Edgar Filing: UNICO AMERICAN CORP

unam0608.htm

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, 2008 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 __ Smaller reporting company X

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

5,625,308

Number of shares of common stock outstanding as of August 12, 2008

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PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30		December 31
	2008		2007
	(Unaudited)
ASSETS
Investments
Available for sale:
Fixed maturities, at fair value (amortized cost: June 30, 2008 $138,169,290; December 31, 2007 $139,992,208)	$	140,949,646	$	142,895,472
Short-term investments, at cost		6,927,353		7,356,159
Total Investments		147,876,999		150,251,631
Cash		30,990		108,864
Accrued investment income		1,332,844		1,554,741
Premiums and notes receivable, net		4,939,620		5,066,646
Reinsurance recoverable:
Paid losses and loss adjustment expenses		424,549		318,186
Unpaid losses and loss adjustment expenses		23,217,440		28,425,424
Deferred policy acquisition costs		5,319,367		5,722,847
Property and equipment (net of accumulated depreciation)		463,484		557,234
Deferred income taxes		694,900		686,910
Other assets		1,038,533		1,083,378
Total Assets	$	185,338,726	$	193,775,861

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses	$	85,922,048	$	94,730,711
Unearned premiums		20,674,279		22,742,612
Advance premium and premium deposits		1,216,840		2,159,290
Accrued expenses and other liabilities		6,762,625		5,040,145
Total Liabilities	$	114,575,792	$	124,672,758

STOCKHOLDERS' EQUITY
Common stock, no par – authorized 10,000,000 shares; issued and outstanding
shares 5,625,308 at June 30, 2008 and 5,625,308 at December 31, 2007	$	3,594,207	$	3,594,207
Accumulated other comprehensive gain		1,835,035		1,916,154
Retained earnings		65,333,692		63,592,742
Total Stockholders’ Equity	$	70,762,934	$	69,103,103

Total Liabilities and Stockholders' Equity	$	185,338,726	$	193,775,861

See notes to unaudited consolidated financial statements.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended				Six Months Ended
	June 30				June 30
	2008		2007		2008		2007
REVENUES
Insurance Company Revenues
Premium earned	$	10,805,540	$	12,392,166	$	21,952,486	$	25,132,499
Premium ceded		2,224,544		2,908,621		4,446,724		5,939,756
Net premium earned		8,580,996		9,483,545		17,505,762		19,192,743
Net investment income		1,481,120		1,660,990		3,078,186		3,283,280
Net realized investment gains		-		-		6,306		-
Other income		207,545		19,859		322,183		29,500
Total Insurance Company Revenues		10,269,661		11,164,394		20,912,437		22,505,523

Other Revenues from Insurance Operations
Gross commissions and fees		1,415,393		1,348,821		2,886,757		2,714,898
Investment income		15,629		40,124		41,077		78,149
Finance charges and fees		119,011		142,484		243,532		291,024
Other income		2,700		3,215		6,711		6,496
Total Revenues		11,822,394		12,699,038		24,090,514		25,596,090

EXPENSES
Losses and loss adjustment expenses		6,080,589		5,484,106		12,276,295		11,418,076
Policy acquisition costs		2,077,190		2,305,015		4,158,161		4,300,595
Salaries and employee benefits		1,398,398		1,463,143		2,835,437		2,884,651
Commissions to agents/brokers		318,161		236,192		639,652		440,497
Other operating expenses		781,870		698,596		1,568,482		1,463,847
Total Expenses		10,656,208		10,187,052		21,478,027		20,507,666

Income Before Taxes		1,166,186		2,511,986		2,612,487		5,088,424
Income tax provision		385,226		846,014		871,537		1,700,153
Net Income	$	780,960	$	1,665,972	$	1,740,950	$	3,388,271



PER SHARE DATA:
Basic
Weighted Average Shares		5,625,308		5,610,570		5,625,308		5,603,048
Earnings Per Share	$	0.14	$	0.30	$	0.31	$	0.60
Diluted
Weighted Average Shares		5,668,369		5,682,812		5,669,002		5,681,031
Earnings Per Share	$	0.14	$	0.29	$	0.31	$	0.60

See notes to unaudited consolidated financial statements.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2008			2007			2008			2007

Net Income	$	780,960		$	1,665,972		$	1,740,950		$	3,388,271
Other changes in comprehensive income, net of tax:
Unrealized (losses) on securities classified as available-for-sale arising during the period		(1,793,479	)		(263,397	)		(81,119	)		(58,330	)
Comprehensive Income (Loss)	$	(1,012,519	)	$	1,402,575		$	1,659,831		$	3,329,941

See notes to unaudited consolidated financial statements.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended
	June 30
	2008			2007
Cash Flows from Operating Activities:
Net Income	$	1,740,950		$	3,388,271
Adjustments to reconcile net income to net cash from operations
Depreciation		105,970			121,121
Bond amortization, net		129,993			(38,989	)
Net realized investment gains		(6,306	)		-
Changes in assets and liabilities
Premium, notes and investment income receivable		348,923			345,424
Reinsurance recoverable		5,101,621			(988,718	)
Deferred policy acquisitions costs		403,480			482,148
Other assets		1,987			(111,817	)
Reserve for unpaid losses and loss adjustment expenses		(8,808,663	)		(306,928	)
Unearned premium reserve		(2,068,333	)		(2,877,252	)
Funds held as security and advanced premiums		(942,450	)		424,124
Accrued expenses and other liabilities		1,722,480			597,306
Tax benefit from disqualified incentive stock options		-			(49,105	)
Income taxes current/deferred		76,657			(1,552,721	)
Net Cash (Used in) Operations		(2,193,691	)		(567,136	)

Investing Activities
Purchase of fixed maturity investments		(30,241,519	)		(29,645,753	)
Proceeds from maturity of fixed maturity investments		31,435,000			30,600,000
Proceeds from sale of fixed maturity investments		505,750			-
Net (increase) decrease in short-term investments		428,806			(502,357	)
Additions to property and equipment		(12,220	)		(46,758	)
Net Cash Provided by Investing Activities		2,115,817			405,132

Financing Activities
Proceeds from exercise of stock options		-			262,350
Tax benefit from disqualified incentive stock options		-			49,105
Repurchase of common stock		-			(115,261	)
Net Cash Provided by Financing Activities		-			196,194

Net increase in cash		(77,874	)		34,190
Cash at beginning of period		108,864			34,535
Cash at End of Period	$	30,990		$	68,725

Supplemental Cash Flow Information
Cash paid during the period for:
Interest		-			-
Income taxes	$	800,000		$	3,400,597

See notes to unaudited consolidated financial statements.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

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, and health insurance through its agency subsidiaries; and provides insurance premium financing and membership association services through its other subsidiaries. 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, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. Quarterly financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2007 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. While every effort is made to ensure the integrity of such estimates, actual results may differ.

NOTE 2 – IMMATERIAL CORRECTION TO PREVIOUSLY REPORTED AMOUNTS

During the first quarter of 2008, the Company identified an error associated with the Company’s policy fee income. The error arose from the recognition of non-refundable policy fee income at policy inception rather than over the policy term in accordance with the SEC’s Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and EITF 00-21, Revenue Arrangements with Multiple Deliverables.

The Company made an assessment of the materiality of this item on the Company’s historical financial statements in accordance with SAB No. 99, Materiality, and concluded that the error was immaterial to all periods. The Company also concluded that had the error been adjusted when it was identified within the first quarter of 2008, the impact of such an adjustment would have been material to its first quarter 2008 financial statements and was expected to be material to its full year 2008 financial statements.

Accordingly, in accordance with SAB No. 108, Financial Statements, the December 31, 2007, balance sheet, and the consolidated statements of operations, comprehensive income, and cash flows for the three and six months ended June 30, 2007, herein have been revised to correct the immaterial error and to reflect the corrected balances as of that date.

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The line items in the financial statements that are impacted by this error are detailed in the table below.

	Consolidated Balance Sheet For the year ended December 31, 2007
	As previously reported		Correction			As corrected

Deferred income taxes	$	295,026	$	391,884		$	686,910
Accrued expenses and other liabilities	$	3,887,546	$	1,152,599		$	5,040,145
Retained earnings	$	64,353,457	$	(760,715	)	$	63,592,742

	Consolidated Statement of Operation For the three months ended June 30, 2007						Consolidated Statement of Operation For the six months ended June 30, 2007
	As previously reported		Correction		As corrected		As previously reported		Correction		As corrected

Gross commission and fees	$	1,288,749	$	60,072	$	1,348,821	$	2,603,749	$	111,149	$	2,714,898
Income tax provision	$	825,590	$	20,424	$	846,014	$	1,662,363	$	37,790	$	1,700,153
Net income	$	1,626,324	$	39,648	$	1,665,972	$	3,314,912	$	73,359	$	3,388,271

	Statement of Comprehensive Income For the three months ended June 30, 2007						Statement of Comprehensive Income For the six months ended June 30, 2007
	As previously reported		Correction		As corrected		As previously reported		Correction		As corrected

Net income	$	1,626,324	$	39,648	$	1,665,972	$	3,314,912	$	73,359	$	3,388,271

	Consolidated Statement of Cash Flow For the six months ended June 30, 2007
	As previously reported			Correction			As corrected

Net income	$	3,314,912		$	73,359		$	3,388,271
Accrued expenses and other liabilities	$	708,455		$	(111,149	)	$	597,306
Income taxes current/deferred	$	(1,590,511	)	$	37,790		$	(1,552,721	)

NOTE 3 - STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) 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 on or after January 1, 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, 2008 and 2007.

NOTE 4 - REPURCHASE OF COMMON STOCK - EFFECTS 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 three and six months ended June 30, 2008, the Company did not repurchase any shares of the Company’s common stock. As of June 30, 2008, 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.

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NOTE 5 - 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, 2008 and 2007:

	Three Months Ended				Six Months Ended
	June 30				June 30
	2008		2007		2008		2007
Basic Earnings Per Share
Net income numerator	$	780,960	$	1,665,972	$	1,740,950	$	3,388,271

Weighted average shares outstanding denominator		5,625,308		5,610,570		5,625,308		5,603,048

Basic Earnings Per Share	$	0.14	$	0.30	$	0.31	$	0.60

Diluted Earnings per Share
Net income numerator	$	780,960	$	1,665,972	$	1,740,950	$	3,388,271

Weighted average shares outstanding		5,625,308		5,610,570		5,625,308		5,603,048
Effect of diluted securities		43,061		72,242		43,694		77,983
Diluted shares outstanding denominator		5,668,369		5,682,812		5,669,002		5,681,031

Diluted Earnings Per Share	$	0.14	$	0.29	$	0.31	$	0.60

NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (“GAAP hierarchy”). The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles,” has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. SFAS No. 162 shall be effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to U.S. Auditing Standards Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” SFAS No. 162 is not expected to have a material impact on the Company’s consolidated financial statements.

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 adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS 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 adopted SFAS No. 159 as of the beginning of 2008 by not electing the fair value option for any of its financial assets or liabilities.

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In December 2007, FASB Statements No. 141 (revised 2007), “Business Combinations” (SFAS 141R), and No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160), were issued. SFAS 141R replaces FASB Statement No. 141, “Business Combinations.” SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose additional information regarding the nature and financial effect of the business combination. SFAS 160 requires all entities to report non-controlling (minority) interests in subsidiaries in the same way - as equity in the consolidated financial statements. SFAS 160 also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The Company will adopt SFAS 141R and SFAS 160 for any business combinations initiated after December 31, 2008.

There were no other accounting standards issued during 2008 that are expected to have a material impact on the Company’s consolidated financial statements.

NOTE 7 - 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 2004 through 2007 for federal income taxes and 2003 through 2007 for California state income taxes. On April 30, 2008, the Company was notified by the Internal Revenue Service that the Company’s consolidated federal income tax return on Form 1120 for the tax year ended December 31, 2006, was selected for examination. The examination began on July 29, 2008. As of the date of this report, the examination has not been completed.

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 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. In addition, the Company had not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense. As of June 30, 2008, the Company had no unrecognized tax benefits and no additional liabilities or reduction in deferred tax asset as a result of the adoption of FIN 48 effective January 1, 2007.

NOTE 8 - 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 87% of consolidated revenues for the three and six months ended June 30, 2008, compared to 88% of revenues for the three and six months ended June 30, 2007. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues.

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Revenues, income before income taxes, and assets by segment are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2008			2007			2008			2007
Revenues
Insurance company operation	$	10,269,661		$	11,164,394		$	20,912,437		$	22,505,523

Other insurance operations		4,234,233			4,762,084			8,750,462			9,354,384
Intersegment eliminations (1)		(2,681,500	)		(3,227,440	)		(5,572,385	)		(6,263,817	)
Total other insurance operations		1,552,733			1,534,644			3,178,077			3,090,567

Total revenues	$	11,822,394		$	12,699,038		$	24,090,514		$	25,596,090

Income (Loss) Before Income Taxes
Insurance company operation	$	1,904,906		$	3,167,960		$	3,910,083		$	6,095,011
Other insurance operations		(738,720	)		(655,974	)		(1,297,596	)		(1,006,587	)
Total income before income taxes	$	1,166,186		$	2,511,986		$	2,612,487		$	5,088,424

	As of
	June 30			December 31
	2008			2007
Assets
Insurance company operation	$	169,159,355		$	177,278,243
Intersegment eliminations (2)		(1,449,219	)		(1,537,590	)
Total insurance company operation		167,710,136			175,740,653
Other insurance operations		17,628,590			18,035,208
Total assets	$	185,338,726		$	193,775,861

(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.

NOTE 9 - FAIR VALUE ON FIXED MATURITY INVESTMENTS

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). The hierarchy gives the highest priority to level 1 inputs and the lowest priority to level 3 inputs. In general, fair values determined by level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by level 2 inputs utilize inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The Company’s fixed maturities investments are all classified within level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Fair value measurements are not adjusted for transaction costs. The Company’s fixed maturities investments are at fair value and are reflected in the consolidated balance sheets on a trade-date basis. 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.

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

General

The Company had a net income of $780,960 for the three months ended June 30, 2008, compared to net income of $1,665,972 for the three months ended June 30, 2007, a decrease in net income of $885,012 (53%). For the six months ended June 30, 2008, the Company had a net income of $1,740,950 compared to a net income of $3,388,271 for the six months ended June 30, 2007, a decrease in net income of $1,647,321 (49%).

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.

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 87% of consolidated revenues for the three and six months ended June 30, 2008, compared to 88% of revenues for the three and six months ended June 30, 2007. 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 primarily writing Commercial Multiple Peril business in the state of California. Crusader’s A.M. Best Company rating is B++ (Good). On January 15, 2008, A.M. Best Company upgraded Crusader’s rating outlook from stable to positive.

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.

Premium written before reinsurance decreased $2,021,675 (17%) to $9,932,940 for the three months ended June 30, 2008, compared to $11,954,615 for the three months ended June 30, 2007. Premium written before reinsurance decreased $2,371,094 (11%) to $19,884,153 for the six months ended June 30, 2008, compared to $22,255,247 for the six months ended June 30, 2007. 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. The decrease in written premium before reinsurance which began in 2005 and has continued through the three and six months ended June 30, 2008, is primarily due to a loss of customers attributable to the fact that the insurance marketplace continues to be intensely competitive. There are more insurers competing for the same customers. Many of those competitors price their insurance at rates that Crusader believes are inadequate to support any profit. 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. Nonetheless, Crusader believes that it can grow its sales and profitability by continuing to focus upon three key areas of its operations: (1) product development, (2) improved service to retail brokers, and (3) appointment of captive and independent retail agents.

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Crusader’s underwriting profit (before income taxes) is as follows:

	Three Months Ended June 30							Six Months Ended June 30
					Increase							Increase
	2008		2007		(Decrease)			2008		2007		(Decrease)

Net premium earned	$	8,580,996	$	9,483,545	$	(902,549	)	$	17,505,762	$	19,192,743	$	(1,686,981	)

Less:
Losses and loss adjustment expenses		6,080,589		5,484,106		596,483			12,276,295		11,418,076		858,219
Policy acquisition costs		2,077,190		2,305,015		(227,825	)		4,158,161		4,300,595		(142,434	)
Total		8,157,779		7,789,121		368,658			16,434,456		15,718,671		715,785

Underwriting Profit (Before Income Taxes)	$	423,217	$	1,694,424	$	(1,271,207	)	$	1,071,306	$	3,474,072	$	(2,402,766	)

The reduction in the underwriting profit (before income tax) for the three and six months ended June 30, 2008, compared to the prior year periods, as shown in the above table, are primarily the result of a decrease in net premium earned and an increase in losses and loss adjustment expenses.

Losses and loss adjustment expenses were 71% of net premium earned for the three months ended June 30, 2008, compared to 58% of net premium earned for the three months ended June 30, 2007. Losses and loss adjustment expenses were 70% of net premium earned for the six months ended June 30, 2008, compared to 59% of net premium earned for the six months ended June 30, 2007. The increase in losses and loss adjustment expenses as compared to the prior year periods is due to both an increase in the current accident year losses and loss adjustment expenses incurred primarily from an unexpected increase in property claims and a decrease in favorable development of prior accident years’ losses and loss adjustment expenses primarily from higher casualty claims from accident year 2007. Accident year 2008 losses and loss adjustment expenses incurred were approximately 74% of net premium earned for the three and six months ended June 30, 2008, respectively. Accident year 2007 losses and loss adjustment expenses incurred were approximately 70% of net premium earned for the three and six months ended June 30, 2007. Favorable development of all prior accident years’ losses and loss adjustment expenses for the three and six months ended June 30, 2008, were $297,974 and $656,747, 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.

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 13% of total revenues for the three and six months ended June 30, 2008, and 12% of total revenues for the three and six months ended June 30, 2007.

Investments and Liquidity

The Company generates revenue from its investment portfolio, which consisted of approximately $145.1 million (at amortized cost) at June 30, 2008, compared to $147.3 million (at amortized cost) at December 31, 2007. Investment income decreased $204,365 (12%) and $242,166 (7%) for the three and six months ended June 30, 2008, as compared to prior year periods, respectively. The decrease in investment income is primarily a result of the decrease in the Company’s annualized weighted average investment yield to 4.1% and 4.3% in the three and six months ended June 30, 2008, respectively, from 4.6% in the three and six months ended June 30, 2007. 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.

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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, 2008, the Company had cash and investments of $145,127,633 (at amortized cost) of which $142,475,384 (98%) were investments of Crusader.

As of June 30, 2008, the Company had invested $138,169,290 (at amortized cost) or 95% of its invested assets in fixed maturity obligations. In accordance with SFAS 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 $138,169,290 (at amortized cost) include $15,000 (0.0%) of pre-refunded state and municipal tax-exempt bonds, $127,575,439 (92.3%) of U.S. treasury securities, $10,178,851 (7.5%) of industrial and miscellaneous securities, and $400,000 (0.2%) 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.

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 4). No shares were repurchased in the three and six months ended June 30, 2008.

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 $161,548, 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, 2008, to the three months and six months ended June 30, 2007, unless otherwise indicated.

The Company had a net income of $780,960 for the three months ended June 30, 2008, compared to a net income of $1,665,972 for the three months ended June 30, 2007, a decrease of $885,012 (53%). For the six months ended June 30, 2008, the Company had a net income of $1,740,950 compared to a net income of $3,388,271 for the six months ended June 30, 2007, a decrease of $1,647,321 (49%). Total revenues decreased $876,644 (7%) to $11,822,394 for the three months and $1,505,576 (6%) to $24,090,514 for the six months ended June 30, 2008, compared to total revenues of $12,699,038 for the three months and $25,596,090 for the six months ended June 30, 2007.

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. Direct written premium reported on the Company’s statutory statement decreased $2,021,675 (17%) and $2,371,094 (11%), to $9,932,940 and $19,884,153 for the three and six months ended June 30, 2008, compared to $11,954,615 and $22,255,247 for the three and six months ended June 30, 2007.

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The decrease in written premium in the three and six months ended June 30, 2008, compared to the three and six months ended June 30, 2007, was primarily the result of a loss of customers attributable to the intense competition in the property and casualty market. The insurance marketplace has become more competitive as more insurers are competing for the same customers. Many of those competitors price their insurance at rates that Crusader believes are inadequate to support any profit. Nonetheless, Crusader believes that it can grow its sales and profitability by continuing to focus upon three key areas of its operations: (1) product development, (2) improved service to retail brokers, and (3) appointment of captive and independent retail agents. During 2008, Crusader began to introduce many product changes such as to its rates, eligibility guidelines, rules and coverage forms. Improved service to retail brokers is primarily focused upon transacting business through the internet, as well as providing more options to make the brokers’ time more efficiently spent with us (i.e., as opposed to spending time with our competitors). In an effort to increase sales, the Company employs two full-time marketing representatives. Those representatives are charged with the responsibility of identifying product development opportunities, promoting the company and its products to the insurance brokerage community, and they are charged with the duty to appoint retail agents so as to introduce the Crusader brand at the consumer’s level of distribution (i.e., retail). Crusader plans to have approximately twelve retail agents appointed by the end of year 2008, and approximately twenty-four by the end of year 2009. Presently it is expected that each such retail agent should be able to reach an annual sales volume of approximately one to two million dollars of Crusader’s products within three to five years of their appointment by the Company.

Premium earned before reinsurance decreased $1,586,626 (13%) to $10,805,540 for the three months and $3,180,013 (13%) to $21,952,486 for the six months ended June 30, 2008, compared to $12,392,166 for the three months and $25,132,499 for the six months ended June 30, 2007. 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 as previously discussed.

Premium ceded decreased $684,077 (24%) to $2,224,544 for the three months and $1,493,032 (25%) to $4,446,724 for the six months ended June 30, 2008, compared to ceded premium of $2,908,621 in the three months and $5,939,756 for the six months ended June 30, 2007. The decrease in premium ceded is primarily a result of a decrease in direct premium earned, and a decrease in the rate charged by Crusader’s reinsurers. 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. As of June 30, 2008, all such ceded contracts are accounted for as risk transfer reinsurance. The 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
	2008			2007			(Decrease)			2008			2007			(Decrease)

Direct earned premium	$	10,805,540		$	12,392,166		$	(1,586,626	)	$	21,952,486		$	25,132,499		$	(3,180,013	)
Earned ceded premium:
Excluding provisionally rated ceded premium		2,230,629			2,943,123			(712,494	)		4,526,560			5,969,112			(1,442,552	)
Provisionally rated ceded premium		(6,085	)		(34,502	)		28,417			(79,836	)		(29,356	)		(50,480	)
Total earned ceded premium		2,224,544			2,908,621			(684,077	)		4,446,724			5,939,756			(1,493,032	)

Ceding commission		(668,240	)		(902,973	)		234,733			(1,357,643	)		(1,831,546	)		473,903

Total earned ceded premium net of ceding commission	$	1,556,304		$	2,005,648		$	(449,344	)	$	3,089,081		$	4,108,210		$	(1,019,129	)

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Total earned ceded premium excluding provisionally rated ceded premium was approximately 21% of direct earned premium in the three and six months ended June 30, 2008, and 24% of direct earned premium in the three and six months ended June 30, 2007. There was no significant change in the ceding commission rate.

In 2008 Crusader retained a participation in its excess of loss reinsurance treaties of 20% 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 0% in its property and casualty clash treaty. 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.

The 2008 and 2007 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 2005 excess of loss treaties do not provide for a contingent commission. Crusader’s 2004 and 2003 1st layer primary excess of loss treaties provide 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. For each accounting period as described above, 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, the Company received an advance of $1 million from its reinsurer, and in February 2008, the Company received an additional $2,419,940 to be applied against future contingent commission earned, if any. Based on the Company’s ceded losses and loss adjustment expenses (including ceded incurred but not reported losses) as of June 30, 2008, the Company recorded $2,879,607 of these payments as an advance from its reinsurer and it is included in “Accrued Expenses and Other Liabilities” in the consolidated balance sheets. Thus, the Company has recognized $540,333 of contingent commission, of which $196,195 was recognized in the three months ended June 30, 2008 and $286,778 was recognized in the six months ended June 30, 2008.

Investment income, excluding realized investment gains, decreased $204,365 (12%) to $1,496,749 for the three months ended June 30, 2008, compared to investment income of $1,701,114 for the three months ended June 30, 2007. Investment income, excluding realized investment gains, decreased $242,166 (7%) to $3,119,263 for the six months ended June 30, 2008, compared to investment income of $3,361,429 for the six months ended June 30, 2007. The decrease in investment income in the current periods as compared to the prior year periods is a result of a decrease in the Company’s annualized yield on average invested assets to 4.1% for the three months and 4.3% for the six months ended June 30, 2008, from 4.6% for the three and six months ended June 30, 2007. The decrease in the annualized yield on average invested assets is a result of lower 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
	2008			2007			2008			2007

Average Invested Assets*	$	147,096,706		$	146,915,430		$	146,222,505		$	147,105,884
Total Investment Income	$	1,496,749		$	1,701,114		$	3,119,263		$	3,361,429
Annualized Yield on Average Invested Assets		4.1	%		4.6	%		4.3	%		4.6	%

* The average is based on the beginning and ending balance of the amortized cost of the invested assets.

The par value, amortized cost, estimated market value and weighted average yield of fixed maturity investments at June 30, 2008, 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.

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Maturities by Calendar Year	Par Value		Amortized Cost		Fair Value		Weighted Average Yield

December 31, 2008	$	35,825,000	$	35,885,620	$	36,052,343		4.1	%
December 31, 2009		32,700,000		32,731,574		33,379,606		4.8	%
December 31, 2010		24,200,000		24,250,337		24,121,731		2.3	%
December 31, 2011		7,250,000		7,237,248		7,591,953		4.6	%
December 31, 2012		38,000,000		37,960,659		39,702,575		4.4	%
December 31, 2013		100,000		103,852		101,438		2.7	%
Total	$	138,075,000	$	138,169,290	$	140,949,646		4.1	%

The weighted average maturity of the Company’s fixed maturity investments was 1.9 years as of June 30, 2008, compared to 1.5 years as of June 30, 2007. Due to the current interest rate environment, management 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, 2008, the Company held fixed maturity investments with unrealized appreciation of $2,940,182 and fixed maturity investments with unrealized depreciation of $159,826. 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, 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 $159,826 as of June 30, 2008, 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, 2008, 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	$	15,499,575	$	159,826
7-12 months		-		-
Over 12 months		-		-
Total	$	15,499,575	$	159,826

As of June 30, 2008, the fixed maturity investments with a gross unrealized loss are for a continuous period of 0 to 6 months and consisted of U.S. treasury securities and investment grade fixed maturity industrial securities.

Gross commissions and fees increased $66,572 (5%) to $1,415,393 for the three months and $171,859 (6%) to $2,886,757 for the six months ended June 30, 2008, compared to commissions and fees of $1,348,821 for the three months and $2,714,898 for the six months ended June 30, 2007. The increase in gross commission and fee income is primarily due to increased commission income in the health insurance program. The increase in gross commissions and fee income for the three and six months ended June 30, 2008, compared to the three and six months ended June 30, 2007, is as follows:

	Three Months Ended June 30							Six Months Ended June 30
					Increase							Increase
	2008		2007		(Decrease)			2008		2007		(Decrease)
Policy fee income	$	564,162	$	633,094	$	(68,932	)	$	1,143,020	$	1,282,733	$	(139,713	)
Health insurance program		686,419		547,818		138,601			1,358,877		1,048,861		310,016
Membership and fee income		76,132		76,932		(800	)		153,049		154,076		(1,027	)
Other commission and fee income		6,165		6,010		155			7,162		12,946		(5,784	)
Daily automobile rental insurance program:
Commission income (excluding contingent commission)		82,515		84,967		(2,452	)		166,056		169,743		(3,687	)
Contingent commission		-		-		-			58,593		46,539		12,054
Total	$	1,415,393	$	1,348,821	$	66,572		$	2,886,757	$	2,714,898	$	171,859

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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 fees are earned ratably over the life of the related insurance policy. The unearned portion of the policy fee is recorded as a liability on the balance sheet under Accrued Expenses and Other Liabilities. Policy fee income decreased $68,932 (11%) and $139,713 (11%) for the three and six months ended June 30, 2008, respectively, compared to the three and six months ended June 30, 2007. 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, 2008, as compared to the three and six months ended June 30, 2007.

American Insurance Brokers, Inc. (AIB), a wholly owned subsidiary of the Company, markets health insurance in California through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the premiums that it writes. Commission income in this program increased $138,601 (25%) and $310,016 (30%) for the three and six months ended June 30, 2008, respectively, compared to the three and six months ended June 30, 2007. 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. Beginning April 1, 2008, these plans are being actively marketed by AIB and other agencies throughout California. All CIGNA small group insurance policyholders in California are members of AAQHC

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 insurance policies that AAQHC negotiates for the association. For these services, AAQHC receives membership and fee income from its members.

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 $2,452 (3%) and $3,687 (2%) for the three and six months ended June 30, 2008, respectively, compared to the three and six months ended June 30, 2007.

The Company‘s consolidated financial statements include estimated reserves for unpaid losses and related loss adjustment expenses of the insurance company operation. Management 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 management’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

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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 an independent 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. 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.

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% of net premium earned for the three and six months ended June 30, 2008. Policy acquisition costs were approximately 24% and 22% of net premium earned for the three and six months ended June 30, 2007, respectively.

Salaries and employee benefits decreased $64,745 (4%) to $1,398,398 for the three months and $49,214 (2%) to $2,835,437 for the six months ended June 30, 2008, compared to salary and employee benefits of $1,463,143 for the three months and $2,884,651 for the six months ended June 30, 2007.

Commissions to agents/brokers increased $81,969 (35%) to $318,161 for the three months and $199,155 (45%) to $639,652 for the six months ended June 30, 2008, compared to commission expense of $236,192 for the three months and $440,497 for the six months ended June 30, 2007. The increase is primarily the result of the increase in written premium in the health insurance program and is related to the increase in commission income from that program.

Other operating expenses increased $83,274 (12%) to $781,870 for the three months and $104,635 (7%) to $1,568,482 for the six months ended June 30, 2008, compared to $698,596 for the three months and $1,463,847 for the six months ended June 30, 2007.

Income tax provision was an expense of $385,226 (33% of pre-tax income) for the three months and $871,537 (33% of pre-tax income) for the six months ended June 30, 2008, compared to an income tax expense of $846,014 (34% of pre-tax income) in the three months and an income tax expense of $1,700,153 (33% of pre-tax income) for the six months ended June 30, 2007. This change was primarily due to a pre-tax income of $1,166,186 in the three months and $2,612,487 in the six months ended June 30, 2008, compared to pre-tax income of $2,511,986 in the three months and a pre-tax income of $5,088,424 in the six months ended June 30, 2007.

The effect of inflation on net income of the Company during the three and six months ended June 30, 2008, and the three and six months ended June 30, 2007, was not significant.

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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 2008		December 31 2007		Increase (Decrease)

Fixed maturity bonds (at amortized value)	$	137,769,290	$	139,592,208	$	(1,822,918	)
Short-term cash investments (at cost)		6,927,353		7,356,159		(428,806	)
Certificates of deposit (over 1 year, at cost)		400,000		400,000		-
Total invested assets	$	145,096,643	$	147,348,367	$	(2,251,724	)

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 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 June 30, 2008, (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 identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Securities Exchange Act of 1934 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, 2007, in response to Item 1A to Part I of Form

10-K.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

(a)	On May 22, 2008, 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.

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(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	Withheld

Erwin Cheldin	4,180,997	1,175,804
Cary L. Cheldin	4,150,937	1,205,864
Lester A. Aaron	4,147,415	1,209,386
George C. Gilpatrick	4,169,597	1,187,204
Terry L. Kinigstein	4,169,297	1,187,504
Jon P. Kocourek	5,234,260	122,541
David A. Lewis	5,229,888	126,913
Warren D. Orloff	5,233,410	123,391
Donald B. Urfrig	5,234,410	122,391

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 12, 2008 By: /s/ ERWIN CHELDIN

Erwin Cheldin

Chairman of the Board, President and Chief

Executive Officer, (Principal Executive Officer)

Date: August 12, 2008 By: /s/ LESTER A. AARON

Lester A. Aaron

Treasurer, Chief Financial Officer, (Principal

Accounting and Principal Financial Officer)

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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)