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 June 30, 2007 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
--- ---
5,625,208
Number of shares of common stock outstanding as of August 10, 2007
1
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2007 2006
---- ----
(Unaudited)
ASSETS
------
Investments
Available for sale:
Fixed maturities, at fair value (amortized cost: June 30,
2007 $139,577,070; December 31, 2006 $140,492,328) $139,161,306 $140,164,942
Short-term investments, at cost 7,322,364 6,820,007
----------- -----------
Total Investments 146,483,670 146,984,949
Cash 68,725 34,535
Accrued investment income 1,782,166 1,762,586
Premiums and notes receivable, net 5,476,745 5,841,749
Reinsurance recoverable:
Paid losses and loss adjustment expenses 119,961 268,355
Unpaid losses and loss adjustment expenses 24,656,799 23,519,687
Deferred policy acquisition costs 5,948,117 6,430,265
Property and equipment (net of accumulated depreciation) 664,717 739,080
Deferred income taxes 1,537,303 1,473,024
Other assets 859,423 747,606
----------- -----------
Total Assets $187,597,626 $187,801,836
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------
Unpaid losses and loss adjustment expenses $93,289,189 $93,596,117
Unearned premiums 23,556,935 26,434,187
Advance premium and premium deposits 2,226,367 1,802,243
Income taxes payable - 1,605,385
Accrued expenses and other liabilities 4,201,337 3,492,882
----------- -----------
Total Liabilities $123,273,828 $126,930,814
----------- ===========
STOCKHOLDERS' EQUITY
---------------------
Common stock, no par - authorized 10,000,000 shares; issued and outstanding
shares 5,617,708 at June 30, 2007 and 5,592,119 at December 31, 2006 $3,543,540 $3,236,745
Accumulated other comprehensive (loss) (274,404) (216,074)
Retained earnings 61,054,662 57,850,351
---------- ----------
Total Stockholders' Equity $64,323,798 $60,871,022
---------- ----------
Total Liabilities and Stockholders' Equity $187,597,626 $187,801,836
=========== ===========
See notes to unaudited consolidated financial statements.
2
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2007 2006 2007 2006
---- ---- ---- ----
REVENUES
--------
Insurance Company Revenues
Premium earned $12,392,166 $14,293,870 $25,132,499 $29,138,769
Premium ceded 2,908,621 3,488,479 5,939,756 7,119,068
--------- ---------- --------- ----------
Net premium earned 9,483,545 10,805,391 19,192,743 22,019,701
Net investment income 1,660,990 1,420,656 3,283,280 2,754,319
Other income 19,859 19,689 29,500 47,220
---------- ---------- ---------- ----------
Total Insurance Company Revenues 11,164,394 12,245,736 22,505,523 24,821,240
Other Revenues from Insurance Operations
Gross commissions and fees 1,288,749 1,224,974 2,603,749 2,524,680
Investment income 40,124 23,747 78,149 45,000
Finance charges and fees 142,484 172,174 291,024 345,186
Other income 3,215 515 6,496 4,715
---------- ---------- ---------- ----------
Total Revenues 12,638,966 13,667,146 25,484,941 27,740,821
---------- ---------- ---------- ----------
EXPENSES
--------
Losses and loss adjustment expenses 5,484,106 6,053,114 11,418,076 12,571,568
Policy acquisition costs 2,305,015 2,315,415 4,300,595 4,766,263
Salaries and employee benefits 1,463,143 1,398,162 2,884,651 2,683,053
Commissions to agents/brokers 236,192 152,733 440,497 310,426
Other operating expenses 698,596 734,551 1,463,847 1,482,197
---------- ---------- ---------- ----------
Total Expenses 10,187,052 10,653,975 20,507,666 21,813,507
---------- ---------- ---------- ----------
Income Before Taxes 2,451,914 3,013,171 4,977,275 5,927,314
Income tax provision 825,590 1,056,451 1,662,363 2,083,044
--------- --------- --------- ---------
Net Income $1,626,324 $1,956,720 $3,314,912 $3,844,270
========= ========= ========= =========
PER SHARE DATA:
Basic
Earnings Per Share $0.29 $0.35 $0.59 $0.69
Weighted Average Shares 5,610,570 5,583,344 5,603,048 5,544,503
Diluted
Earnings Per Share $0.29 $0.35 $0.58 $0.68
Weighted Average Shares 5,682,812 5,657,598 5,681,031 5,641,560
See notes to unaudited consolidated financial statements.
3
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2007 2006 2007 2006
---- ---- ---- ----
Net Income $1,626,324 $1,956,720 $3,314,912 $3,844,270
Other changes in comprehensive income, net of tax:
Unrealized (losses) on securities classified
as available-for-sale arising during the period (263,397) (138,559) (58,330) (377,260)
--------- --------- --------- ---------
Comprehensive Income $1,362,927 $1,818,161 $3,256,582 $3,467,010
========= ========= ========= =========
See notes to unaudited consolidated financial statements.
4
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
June 30
-------
2007 2006
---- ----
Cash Flows from Operating Activities:
Net Income $3,314,912 $3,844,270
Adjustments to reconcile net income to net cash from operations
Depreciation 121,121 114,803
Bond amortization, net (38,989) (1,076)
Changes in assets and liabilities
Premium, notes and investment income receivable 345,424 189,068
Reinsurance recoverable (988,718) (143,719)
Deferred policy acquisitions costs 482,148 652,886
Other assets (111,817) 251,508
Reserve for unpaid losses and loss adjustment expenses (306,928) 186,457
Unearned premium reserve (2,877,252) (3,053,348)
Funds held as security and advanced premiums 424,124 109,931
Accrued expenses and other liabilities 708,455 (352,647)
Tax benefit from disqualified incentive stock options (49,105) (196,464)
Income taxes current/deferred (1,590,511) 251,610
--------- ---------
Net Cash (Used in) Provided by Operations (567,136) 1,853,279
------- ---------
Investing Activities
Purchase of fixed maturity investments (29,645,753) (34,280,540)
Proceeds from maturity of fixed maturity investments 30,600,000 30,097,000
Net (increase) decrease in short-term investments (502,357) 1,926,670
Additions to property and equipment (46,758) (47,509)
------- ---------
Net Cash (Used in) Provided by Investing Activities 405,132 (2,304,379)
------- ---------
Financing Activities
Proceeds from exercise of stock options 262,350 290,007
Tax benefit from disqualified incentive stock options 49,105 196,464
Repurchase of common stock (115,261) -
------- -------
Net Cash Provided by Financing Activities 196,194 486,471
------- -------
Net increase in cash 34,190 35,371
Cash at beginning of period 34,535 13,472
------ ------
Cash at End of Period $68,725 $48,843
====== ======
Supplemental Cash Flow Information Cash paid during the period for:
Interest - -
Income taxes $3,400,597 $1,850,000
See notes to unaudited consolidated financial statements.
5
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
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 six months ended June 30, 2007, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2007. Quarterly financial statements should be read in conjunction with the
consolidated financial statements and related notes in the Company's 2006 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
---------------------------------
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), using
the modified prospective transition method. Under this transition method,
share-based compensation expense for 2006 includes compensation expense for all
share-based compensation awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant-date fair value estimated in accordance with
the original provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Share-based compensation expense for
all share-based payment awards granted or modified on or after January 1, 2006,
is based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123R.
There were no options granted during the three and six months ended June 30,
2007 and 2006; and there were no unvested options as of January 1, 2006, on
adoption of SFAS 123R. As a result, there is no share-based compensation
expenses recorded for the three and six months ended June 30, 2007 and 2006.
6
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
NOTE 3 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY
--------------------------------------------------------------------
The Company has 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 six months ended
June 30, 2007, the Company repurchased 9,483 shares of the Company's common
stock at a cost of $115,261 of which $4,660 was allocated to capital and
$110,601 was allocated to retained earnings. As of June 30, 2007, the Company
had purchased and retired under the Board of Directors' authorization an
aggregate of 878,441 shares of its common stock at a cost of $5,632,727.
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 six months ended June 30, 2007 and 2006:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2007 2006 2007 2006
---- ---- ---- ----
Basic Earnings Per Share
------------------------
Net income numerator $1,626,324 $1,956,720 $3,314,912 $3,844,270
========= ========= ========= =========
Weighted average shares outstanding denominator 5,610,570 5,583,344 5,603,048 5,544,503
========= ========= ========= =========
Basic Earnings Per Share $0.29 $0.35 $0.59 $0.69
Diluted Earnings Per Share
--------------------------
Net income numerator $1,626,324 $1,956,720 $3,314,912 $3,844,270
========= ========= ========= =========
Weighted average shares outstanding 5,610,570 5,583,344 5,603,048 5,544,503
Effect of diluted securities 72,242 74,254 77,983 97,057
--------- --------- --------- ---------
Diluted shares outstanding denominator 5,682,812 5,657,598 5,681,031 5,641,560
========= ========= ========= =========
Diluted Earnings Per Share $0.29 $0.35 $0.58 $0.68
NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
---------------------------------------------
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for 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 became effective January 1,
2007. The Company's adoption of FIN 48 did not have an effect on its results of
operations or financial position.
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 is currently reviewing the provisions of SFAS 157 to determine the
impact on our financial statements.
7
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
In October 2005, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 05-1, "Accounting by Insurance Enterprises for
Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts" (SOP 05-1). SOP 05-1 provides accounting guidance for
deferred policy acquisition costs associated with internal replacements of
insurance and investment contracts other than those already described in SFAS
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments." SOP 05-1 defines an internal replacement as a modification in
product benefits, features, rights, or coverages that occurs by the exchange of
a contract for a new contract, or by amendment, endorsement or rider to a
contract, or by the election of a feature or coverage within a contract. The
provisions of SOP 05-1 became effective for internal replacements occurring in
fiscal years beginning after December 15, 2006. The Company's adoption of SOP
05-1 did not have an effect on its results of operations or financial position.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities--Including an Amendment of FASB Statement No. 115" ("SFAS No. 159").
SFAS No. 159 permits an entity to measure certain financial assets and financial
liabilities at fair value. The main objective of SFAS No. 159 is to improve
financial reporting by allowing entities to mitigate volatility in reported
earnings caused by the measurement of related assets and liabilities using
different attributes, without having to apply complex hedge accounting
provisions. Entities that elect the fair value option will report unrealized
gains and losses in earnings at each subsequent reporting date. SFAS No. 159
establishes presentation and disclosure requirements to help financial statement
users understand the effect of the entity's election on its earnings, but does
not eliminate disclosure requirements of other accounting standards. SFAS No.
159 is expected to expand the use of fair value measurement, which is consistent
with the FASB's long-term measurement objectives for accounting for financial
instruments. SFAS No. 159 is effective as of the beginning of the first fiscal
year that begins after November 15, 2007. The Company is currently assessing the
impact of adopting SFAS No. 159 on its consolidated financial statements.
NOTE 6 - ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
---------------------------------------------------
The Company and its subsidiaries file federal and state income tax returns.
Management does not believe that the ultimate outcome of any future examinations
of open tax years will have a material impact on the Company's results of
operations. Tax years that remain subject to examination by major taxing
jurisdictions are 2003 through 2006 for federal income taxes and 2001 through
2006 for California state income taxes. The Company had no unrecognized tax
benefits and recognized no additional liability or reduction in deferred tax
asset as a result of the adoption of FIN 48 effective January 1, 2007.
The Company does not expect any changes in unrecognized tax benefits within the
next 12 months to have a significant impact on its consolidated financial
statements. The Company recognizes interest and penalties related to
unrecognized tax benefits as part of income taxes. As of January 1, 2007, the
Company had no accrual relating to interest and penalties related to
unrecognized tax benefits. During the three and six months ended June 30, 2007,
there have been no material changes in the liability for uncertain tax
positions.
NOTE 7 - 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 88% of
consolidated revenues for the three and six months ended June 30, 2007. For the
three and six months ended June 30, 2006, revenues from this segment comprised
90% and 89% of consolidated revenues, respectively. The Company's remaining
operations constitute a variety of specialty insurance services, each with
unique characteristics and individually insignificant to consolidated revenues.
8
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
Revenues, income before income taxes, and assets by segment are as follows:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2007 2006 2007 2006
---- ---- ---- ----
Revenues
--------
Insurance company operation $11,164,394 $12,245,736 $22,505,523 $24,821,240
Other insurance operations 4,702,012 5,082,798 9,243,235 10,073,855
Intersegment eliminations (1) (3,227,440) (3,661,388) (6,263,817) (7,154,274)
--------- --------- --------- ---------
Total other insurance operations 1,474,572 1,421,410 2,979,418 2,919,581
--------- --------- --------- ---------
Total Revenues $12,638,966 $13,667,146 $25,484,941 $27,740,821
========== ========== ========== ==========
Income (Loss) Before Income Taxes
---------------------------------
Insurance company operation $3,167,960 $3,268,800 $6,095,011 $6,505,407
Other insurance operations (716,046) (255,629) (1,117,736) (578,093)
--------- --------- --------- ---------
Total Income Before Income Taxes $2,451,914 $3,013,171 $4,977,275 $5,927,314
========= ========= ========= =========
As of June 30
2007 2006
---- ----
Assets
------
Insurance company operation $167,032,295 $169,010,069
Intersegment eliminations (2) (1,510,968) (1,366,398)
----------- -----------
Total insurance company operation 165,521,327 167,643,671
Other insurance operations 22,076,299 19,497,382
----------- -----------
Total Assets $187,597,626 $187,141,053
=========== ===========
(1) Intersegment revenue eliminations reflect commission paid by Crusader to
Unifax Insurance Systems, Inc., (Unifax) a wholly owned subsidiary of the
Company.
(2) Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
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 $1,626,324 for the three months ended June 30,
2007, compared to net income of $1,956,720 for the three months ended June 30,
2006, a decrease in net income of $330,396 (17%). For the six months ended June
30, 2007, the Company had a net income of $3,314,912 compared to a net income of
$3,844,270 for the six months ended June 30, 2006, a decrease in net income of
$529,358 (14%).
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 the
management discussion and analysis, the Company's financial statements and notes
thereto, and all other items contained within the report on this Form 10-Q.
9
Revenue and Income Generation
-----------------------------
The Company receives its revenue primarily from earned premium derived from the
insurance company operation, commission and fee income generated from the
insurance agency operations, finance charges and fee income from the premium
finance operation, and investment income from cash generated primarily from the
insurance operation. The insurance company operation generated approximately 88%
of consolidated revenues for the three and six months ended June 30, 2007, and
89% and 90% of consolidated revenues for the three and six months ended June 30,
2006, respectively.. 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. Crusader is only writing business in the
state of California that primarily consists of Commercial Multiple Peril
business. Crusader's financial strength rating has been upgraded by A.M. Best
Company from B+ (Good) to B++ (Good) effective January 2, 2007, 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. That is, when pricing its products, the Company must
forecast the ultimate claim and loss adjustment costs. In addition, factors such
as changes in regulations and legal environment, among other things, can all
impact the accuracy of such cost forecasts.
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, in which premium
rates rise, coverage may be more difficult to find and insurers' profits
increase. The Company believes that the California property and casualty
insurance market has transitioned to a "soft market" in the last few years. The
Company cannot determine how long the existing market conditions will continue,
nor in which direction they might change.
Crusader's underwriting results are as follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
Increase Increase
2007 2006 (Decrease) 2007 2006 (Decrease)
---- ---- -------- ---- ---- --------
Net premium earned $9,483,545 $10,805,391 $(1,321,846) $19,192,743 $22,019,701 $(2,826,958)
Less:
Losses and loss
adjustment expenses 5,484,106 6,053,114 (569,008) 11,418,076 12,571,568 (1,153,492)
Policy acquisition costs 2,305,015 2,315,415 (10,400) 4,300,595 4,766,263 (465,668)
--------- --------- ------- ---------- ---------- ---------
Total 7,789,121 8,368,529 (579,408) 15,718,671 17,337,831 (1,619,160)
--------- --------- ------- ---------- ---------- ---------
Underwriting Profit
(Before Income Taxes) $1,694,424 $2,436,862 $(742,438) $3,474,072 $4,681,870 $(1,207,798)
========= ========= ======= ========= ========= =========
The reduction in the underwriting results for the three and six months ended
June 30, 2007, as shown in the above table, are primarily the result of the
following:
Premium written before reinsurance decreased $770,949 (6%) to $11,954,615 for
the three months ended June 30, 2007, compared to $12,725,564 for the three
months ended June 30, 2006. Premium written before reinsurance decreased
$3,236,788 (13%) to $22,255,247 for the six months ended June 30, 2007, compared
to $25,492,035 for the six months ended June 30, 2006. The decrease in written
premium before reinsurance for the three and six months ended June 30, 2007, is
primarily the result of the increased competition in the property and casualty
market. Despite the increased competition in the property and casualty
marketplace, the Company believes that rate adequacy is more important than
premium growth and that underwriting profit (net earned premium less losses and
loss adjustment expenses and policy acquisition costs) is its primary goal.
10
Favorable development of prior years' losses and loss adjustment expenses
decreased $400,568 (26%) and $906,878 (31%) for the three and six months ended
June 30, 2007, compared to prior year periods, respectively. Favorable
development of all prior accident years' losses and loss adjustment expenses for
the three and six months ended June 30, 2007, were $1,133,407 and $1,973,766,
respectively. Favorable development of all prior accident years' losses and loss
adjustment expenses for the three and six months ended June 30, 2006, were
$1,533,975 and $2,880,644, respectively.
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
for the three and six months ended June 30, 2007, and 10% of total revenues for
the three and six months ended June 30, 2006.
Investments and Liquidity
-------------------------
The Company generates revenue from its investment portfolio, which consisted of
approximately $146.9 million (at amortized cost) at June 30, 2007, compared to
$147.3 million (at amortized cost) at December 31, 2006. Although the portfolio
slightly decreased in 2007, investment income increased $256,711 (18%) and
$562,110 (20%) for the three and six months ended June 30, 2007, as compared to
prior year periods, respectively. The increase in investment income is primarily
a result of the increase in the Company's annualized weighted average investment
yield to 4.6% in the three and six months ended June 30, 2007, from 4.0% in the
three and six months ended June 30, 2006. Due to the current interest rate
environment, management believes it is prudent to purchase fixed maturity
investments with maturities of five years or less and with minimal credit risk.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Due to the nature of the Company's business (insurance and insurance services)
and whereas Company growth does not normally require material reinvestments of
profits into property or equipment, the cash flow generated from operations
usually results in improved liquidity for the Company.
Crusader generates a significant amount of cash as a result of its holdings of
unearned premium reserves, reserves for loss payments, and its capital and
surplus. Crusader's loss and loss adjustment expense payments are the most
significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover
these payments without the need to liquidate its investments. As of June 30,
2007, the Company had cash and investments of $146,968,159 (at amortized cost)
of which $143,283,611 (97.5%) were investments of Crusader.
As of June 30, 2007, the Company had invested $139,577,070 (at amortized cost)
or 95% of its invested assets in fixed maturity obligations. In accordance with
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company is required to classify
its investments in debt and equity securities into one of three categories:
held-to-maturity, available-for-sale, or trading securities. Although all of the
Company's investments are classified as available-for-sale, the Company's
investment guidelines place primary emphasis on buying and holding high-quality
investments until maturity.
The Company's investments in fixed maturity obligations of $139,577,070 (at
amortized cost) include $15,090 (0.0%) of pre-refunded state and municipal
tax-exempt bonds, $127,183,740 (91.1%) of U.S. treasury securities, $11,978,240
(8.6%) 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.
11
The Company has 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 three months ended
June 30, 2007, the Company repurchased 9,483 shares of the Company's common
stock at a cost of $115,261 of which $4,660 was allocated to capital and
$110,601 was allocated to retained earnings. As of June 30, 2007, the Company
had purchased and retired under the Board of Directors' authorization an
aggregate of 878,441 shares of its common stock at a cost of $5,632,727.
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 $1,064,908, statutory deposits of $700,000,
and the dividend restriction between Crusader and Unico plus the cash to be
generated from operations, should be sufficient to meet its operating
requirements during the next twelve months without the necessity of borrowing
funds.
RESULTS OF OPERATIONS
---------------------
All comparisons made in this discussion are comparing the three months and six
months ended June 30, 2007, to the three months and six months ended June 30,
2006, unless otherwise indicated.
The Company had a net income of $1,626,324 for the three months ended June 30,
2007, compared to a net income of $1,956,720 for the three months ended June 30,
2006, a decrease of $330,396 (17%). For the six months ended June 30, 2007, the
Company had a net income of $3,314,912 compared to a net income of $3,844,270
for the six months ended June 30, 2006, a decrease of $529,358 (14%). Total
revenues decreased $1,028,180 (8%) to $12,638,966 for the three months and
$2,255,880 (8%) to $25,484,941 for the six months ended June 30, 2007, compared
to total revenues of $13,667,146 for the three months and $27,740,821 for the
six months ended June 30, 2006.
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, 2007, 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 $770,949
(6%) and $3,236,788 (13%), to $11,954,615 and $22,255,247 for the three and six
months ended June 30, 2007, compared to $12,725,564 and $25,492,035 for the
three and six months ended June 30, 2006. Had the change in excluding advance
business from statutory written premium been made on a retroactive basis,
written premium would have been $13,581,284 and $26,085,421 for the three and
six months ended June 30, 2006, and the decrease in written premium would have
been 12% for the three months and 15% for the six months ended June 30, 2007.
The decrease in written premium in the three and six months ended June 30, 2007,
compared to the three and six months ended June 30, 2006, was primarily the
result of the increased competition in the California property and casualty
market. The Company believes that the California property and casualty insurance
market has transitioned to a "soft market" in the last few years The Company
cannot determine how long the existing market conditions will continue, nor in
which direction they might change. The Company's future writings and growth are
dependent on market conditions, competition, and upon the Company's ability to
introduce new marketing channels and profitable products. The Company continues
to believe that it can compete effectively and profitably by offering better
service and by focusing its marketing efforts upon independent agents.
Historically, most of Crusader's marketing was aimed at independent insurance
brokers, representatives of the consumer. With the relatively recent advent of
heightened competition and of declining sales, in 2007 Crusader adopted a plan
to supplement its marketing efforts with independent agents, representatives of
the Company. The Company believes that those agents will be particularly
effective and that their efforts will not diminish the business historically
produced by independent brokers. Crusader expects to begin making these agency
appointments by the end of 2007.
PREMIUM EARNED before reinsurance decreased $1,901,704 (13%) to $12,392,166 for
the three months and $4,006,270 (14%) to $25,132,499 for the six months ended
June 30, 2007, compared to $14,293,870 for the three months and $29,138,769 for
the six months ended June 30, 2006. 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.
12
Premium ceded decreased $579,858 (17%) to $2,908,621 for the three months and
$1,179,312 (17%) to $5,939,756 for the six months ended June 30, 2007, compared
to ceded premium of $3,488,479 in the three months and $7,119,068 for the six
months ended June 30, 2006. 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 June 30, 2007, 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 June 30 Six Months Ended June 30
-------------------------- ------------------------
Increase Increase
2007 2006 (Decrease) 2007 2006 (Decrease)
---- ---- -------- ----- ---- --------
Direct earned premium $12,392,166 $14,293,870 ($1,901,704) $25,132,499 $29,138,769 $(4,006,270)
Earned ceded premium:
Excluding provisionally rated ceded premium 2,943,123 3,495,185 (552,062) 5,969,112 7,094,765 (1,125,653)
Provisionally rated ceded premium (34,502) (6,706) (27,796) (29,356) 24,303 (53,659)
--------- --------- ------- --------- --------- ---------
Total Earned Ceded Premium 2,908,621 3,488,479 (579,858) 5,939,756 7,119,068 (1,179,312)
Ceding commission (902,973) (1,103,419) 200,446 (1,831,546) (2,249,386) 417,840
------- --------- ------- --------- --------- -------
Total Earned Ceded Premium,
Net of Ceding Commission $2,005,648 $2,385,060 $(379,412) $4,108,210 $4,869,682 $(761,472)
========= ========= ======= ========= ========= =======
Total earned ceded premium excluding provisionally rated ceded premium was
approximately 24% of direct earned premium in the three and six months ended
June 30, 2007 and 2006. There was no significant change in the ceding commission
rate.
In 2007 Crusader retained a participation in its excess of loss reinsurance
treaties of 15% in its 1st layer ($700,000 in excess of $300,000), 15% in its
2nd layer ($1,000,000 in excess of $1,000,000), and 15% in its property clash
treaty. In 2006 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 15% in its
property clash treaty.
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 2005 1st layer
primary excess of loss treaties do not provide for a contingent commission.
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 reinsurers its net profit
(excluding incurred but not reported losses), 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. Any contingent commission payment received
is subject to return based on future development of ceded losses and loss
adjustment expenses. In March 2007, one of the reinsurers paid the Company $1
million to be applied against future contingent commission earned, if any. Based
on the Company's losses and loss adjustment expenses ceded (including incurred
but not reported losses) as of June 30, 2007, no contingent commission has been
recognized. The Company considered this payment as an advance from the reinsurer
and it is recorded in accrued expenses and other liabilities in the consolidated
balance sheets as of June 30, 2007.
INVESTMENT INCOME, excluding realized investment gains, increased $256,711 (18%)
to $1,701,114 for the three months ended June 30, 2007, compared to investment
income of $1,444,403 for the three months ended June 30, 2006. Investment
income, excluding realized investment gains, increased $562,110 (20%) to
$3,361,429 for the six months ended June 30, 2007, compared to investment income
of $2,799,319 for the six months ended June 30, 2006. 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 to
4.6% for the three and six
13
months ended June 30, 2007, from 4.0% for the three and six months ended June
30, 2006. 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 June 30 Six Months Ended June 30
-------------------------- ------------------------
2007 2006 2007 2006
---- ---- ---- ----
Average Invested Assets $146,915,430 $143,234,521 $147,105,884 $141,732,563
Total Investment Income $1,701,114 $1,444,403 $3,361,429 $2,799,319
Annualized Yield on Average Invested Assets 4.6% 4.0% 4.6% 4.0%
The par value, amortized cost, estimated market value and weighted average yield
of fixed maturity investments at June 30, 2007, 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, 2007 $39,675,000 $39,667,474 $39,618,402 4.2%
December 31, 2008 49,360,000 49,352,070 49,282,012 4.8%
December 31, 2009 29,200,000 29,261,761 29,224,408 5.0%
December 31, 2010 100,000 100,000 100,000 4.1%
December 31, 2011 7,250,000 7,233,273 7,141,484 4.5%
December 31, 2012 14,000,000 13,962,492 13,795,000 4.6%
----------- ----------- -----------
Total $139,585,000 $139,577,070 $139,161,306 4.7%
=========== =========== ===========
The weighted average maturity of the Company's fixed maturity investments was
1.5 years as of June 30, 2007, compared to 1.1 years as of June 30, 2006. Due to
the current interest rate environment, the Company believes it is prudent to
purchase fixed maturity investments with maturities of 5 years or less and with
minimal credit risk.
As of June 30, 2007, the Company held fixed maturity investments with unrealized
appreciation of $58,430 and fixed maturity investments with unrealized
depreciation of $474,194. 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, and whether the debtor is current on its
contractually obligated interest and principal payments. The Company has the
ability and intent to hold its fixed maturity investments for a period of time
sufficient to allow the Company to recover its costs. The Company has concluded
that the gross unrealized losses of $474,194 as of June 30, 2007, 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 June 30,
2007, 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 $53,651,504 $300,904
7-12 months 6,694,453 53,050
Over 12 months 40,898,351 120,240
----------- -------
Total $101,244,308 $474,194
=========== =======
As of June 30, 2007, the fixed maturity investments with a gross unrealized loss
for a continuous period of 0 to 6 months consisted of U.S. treasury securities
and investment grade fixed maturity industrial securities. 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. 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 fixed maturity
industrial securities, and pre-refunded municipal bonds.
14
GROSS COMMISSIONS AND FEES increased $63,775 (5%) to $1,288,749 for the three
months and $79,069 (3%) to $2,603,749 for the six months ended June 30, 2007,
compared to commissions and fees of $1,224,974 for the three months and
$2,524,680 for the six months ended June 30, 2006. The increase in gross
commissions and fee income for the three and six months ended June 30, 2007,
compared to the three and six months ended June 30, 2006, is as follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
Increase Increase
2007 2006 (Decrease) 2007 2006 (Decrease)
---- ---- -------- ---- ---- --------
Policy fee income $573,022 $662,329 $(89,307) $1,171,583 $1,337,251 $(165,668)
Health and life insurance program
commission income 547,818 398,194 149,624 1,048,860 802,674 246,186
Membership and fee income 76,932 74,667 2,265 154,076 153,128 948
Other commission and fee income 6,010 15,380 (9,370) 12,948 24,310 (11,362)
Daily automobile rental insurance program:
Commission income (excluding
contingent commission) 84,967 74,404 10,563 169,743 153,679 16,064
Contingent commission - - - 46,539 53,638 (7,099)
--------- --------- ------ --------- --------- ------
Total $1,288,749 $1,224,974 $63,775 $2,603,749 $2,524,680 $79,069
========= ========= ====== ========= ========= =======
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 $89,307 (13%) and $165,668 (12%)
for the three and six months ended June 30, 2007, compared to the three and six
months ended June 30, 2006. The decrease in policy fee income is a result of a
decrease in the number of policies issued during the three and six months ended
June 30, 2007, as compared to the three and six months ended June 30, 2006.
The Company's subsidiary Insurance Club, Inc., DBA AAQHC An Administrator
(AAQHC), is an administrator for CIGNA HealthCare and 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.
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 $149,624
(38%) and $246,186 (31%) for the three and six months ended June 30, 2007,
compared to the three and six months ended June 30, 2006. The increase is
primarily due to the increase in sales of small group medical insurance offered
through CIGNA HealthCare. 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) increased $10,563 (14%) and $16,064 (10%) for the three
and six months ended June 30, 2007, compared to the three and six months ended
June 30, 2006.
LOSSES AND LOSS ADJUSTMENT EXPENSES were 58% of net premium earned for the three
months and 59% of net premium earned for the six months ended June 30, 2007,
compared to 56% of net premium earned for the three months and 57% of net
premium earned for the six months ended June 30, 2006. For the three and six
months ended June 30, 2007, current accident year losses incurred were
approximately 70% of net premium earned. For the three and six months ended June
30, 2006, current accident year losses incurred were approximately 70% of net
premium earned. Favorable development of all prior accident years' losses and
loss adjustment expenses for the three and six months ended June 30, 2007, were
$1,133,407 and $1,973,766, respectively. Favorable development of all prior
accident years' losses and loss adjustment expenses for the three and six months
ended June 30, 2006, were $1,533,975 and $2,880,644, respectively.
15
The Company's consolidated financial statements include estimated reserves for
unpaid losses and related loss adjustment expenses of the insurance company
operation. The Company makes its best estimate of the liability for unpaid
claims costs as of the end of each fiscal quarter. Due to the inherent
uncertainties in estimating the Company's unpaid claims costs, actual loss and
loss adjustment expense payments should be expected to vary, perhaps
significantly, from any estimate made prior to the settling of all claims.
Variability is inherent in establishing loss and loss adjustment expense
reserves, especially for a small insurer like the Company. For any given line of
insurance, accident year, or other group of claims, there is a continuum of
possible reserve estimates, each having its own unique degree of propriety or
reasonableness. Due to the complexity and nature of the insurance claims
process, there are potentially an infinite number of reasonably likely
scenarios. The Company does not specifically identify reasonably likely
scenarios other than utilizing management's best estimate. In addition to
applying the various standard methods to the data, an extensive series of
diagnostic tests of the resultant reserve estimates are applied to determine the
Company's best estimate of the unpaid claims liability. Among the statistics
reviewed for each accident year are loss and loss adjustment expense development
patterns, frequencies (expected claim counts), severities (average cost per
claim), loss and loss adjustment expense ratios to premium, and loss adjustment
expense ratios to loss. When there is clear evidence that the actual claims
costs emerged are different than expected for any prior accident year, the
claims cost estimates for that year are revised accordingly. The accurate
establishment of loss and loss adjustment expense 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. Estimates are
based on a variety of industry data and on the Company's current and historical
accident year claims data, including but not limited to reported claim counts,
open claim counts, closed claim counts, closed claim counts with payments, paid
losses, paid loss adjustment expenses, case loss reserves, case loss adjustment
expense reserves, earned premiums and policy exposures, salvage and subrogation,
and unallocated loss adjustment expenses paid. Many other factors, including
changes in reinsurance, changes in pricing, changes in policy forms and
coverage, changes in underwriting and risk selection, legislative changes,
results of litigation and inflation are also taken into account. At the end of
each fiscal quarter, the Company's reserves are re-evaluated for each accident
year (i.e., for all claims incurred within each year) by a committee consisting
of the Company's executive vice president, the Company's chief financial
officer, and its consulting actuary. The Company uses the loss ratio method to
estimate ultimate claims costs on the current accident year. The current
accident year IBNR reserves are initially determined by multiplying earned
premiums for the year by the expected loss and loss adjustment expense ratio,
then subtracting the current accident year's cumulative incurred (paid plus case
reserves) to date. This method is subject to adjustment based upon actual
results incurred during the reporting period. This initial IBNR reserve is
adjusted as subsequent development of that accident year takes place. The
differences between actual and expected claims costs are typically not due to
one specific factor, but a combination of many factors such as the period of
time between the initial occurrence and the final settlement of the claim,
current and perceived social and economic inflation, and many other economic,
legal, political, and social factors. Because of these and other factors, actual
loss and loss adjustment expense payments should be expected to vary, perhaps
significantly, from any estimate made prior to the settling of all claims. Any
adjustments to reserves are reflected in the operating results of the periods in
which they are made. The Company 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.
POLICY ACQUISITION COSTS consist of commissions, premium taxes, inspection
fees, and certain other underwriting costs, which are related to the production
of Crusader insurance policies. These costs include both Crusader expenses and
allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay
Crusader a ceding commission, which is primarily a reimbursement of the
acquisition cost related to the ceded premium. Policy acquisition costs, net of
ceding commission, are deferred and amortized as the related premiums are
earned. These costs were approximately 24% and 22% of net premium earned for the
three and six months ended June 30, 2007. Policy acquisition costs were
approximately 21% and 22% of net premium earned for the three and six months
ended June 30, 2006.
SALARIES AND EMPLOYEE BENEFITS increased $64,981 (5%) to $1,463,143 for the
three months and $201,598 (8%) to $2,884,651 for the six months ended June 30,
2007, compared to salary and employee benefits of $1,398,162 for the three
months and $2,683,053 for the six months ended June 30, 2006.
COMMISSIONS TO AGENTS/BROKERS increased $83,459 (55%) to $236,192 for the three
months and $130,071 (42%) to $440,497 for the six months ended June 30, 2007,
compared to commission expense of $152,733 for the three months and $310,426 for
the six months ended June 30, 2006. The increase is primarily the result of the
increase in written premium in the health and life insurance program and is
related to the increase in commission income from that program.
16
OTHER OPERATING EXPENSES decreased $35,955 (5%) to $698,596 for the three months
and $18,350 (1%) to $1,463,847 for the six months ended June 30, 2007, compared
to $734,551 for the three months and $1,482,197 for the six months ended June
30, 2006.
INCOME TAX PROVISION was an expense of $825,590 (34% of pre-tax income) for the
three months and $1,662,363 (33% of pre-tax income) for the six months ended
June 30, 2007, compared to an income tax expense of $1,056,451 (35% of pre-tax
income) in the three months and an income tax expense of $2,083,044 (35% of
pre-tax income) for the six months ended June 30, 2006. This change was
primarily due to a pre-tax income of $2,451,914 in the three months and
$4,977,275 in the six months ended June 30, 2007, compared to pre-tax income of
$3,013,171 in the three months and a pre-tax income of $5,927,314 in the six
months ended June 30, 2006.
The effect of inflation on net income of the Company during the three and six
months ended June 30, 2007, and the three and six months ended June 30, 2006,
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:
June 30 December 31 Increase
2007 2006 (Decrease)
---- ---- --------
Fixed maturity bonds (at amortized value) $139,177,070 $140,092,328 $(915,258)
Short-term cash investments (at cost) 7,322,364 6,820,007 502,357
Certificates of deposit (over 1 year, at cost) 400,000 400,000 -
----------- ----------- -------
Total Invested Assets $146,899,434 $147,312,335 $(412,901)
=========== =========== =======
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.
ITEM 4T - 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
June 30, 2007, (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.
17
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, 2006, in response to Item 1A
to Part I of Form 10-K.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------
The following table sets forth certain information with respect to purchases of
common stock of the Company during the quarter ended June 30, 2007, by the
Company and persons who may be deemed to be "affiliated purchasers" as defined
in Rule 10b-18(a)(3) promulgated under the Securities Exchange Act of 1934.
Total Number Maximum
of Shares Number
Total Purchased as Part of Shares
Number of Average Of Publicly that May Yet Be
Shares Price Paid Announced Plans Purchased Under the
Period Purchased Per Share or Programs(1) Plans or Programs(1)
------ --------- --------- ----------- -------------------
April 1, 2007 through April 30, 2007 - - - 76,042
May 1, 2007 through May 31, 2007 200 $12.21 200 75,842
June 1, 2007 through June 30, 2007 9,283 $12.15 9,283 66,559
----- -----
Total 9,483 $12.15 9,483 66,559
===== =====
(1) In April 2000, the Company announced that its Board of Directors had
authorized the repurchase in the open market from time to time of up to an
aggregate of 315,000 shares of the common stock of the Company. On August
8, 2000, the Board of Directors authorized the repurchase of an additional
315,000 shares and on September 6, 2000, the Board of Directors authorized
the repurchase of another 315,000 shares of the common stock of the Company
in the open market from time to time. Thus, the Board of Directors had
authorized the repurchase in the open market of up to an aggregate of
945,000 shares of the common stock of the Company. The program has no
expiration date and may be terminated by the Board of Directors at any
time. As of June 30, 2007, an aggregate of 878,441 shares of common stock
had been purchased by the Company pursuant to this authorization.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
--------------------------------------------------------
(a) On May 25, 2007, the Company held its Annual Meeting of Stockholders.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934; there was no solicitation in opposition to
nominees of the Board of Directors as listed in the Proxy Statement and all
such nominees were elected.
(c) At the meeting, the following persons were elected by the vote indicated as
directors to serve until the next annual meeting of stockholders and until
their successors are duly elected and qualified. There were no broker
non-votes.
Name For Against or Withheld
---- --- -------------------
Erwin Cheldin 5,028,212 358,624
Cary L. Cheldin 4,939,591 447,245
Lester A. Aaron 4,849,453 537,383
George C. Gilpatrick 5,031,212 355,624
David A. Lewis 5,196,997 189,839
Warren D. Orloff 5,366,591 20,245
Donald B. Urfrig 5,375,512 11,324
18
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: August 13, 2007 By: /s/ ERWIN CHELDIN
-----------------------
Erwin Cheldin
Chairman of the Board, President and Chief
Executive Officer, (Principal Executive Officer)
Date: August 13, 2007 By: /s/ LESTER A. AARON
-------------------------
Lester A. Aaron
Treasurer, Chief Financial Officer, (Principal
Accounting and Principal Financial Officer)
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)