------- --------- ---------- ---------- ---------
Underwriting Profit (Before Income Taxes) $2,705,962 $2,018,697 $687,265 $7,387,832 $5,952,162 $1,435,670
========= ========= ======= ========= ========= =========
The improved underwriting results for the three and nine months ended September
30, 2006, as shown in the above table, are primarily the result of the
following:
o Net premium earned for the three and nine months ended September 30,
2006, decreased as compared to the prior periods due to the Company's
reduction in direct written premium. Policies issued decreased by 754
(16%) to 3,820 for the three months ended September 30, 2006, compared
to 4,574 for the three months ended September 30, 2005. For the nine
months ended September 30, 2006, policies issued decreased by 2,490
(18%) to 11,418, compared to 13,908 for the nine months ended September
30, 2005. Despite the increased competition in the property and casualty
marketplace, the Company believes that rate adequacy is more important
than premium growth and underwriting profit is the Company's primary
goal.
o Losses and loss adjustment expenses decreased for the three and nine
months ended September 30, 2006, as compared to prior periods, as a
result of the decrease in earned premiums and as a result of an increase
in the amount of favorable development of prior years' losses for the
three and nine months ended September 30, 2006, as compared to prior
periods.
o Policy acquisition costs for the three and nine months ended September
30, 2006, decreased as compared to the prior periods due to the
Company's reduction in direct earned premium.
Other Operations
----------------
The Company's other revenues from insurance operations consist of commissions,
fees, finance charges, and investment and other income. Excluding investment and
other income, these operations accounted for approximately 11% of total revenues
in the three and nine months ended September 30, 2006, and approximately 10% of
total revenues in the three and nine months ended September 30, 2005.
Investments and Liquidity
-------------------------
The Company generates revenue from its investment portfolio, which consisted of
approximately $146.7 million (at amortized cost) at September 30, 2006, compared
to $140.6 million (at amortized cost) at December 31, 2005. Investment income
for the three months ended September 30, 2006, increased $485,153 (46%) to
$1,548,234 and increased $1,166,362 (37%) to $4,347,553 for the nine months
ended September 30, 2006, compared to $1,063,081 and $3,181,191 for the three
and nine months ended September 30, 2005, respectively. The increase in
investment income is primarily a result of an increase in the Company's
annualized yield on average invested assets.
LIQUIDITY AND CPITAL RESOURCES
------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. As of September
30, 2006, the Company had cash and investments of $146,653,104 (at amortized
cost) of which $143,540,898 (97.9%) were cash and investments of Crusader.
12
As of September 30, 2006, the Company had invested $136,549,491 (at amortized
cost) or 93% of its invested assets in fixed maturity obligations. In accordance
with Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company is required to classify
its investments in debt and equity securities into one of three categories:
held-to-maturity, available-for-sale, or trading securities. Although all of the
Company's investments are classified as available-for-sale, the Company's
investment guidelines place primary emphasis on buying and holding high-quality
investments until maturity.
The Company's investments in fixed maturity obligations of $136,549,491 (at
amortized cost) includes $907,754 (0.7%) of pre-refunded state and municipal
tax-exempt bonds, $121,192,355 (88.7%) of U.S. treasury securities, $14,049,382
(10.3%) of industrial and miscellaneous securities, and $400,000 (0.3%) of
long-term certificates of deposit.
The balance of the Company's investments is in short-term investments that
include U.S. treasury bills, bank money market accounts, certificates of
deposit, commercial paper, and a short-term treasury money market fund.
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 those investments to high-grade
obligations with a maximum term of eight years. The maximum investment
authorized in any one issuer is $2,000,000 and the maximum in any one U.S.
government agency or U.S. government sponsored enterprise is $3,000,000. This
dollar limitation excludes bond premiums paid in excess of par value and U.S.
government or U.S. government guaranteed issues. Investments in municipal
securities are primarily pre-refunded and secured by U.S. treasury securities.
The short-term investments are either U.S. government obligations, FDIC insured,
or are in an institution with a Moody's rating of P2 and/or a Standard & Poor's
rating of A1. All of the Company's fixed maturity investment securities are
rated and readily marketable and could be liquidated without any materially
adverse financial impact.
During 2005 the Company began its conversion to a "paperless office" including
improvements to its computer network, hardware, and other related computer
infrastructure. As of September 30, 2006, the Company had substantially
completed its "paperless office" project and the planned conversion and
improvements. The Company is now fine-tuning its paperless office systems and
back scanning its previous paper files and documents. As of September 30, 2006,
the Company had incurred approximately $760,000 of capital expenditures on these
projects. The Company anticipates its potential payback on these capital
expenditures in approximately two to three years due to productivity
improvements, improved customer service, and lower operating costs. In addition,
the Company is in the process of enhancing its technology related to its
underwriting procedures and electronic communication systems to better
accommodate its customers' needs and to improve operating efficiencies.
The Company previously announced that its Board of Directors had authorized the
repurchase in the open market from time to time of up to an aggregate of 945,000
shares of the common stock of the Company (see Note 3). No shares were
repurchased in the three and nine months ended September 30, 2006.
Although material capital expenditures may also be funded through borrowings,
the Company believes that its cash and short-term investments as of the date of
this report, net of trust restriction of $22,075, statutory deposits of
$700,000, cash of $200,000 deposited with superior courts in lieu of bonds, and
the dividend restriction between Crusader and Unico plus the cash to be
generated from operations, should be sufficient to meet its operating
requirements during the next twelve months without the necessity of borrowing
funds.
RESULTS OF OPERATIONS
---------------------
All comparisons made in this discussion are comparing the three months and nine
months ended September 30, 2006, to the three months and nine months ended
September 30, 2005, unless otherwise indicated.
The Company had a net income of $2,214,146 for the three months ended September
30, 2006, compared to a net income of $1,661,458 for the three months ended
September 30, 2005, an increase of $552,688 (33%). For the nine months ended
September 30, 2006, the Company had a net income of $6,058,416 compared to a net
income of $4,859,951 for the nine months ended September 30, 2005, an increase
of $1,198,465 (25%). Total revenues decreased $1,545,103 (10%) to $13,659,332
for the three months and $4,947,719 (11%) to $41,400,153 for the nine months
ended September 30, 2006, compared to total revenues of $15,204,435 for the
three months and $46,347,872 for the nine months ended September 30, 2005.
13
PREMIUM WRITTEN (before reinsurance) is a non-GAAP financial measure which is
defined, under statutory accounting, as the contractually determined amount
charged by the Company to the policyholder for the effective period of the
contract based on the expectation of risk, policy benefits, and expenses
associated with the coverage provided by the terms of the policies. Premium
earned, the most directly comparable GAAP measure, represents the portion of
premiums written that is recognized as income in the financial statements for
the period presented and earned on a pro-rata basis over the term of the
policies. Commencing April 1, 2006, the Company prospectively changed its
statutory reporting of written premium amount to exclude advance premiums that
had been recorded but were not yet effective as of the reporting date. Advance
premiums represent policies that have been submitted to the Company and are
bound, billed, and recorded up to 30 days prior to the policy effective date.
Written premium reported on the Company's statutory statement decreased
1,774,882 (12%) to $13,331,282 and decreased 6,641,052 (15%) to $38,823,317 for
the three and nine months ended September 30, 2006, compared to $15,106,164 and
$45,464,369 for the three and nine months ended September 30, 2005. Had the
change of excluding advance business from statutory written premium been made on
a retroactive basis, written premium would have been $13,331,282 and $39,416,704
for the three and nine months ended September 30, 2006, compared to $15,966,403
and $46,224,423 for the three and nine months ended September 30, 2005, and the
decrease in written premium would have been 16.5% for the three months and 14.7%
for the nine months ended September 30, 2006.
The decrease in written premium for the three and nine months ended September
30, 2006, compared to the three and nine months ended September 30, 2005, was
primarily the result of the increased competition in the property and casualty
market. The Company believes that the "hard market" that existed in California
in the past few years has transitioned to a "soft market." The Company cannot
determine how long the existing market conditions will continue, nor in which
direction they might change.
The Company intends to continue to allocate its resources toward improving its
California business rates, rules, and forms. The Company continues to believe
that it can compete effectively and profitably by offering better service and by
marketing its policies through its current independent agents and brokers.
PREMIUM EARNED before reinsurance decreased $2,040,233 (13%) to $14,006,664 for
the three months and $6,111,022 (12%) to $43,145,433 for the nine months ended
September 30, 2006, compared to $16,046,897 for the three months and $49,256,455
for the nine months ended September 30, 2005. The Company writes annual policies
and, therefore, earns written premium over the one-year policy term. The
decrease in earned premium is a direct result of the related decrease in written
premium previously discussed.
Premium ceded decreased $178,106 (5%) to $3,330,008 for the three months and
$451,880 (4%) to $10,449,076 for the nine months ended September 30, 2006,
compared to ceded premium of $3,508,114 in the three months and $10,900,956 for
the nine months ended September 30, 2005. The Company evaluates each of its
ceded reinsurance contracts at their inception to determine if there is a
sufficient risk transfer to allow the contract to be accounted for as
reinsurance under current accounting literature. At September 30, 2006, all such
ceded contracts are accounted for as risk transfer reinsurance. Earned premium
ceded consists of both premium ceded under the Company's current reinsurance
contracts and premium ceded to the Company's provisionally rated reinsurance
contracts. Prior to January 1, 1998, the Company's reinsurer charged a
provisional rate on exposures up to $500,000 that was subject to adjustment and
was based on the amount of losses ceded, limited by a maximum percentage that
could be charged. That provisionally rated treaty was cancelled on a runoff
basis in 1997. Direct earned premium, earned ceded premium, and ceding
commission are as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2006 2005 (Decrease) 2006 2005 (Decrease)
---- ---- -------- ---- ---- --------
Direct earned premium $14,006,664 $16,046,897 ($2,040,233) $43,145,433 $49,256,455 $(6,111,022)
Earned ceded premium:
Excluding provisionally rated
ceded premium 3,422,262 3,505,643 (83,381) 10,517,027 10,773,915 (256,888)
Provisionally rated
ceded premium (92,254) 2,471 (94,725) (67,951) 127,041 (194,992)
--------- --------- ------ ---------- ---------- -------
Total Earned Ceded Premium 3,330,008 3,508,114 (178,106) 10,449,076 10,900,956 (451,880)
Ceding commission (1,081,140) (1,153,640) 72,500 (3,330,526) (3,540,346) 209,820
--------- --------- ------ --------- --------- -------
Total Earned Ceded Premium
Net of Ceding Commission $2,248,868 $2,354,474 $(105,606) $7,118,550 $7,360,610 $(242,060)
========= ========= ======= ========= ========= =======
14
Total earned ceded premium excluding provisionally rated ceded premium was 24%
of direct earned premium in the three and nine months ended September 30, 2006,
compared to 22% in the three and nine months ended September 30, 2005. There was
no change in the ceding commission rate.
In 2006 and 2005 Crusader retained a participation in its excess of loss
reinsurance treaties of 10% in its 1st layer ($700,000 in excess of $300,000),
10% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 30% in its
property and casualty clash treaties.
Crusader's 2004 and 2003 1st layer primary excess of loss treaty provides for a
contingent commission to the Company equal to 45% of the net profit, if any,
accruing to the reinsurer. The first accounting period for the contingent
commission covers the period from January 1, 2003, through December 31, 2004.
The Company will calculate and report to the reinsurer its net profit, if any,
within 90 days after 36 months following the end of the first accounting period,
and within 90 days after the end of each 12 month period thereafter until all
losses subject to the agreement have been finally settled. Based on losses and
loss adjustment expenses ceded (including incurred but not reported losses) as
of September 30, 2006, no contingent commission has been accrued. The 2005 1st
layer primary excess of loss treaties do not provide for a contingent
commission. Crusader's 2006 1st layer primary excess of loss treaty provides for
a contingent commission equal to 20% of the net profit, if any, accruing to the
reinsurer. The first accounting period for the contingent commission covers the
period from January 1, 2006, through December 31, 2006. The Company will
calculate and report to the reinsurer its net profit, if any, within 90 days
after 36 months following the end of the first accounting period, and within 90
days after the end of each 12 month period thereafter until all losses subject
to the agreement have been finally settled. Based on losses and loss adjustment
expenses ceded (including incurred but not reported losses) as of September 30,
2006, no contingent commission has been accrued.
INVESTMENT INCOME, excluding realized investment gains, increased $485,153 (46%)
to $1,548,234 for the three months ended September 30, 2006, compared to
investment income of $1,063,081 for the three months ended September 30, 2005.
Investment income, excluding realized investment gains, increased $1,166,362
(37%) to $4,347,553 for the nine months ended September 30, 2006, compared to
investment income of $3,181,191 for the nine months ended September 30, 2005.
The increase in investment income in the current periods as compared to the
prior year periods is a result of an increase in the Company's annualized yield
on average invested assets from 3.1% for the three and nine months ended
September 30, 2005, to 4.3% and 4.0% for the three and nine months ended
September 30, 2006, respectively. The increase in the annualized yield on
average invested assets is a result of higher yields in the marketplace on both
new and reinvested assets.
The average annualized yields on the Company's average invested assets are as
follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Average Invested Assets $144,725,503 $137,839,419 $143,596,530 $135,504,945
Total Investment Income $1,548,234 $1,063,081 $4,347,553 $3,181,191
Annualized Yield on Average Invested Assets 4.3% 3.1% 4.0% 3.1%
The par value, amortized cost, estimated market value and weighted average yield
of fixed maturity investments at September 30, 2006, 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.
Weighted
Maturities by Par Average
Calendar Year Value Amortized Cost Fair Value Yield
------------- ----- -------------- ---------- -----
December 31, 2006 $12,525,000 $12,539,729 $12,509,817 3.1%
December 31, 2007 67,775,000 67,714,898 67,318,141 4.2%
December 31, 2008 40,610,000 40,602,707 40,664,952 4.9%
December 31, 2009 13,500,000 13,601,951 13,690,640 5.1%
December 31, 2010 100,000 100,000 100,000 4.1%
December 31, 2011 2,000,000 1,990,206 2,001,875 4.7%
----------- ----------- -----------
Total $136,510,000 $136,549,491 $136,285,425 4.4%
=========== =========== ===========
15
The weighted average maturity of the Company's fixed maturity investments was
1.2 years as of September 30, 2006 and September 30, 2005. Due to the current
interest rate environment, management believes it is prudent to purchase fixed
maturity investments with maturities of three years or less and with minimal
credit risk.
As of September 30, 2006, the Company held fixed maturity investments with
unrealized appreciation of $272,888 and fixed maturity investments with
unrealized depreciation of $536,954. The Company monitors its investments
closely. If an unrealized loss is determined to be other than temporary, it is
written off as a realized loss through the Consolidated Statements of
Operations. The Company's methodology of assessing other-than-temporary
impairments is based on security-specific analysis as of the balance sheet date
and considers various factors including the length of time to maturity and the
extent to which the fair value has been less than the cost, the financial
condition and the near-term prospects of the issuer, whether the debtor is
current on its contractually obligated interest and principal payments, and the
Company's intent to hold the investment for a period of time sufficient to allow
the Company to recover its costs. The Company has concluded that the gross
unrealized losses of $536,954 as of September 30, 2006, were temporary in
nature. However, facts and circumstances may change which could result in a
decline in market value considered to be other than temporary. The following
table summarizes all fixed maturities in an unrealized loss position at
September 30, 2006, and the aggregate fair value and gross unrealized loss by
length of time those fixed maturities have been continuously in an unrealized
loss position:
Market Gross
Value Unrealized Loss
----- ---------------
0-6 months - -
7-12 months $65,892,549 $335,248
Over 12 months 29,743,678 201,706
---------- -------
Total $95,636,227 $536,954
========== =======
As of September 30, 2006, the fixed maturity investments with a gross unrealized
loss position for a continuous period of 7 to 12 months consisted of U.S.
treasury securities and investment-grade industrial securities. The fixed
maturity investments with a gross unrealized loss position for a continuous
period over 12 months consisted of U.S. treasury securities, investment-grade
industrial securities, and pre-refunded municipal bonds.
GROSS COMMISSIONS AND FEES decreased $135,733 (10%) to $1,242,068 for the three
months and $375,724 (9%) to $3,766,748 for the nine months ended September 30,
2006, compared to commissions and fees of $1,377,801 for the three months and
$4,142,472 for the nine months ended September 30, 2005. The decrease in gross
commissions and fee income for the three and nine months ended September 30,
2006, compared to the three and nine months ended September 30, 2005, is as
follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
Increase Increase
2006 2005 (Decrease) 2006 2005 (Decrease)
---- ---- -------- ---- ---- --------
Policy fee income $667,232 $791,296 $(124,064) $2,004,483 $2,280,095 $(275,612)
Health and life insurance program commission income 409,098 399,397 9,701 1,211,772 1,225,418 (13,646)
Membership and fee income 75,474 79,609 (4,135) 228,602 242,461 (13,859)
Other commission and fee income 7,707 9,106 (1,399) 32,017 36,757 (4,740)
Daily automobile rental insurance program:
Commission income 82,557 98,393 (15,836) 236,236 327,865 (91,629)
Contingent commission - - - 53,638 29,876 23,762
--------- --------- ------- --------- --------- -------
Total $1,242,068 $1,377,801 $(135,733) $3,766,748 $4,142,472 $(375,724)
========= ========= ======= ========= ========= =======
Unifax primarily sells and services insurance policies for Crusader. The
commissions paid by Crusader to Unifax are eliminated as intercompany
transactions and are not reflected as income in the financial statements. Unifax
also receives policy fee income that is directly related to the Crusader
policies it sells. Policy fee income decreased $124,064 (16%) and $275,612 (12%)
for the three and nine months ended September 30, 2006, compared to the three
and nine months ended September 30, 2005. The decrease in policy fee income is a
result of a decrease in the number of policies issued during the three and nine
months ended September 30, 2006, as compared to the three and nine months ended
September 30, 2005, offset in part by an approximate 8% increase in the policy
fee for policies effective on or after June 26, 2005.
16
American Insurance Brokers, Inc. (AIB), a wholly owned subsidiary of the
Company, sells and services health insurance policies for individual/family and
small business groups and receives commission and fee income based on the
premiums that it writes. Commission income in this program increased $9,701 (2%)
and decreased $13,646 (1%) for the three and nine months ended September 30,
2006, respectively, compared to the three and nine months ended September 30,
2005. 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. Membership and fee income decreased $4,135 (5%) and $13,859 (6%)
for the three and nine months ended September 30, 2006, compared to the three
and nine months ended September 30, 2005. In May 2006, CIGNA HealthCare began
offering new small group medical insurance policies in the state of California.
Currently, all new CIGNA small group medical insurance policies are written
through AIB and all CIGNA small group medical insurance policyholders are
members of AAQHC. The new programs are competitively priced and are being
actively marketed.
The daily automobile rental insurance program is produced by Bedford Insurance
Services, Inc., a wholly owned subsidiary of the Company. Bedford receives a
commission from a non-affiliated insurance company based on premium written.
Commission in the daily automobile rental insurance program (excluding
contingent commission) decreased $15,836 (16%) and $91,629 (28%) for the three
and nine months ended September 30, 2006, compared to the three and nine months
ended September 30, 2005. The decrease is due to the continued intense
competition in the daily automobile rental insurance program. Bedford continues
to produce business only at rates that it believes are adequate. Primarily due
to declining sales, in April 2006 Bedford hired a new general manager who has
substantial experience in the daily automobile rental insurance business. Future
sales growth of the Bedford program is also currently dependent on the
non-affiliated insurance company approving and implementing various product
enhancements that Bedford recommends. Bedford is currently working with the
non-affiliated insurance company to obtain their approval of the recommended
program enhancements.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 54% of net premium earned for the three
months and 56% of net premium earned for the nine months ended September 30,
2006, compared to 63% of net premium earned for the three months and 64% of net
premium earned for the nine months ended September 30, 2005. Favorable
development of all prior accident years' losses and loss adjustment expenses for
the three and nine months ended September 30, 2006, were $1,591,023 and
$4,471,666, respectively. Favorable development of all prior accident years'
losses and loss adjustment expenses for the three and nine months ended
September 30, 2005, were $771,077 and $2,385,274, respectively. The development
of prior years' losses and loss adjustment expenses for the periods indicated
was lower than previously anticipated. Accordingly, the Company reduced its
estimate of its ultimate losses and loss adjustment expenses for those prior
accident years. Losses and loss adjustment expenses for the 2006 accident year
were 70% of net premium earned for the three and nine months ended September 30,
2006. Losses and loss adjustment expenses for the 2005 accident year were 70% of
net premium earned for the three and nine months ended September 30, 2005.
The Company's consolidated financial statements include estimated reserves for
unpaid losses and related loss adjustment expenses of the insurance company
operation. Crusader sets loss and loss adjustment expense reserves at each
balance sheet date at management's best estimate of the ultimate payments that
it anticipates will be made to settle all losses incurred and related loss
adjustment expenses incurred as of that date for both reported and unreported
losses. Estimating loss reserves is a difficult process as there are many
factors that can ultimately affect the final settlement of a claim and,
therefore, the reserve that is needed. Changes in the regulatory and legal
environment, results of litigation, medical costs, the cost of repair materials
and labor rates can all impact ultimate claim costs. In addition, time can be a
critical part of reserving determinations since the longer the span between the
incidence of a loss and the payment or settlement of the claim, the more
variable the ultimate settlement amount can be. Accordingly, short-tail claims,
such as property damage claims, tend to be more reasonably predictable than
long-tail liability claims. 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 development of case estimates and for
unreported losses and loss adjustment expenses. Since the emergence and
disposition of claims are subject to uncertainties, the net amounts that will
ultimately be paid to settle claims 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.
17
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection fees,
and certain other underwriting costs, which are related to the production of
Crusader's insurance policies. These costs include both Crusader expenses and
allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay
Crusader a ceding commission, which is primarily a reimbursement of the
acquisition cost related to the ceded premium. Policy acquisition costs, net of
ceding commission, are deferred and amortized as the related premiums are
earned. These costs were approximately 21% of net premium earned for the three
and nine months ended September 30, 2006, and 21% of net premium earned for the
three and nine months ended September 30, 2005.
SALARIES AND EMPLOYEE BENEFITS increased $125,077 (10%) to $1,434,854 for the
three months and $249,135 (6%) to $4,117,907 for the nine months ended September
30, 2006, compared to salary and employee benefits of $1,309,777 for the three
months and $3,868,772 for the nine months ended September 30, 2005.
COMMISSIONS TO AGENT/BROKERSs decreased $23,811 (15%) to $136,787 for the three
months and $70,688 (14%) to $447,213 for the nine months ended September 30,
2006, compared to commission expense of $160,598 for the three months and
$517,901 for the nine months ended September 30, 2005. The decrease is primarily
the result of a decrease in commissions incurred in the health and life
insurance program and the daily automobile rental insurance program.
OTHER OPERATING EXPENSES increased $83,393 (13%) to $712,350 for the three
months and $222,020 (11%) to $2,194,547 for the nine months ended September 30,
2006, compared to $628,957 for the three months and $1,972,527 for the nine
months ended September 30, 2005.
INCOME TAX PROVISION was an expense of $1,190,501 (35% of pre-tax income) for
the three months and $3,273,545 (35% of pre-tax income) for the nine months
ended September 30, 2006, compared to an income tax expense of $923,559 (36% of
pre-tax income) in the three months and an income tax expense of $2,725,384 (36%
of pre-tax income) for the nine months ended September 30, 2005. This change was
primarily due to a pre-tax income of $3,404,647 in the three months and
$9,331,961 in the nine months ended September 30, 2006, compared to pre-tax
income of $2,585,017 in the three months and $7,585,335 in the nine months ended
September 30, 2005.
The effect of inflation on net income of the Company during the three and nine
months ended September 30, 2006, and the three and nine months ended September
30, 2005, was not significant.
FORWARD LOOKING STATEMENTS
--------------------------
Certain statements contained herein, including the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are not historical facts are forward-looking. These
statements, which may be identified by forward-looking words or phrases such as
"anticipate," "believe," "expect," "intend," "may," "should," and "would,"
involve risks and uncertainties, many of which are beyond the control of the
Company. Such risks and uncertainties could cause actual results to differ
materially from these forward-looking statements. Factors which could cause
actual results to differ materially include underwriting actions not being
effective, rate increases for coverages not being sufficient, premium rate
adequacy relating to competition or regulation, actual versus estimated claim
experience, regulatory changes or developments, unforeseen calamities, general
market conditions and the Company's ability to introduce new profitable
products.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The Company's consolidated balance sheet includes a substantial amount of
invested assets whose fair values are subject to various market risk exposures
including interest rate risk and equity price risk. The Company's invested
assets consist of the following:
September 30 December 31 Increase
2006 2005 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $136,149,491 $135,628,428 $521,063
Short-term cash investments (at cost) 10,045,581 4,475,162 5,570,419
Certificates of deposit (over 1 year, at cost) 400,000 500,000 (100,000)
----------- ----------- ---------
Total Invested Assets $146,595,072 $140,603,590 $5,991,482
=========== =========== =========
There have been no material changes in the composition of the Company's invested
assets or market risk exposures since the end of the preceding fiscal year end.
18
ITEM 4 - CONTROLS AND PROCEDURES
--------------------------------
An evaluation was carried out by the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
September 30, 2006, (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective. During the
period covered by this report, there have been no changes in the Company's
internal control over financial reporting that have materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
---------------------------
ITEM 1A. RISK FACTORS
----------------------
There were no material changes from risk factors as previously disclosed in the
Company's Form 10-K for the year ended December 31, 2005, in response to Item 1A
to Part I of Form 10-K.
ITEM 6 - EXHIBITS
-----------------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNICO AMERICAN CORPORATION
Date: November 8, 2006 By: /s/ ERWIN CHELDIN
-----------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: November 8, 2006 By: /s/ LESTER A. AARON
-------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
19
EXHIBIT INDEX
-------------
Exhibit No. Description
---------- -----------
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)