SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
[
X
] Quarterly Report
under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the
quarterly period ended
September 30, 2011
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 has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
X
No__
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer," "accelerated filer" and "smaller
reporting company" 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
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
|
Outstanding at November 8, 2011
|
Common Stock, $0 par value per share
|
5,339,992
|
PART
1 - FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
September 30
|
|
December 31
|
|
|
2011
|
|
2010
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost: September 30,
|
|
|
|
|
|
|
|
|
2011 - $101,718,787; December 31, 2010 - $123,301,280)
|
|
$
|
104,343,391
|
|
|
$
|
126,711,982
|
|
Short-term investments, at cost
|
|
|
27,141,800
|
|
|
|
6,465,649
|
|
Total Investments
|
|
|
131,485,191
|
|
|
|
133,177,631
|
|
Cash
|
|
|
71,108
|
|
|
|
45,210
|
|
Accrued investment income
|
|
|
603,654
|
|
|
|
690,718
|
|
Premiums and notes receivable, net
|
|
|
5,560,469
|
|
|
|
4,364,393
|
|
Reinsurance recoverable:
|
|
|
|
|
|
|
|
|
Paid losses and loss adjustment expenses
|
|
|
22,254
|
|
|
|
48,877
|
|
Unpaid losses and loss adjustment expenses
|
|
|
8,402,146
|
|
|
|
11,816,314
|
|
Deferred policy acquisition costs
|
|
|
4,294,382
|
|
|
|
4,300,927
|
|
Property and equipment (net of accumulated depreciation)
|
|
|
205,685
|
|
|
|
1,630,574
|
|
Deferred income taxes
|
|
|
1,078,514
|
|
|
|
1,059,557
|
|
Other assets
|
|
|
461,050
|
|
|
|
540,519
|
|
Total Assets
|
|
$
|
152,184,453
|
|
|
$
|
157,674,720
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
$
|
55,231,351
|
|
|
$
|
61,559,695
|
|
Unearned premiums
|
|
|
16,067,088
|
|
|
|
15,929,948
|
|
Advance premium and premium deposits
|
|
|
1,222,022
|
|
|
|
829,746
|
|
Income taxes payable
|
|
|
258,406
|
|
|
|
1,175
|
|
Accrued expenses and other liabilities
|
|
|
3,460,893
|
|
|
|
6,000,340
|
|
Total Liabilities
|
|
$
|
76,239,760
|
|
|
$
|
84,320,904
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock, no par – authorized 10,000,000 shares; issued
|
|
|
|
|
|
|
|
|
and outstanding shares 5,334,992 at September 30, 2011,
|
|
|
|
|
|
|
|
|
and 5,333,081 at December 31, 2010
|
|
$
|
3,579,395
|
|
|
$
|
3,554,973
|
|
Accumulated other comprehensive income
|
|
|
1,732,239
|
|
|
|
2,251,063
|
|
Retained earnings
|
|
|
70,633,059
|
|
|
|
67,547,780
|
|
Total Stockholders’ Equity
|
|
$
|
75,944,693
|
|
|
$
|
73,353,816
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
152,184,453
|
|
|
$
|
157,674,720
|
|
See notes to unaudited consolidated financial
statements.
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Company Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium earned
|
|
$
|
8,021,982
|
|
|
$
|
8,784,025
|
|
|
$
|
24,021,550
|
|
|
$
|
27,135,608
|
|
Premium ceded
|
|
|
1,321,422
|
|
|
|
1,836,956
|
|
|
|
3,974,368
|
|
|
|
5,657,678
|
|
Net premium earned
|
|
|
6,700,560
|
|
|
|
6,947,069
|
|
|
|
20,047,182
|
|
|
|
21,477,930
|
|
Investment income
|
|
|
733,384
|
|
|
|
839,403
|
|
|
|
2,272,247
|
|
|
|
2,685,061
|
|
Other income
|
|
|
746,322
|
|
|
|
150,004
|
|
|
|
1,085,410
|
|
|
|
505,289
|
|
Total Insurance Company Revenues
|
|
|
8,180,266
|
|
|
|
7,936,476
|
|
|
|
23,404,839
|
|
|
|
24,668,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Revenues from Insurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross commissions and fees
|
|
|
875,959
|
|
|
|
1,078,231
|
|
|
|
2,791,244
|
|
|
|
3,456,484
|
|
Investment income
|
|
|
351
|
|
|
|
752
|
|
|
|
1,786
|
|
|
|
2,891
|
|
Finance charges and fees earned
|
|
|
15,846
|
|
|
|
69,598
|
|
|
|
54,627
|
|
|
|
236,833
|
|
Other income
|
|
|
5,397
|
|
|
|
3,757
|
|
|
|
12,167
|
|
|
|
9,174
|
|
Total Revenues
|
|
|
9,077,819
|
|
|
|
9,088,814
|
|
|
|
26,264,663
|
|
|
|
28,373,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
3,357,803
|
|
|
|
4,501,433
|
|
|
|
10,616,401
|
|
|
|
14,384,197
|
|
Policy acquisition costs
|
|
|
1,778,105
|
|
|
|
1,805,586
|
|
|
|
5,322,970
|
|
|
|
5,535,572
|
|
Salaries and employee benefits
|
|
|
1,147,771
|
|
|
|
1,111,503
|
|
|
|
3,270,291
|
|
|
|
3,280,845
|
|
Commissions to agents/brokers
|
|
|
55,718
|
|
|
|
153,932
|
|
|
|
166,986
|
|
|
|
516,673
|
|
Other operating expenses
|
|
|
792,068
|
|
|
|
829,039
|
|
|
|
2,127,801
|
|
|
|
2,569,952
|
|
Total Expenses
|
|
|
7,131,465
|
|
|
|
8,401,493
|
|
|
|
21,504,449
|
|
|
|
26,287,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Taxes
|
|
|
1,946,354
|
|
|
|
687,321
|
|
|
|
4,760,214
|
|
|
|
2,086,423
|
|
Income Tax Expense
|
|
|
671,702
|
|
|
|
63,359
|
|
|
|
1,664,528
|
|
|
|
515,045
|
|
Net Income
|
|
$
|
1,274,652
|
|
|
$
|
623,962
|
|
|
$
|
3,095,686
|
|
|
$
|
1,571,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
$
|
0.58
|
|
|
$
|
0.30
|
|
Weighted Average Shares
|
|
|
5,334,901
|
|
|
|
5,316,751
|
|
|
|
5,334,411
|
|
|
|
5,310,501
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
$
|
0.58
|
|
|
$
|
0.29
|
|
Weighted Average Shares
|
|
|
5,357,869
|
|
|
|
5,352,571
|
|
|
|
5,358,509
|
|
|
|
5,350,974
|
|
See notes to unaudited consolidated financial
statements.
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,274,652
|
|
|
$
|
623,962
|
|
|
$
|
3,095,686
|
|
|
$
|
1,571,378
|
|
Other changes in comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities classified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as available-for-sale arising during the period
|
|
|
(580,353
|
)
|
|
|
(137,827
|
)
|
|
|
(518,824
|
)
|
|
|
(24,852
|
)
|
Comprehensive Income
|
|
$
|
694,299
|
|
|
$
|
486,135
|
|
|
$
|
2,576,862
|
|
|
$
|
1,546,526
|
|
See notes to unaudited consolidated financial
statements.
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For the Nine Months Ended
|
|
|
September 30
|
|
|
2011
|
|
2010
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,095,686
|
|
|
$
|
1,571,378
|
|
Adjustments to reconcile net income to net cash from
operations
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
42,854
|
|
|
|
96,156
|
|
Bond amortization, net
|
|
|
121,496
|
|
|
|
75,046
|
|
Non-cash stock based compensation
|
|
|
23,103
|
|
|
|
—
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Premium, notes and investment income receivable
|
|
|
(1,109,012
|
)
|
|
|
268,322
|
|
Reinsurance recoverable
|
|
|
3,440,791
|
|
|
|
3,022,832
|
|
Deferred policy acquisition costs
|
|
|
6,545
|
|
|
|
425,492
|
|
Other assets
|
|
|
80,801
|
|
|
|
14,936
|
|
Unpaid losses and loss adjustment expenses
|
|
|
(6,328,344
|
)
|
|
|
(7,435,663
|
)
|
Unearned premiums
|
|
|
137,140
|
|
|
|
(2,006,111
|
)
|
Advance premium and premium deposits
|
|
|
392,276
|
|
|
|
114,126
|
|
Accrued expenses and other liabilities
|
|
|
(1,107,530
|
)
|
|
|
(271,793
|
)
|
Income taxes current/deferred
|
|
|
504,215
|
|
|
|
(70,143
|
)
|
Net Cash (Used) by Operating Activities
|
|
|
(699,979
|
)
|
|
|
(4,195,422
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of fixed maturity investments
|
|
|
(6,045,000
|
)
|
|
|
(24,585,750
|
)
|
Proceeds from maturity of fixed maturity investments
|
|
|
27,505,998
|
|
|
|
33,798,999
|
|
Net increase in short-term investments
|
|
|
(20,676,151
|
)
|
|
|
(4,793,000
|
)
|
Additions to property and equipment
|
|
|
(49,882
|
)
|
|
|
(76,002
|
)
|
Net Cash Provided by Investing Activities
|
|
|
734,965
|
|
|
|
4,344,247
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
1,871
|
|
|
|
33,744
|
|
Repurchase of common stock
|
|
|
(10,959
|
)
|
|
|
—
|
|
Net Cash (Used) Provided by Financing Activities
|
|
|
(9,088
|
)
|
|
|
33,744
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
25,898
|
|
|
|
182,569
|
|
Cash at beginning of period
|
|
|
45,210
|
|
|
|
118,512
|
|
Cash at End of Period
|
|
$
|
71,108
|
|
|
$
|
301,081
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
—
|
|
|
|
—
|
|
Income taxes
|
|
$
|
1,158,982
|
|
|
$
|
583,931
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-Cash Investing Activities
|
|
|
|
|
|
|
|
|
(Write-offs) acquisition of fixed assets
|
|
$
|
(1,431,917
|
)
|
|
$
|
1,117,537
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial
statements.
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
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 subsidiary Crusader Insurance Company (Crusader); 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 consolidated financial statements
include the accounts of Unico American Corporation and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine
months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December
31, 2011. Quarterly financial statements should be read in conjunction with the consolidated financial statements and related notes
in the Company’s 2010 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. The most significant assumptions in the preparation of these consolidated
financial statements relate to losses and loss adjustment expenses. While every effort is made to ensure the integrity of such
estimates, actual results may differ.
Fair Value of Financial Instruments
The Company employs 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). Financial assets and financial liabilities recorded on the consolidated balance sheets at
fair value are categorized based on the reliability of inputs to the valuation techniques. (See Note 7.)
The Company has used the following methods and
assumptions in estimating its fair value disclosures:
o
Investment securities, excluding long-term certificates of deposit
– Fair values are obtained from a national quotation service.
o
Long-term certificates of deposit – The carrying amounts reported
at cost in the balance sheet for these instruments approximate their fair values.
-
Cash and short-term investments – The
carrying amounts reported at cost in the balance sheet approximate their fair values given the short-term nature of these instruments.
-
Premiums and notes receivable – The carrying
amounts reported at cost in the balance sheet approximate their fair values given the short-term nature of these instruments.
NOTE 2 – REPURCHASE OF COMMON
STOCK – EFFECTS ON STOCKHOLDERS’ EQUITY
On December 19, 2008, the Board of Directors
authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s
common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. During the three
months ended September 30, 2011, no shares of the Company’s common stock were repurchased. During the nine months ended September
30, 2011, the Company repurchased 1,124 shares of the Company’s common stock in unsolicited private transactions at a cost
of $10,959, of which $552 was allocated to capital and $10,407 was allocated to retained earnings. As of September 30, 2011, the
Company had remaining authority under the 2008 program to repurchase up to an aggregate of 246,232 shares of its common stock.
The 2008 program is the only program under which there is authority to repurchase shares of the Company’s common stock. The
Company has retired all stock repurchased.
NOTE 3 – EARNINGS PER SHARE
The following table represents the reconciliation
of the numerators and denominators of the Company's basic earnings per share and diluted earnings per share computations reported
on the Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
Basic Earnings Per Share
|
|
|
|
|
|
|
|
|
Net income numerator
|
|
$
|
1,274,652
|
|
|
$
|
623,962
|
|
|
$
|
3,095,686
|
|
|
$
|
1,571,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding denominator
|
|
|
5,334,901
|
|
|
|
5,316,751
|
|
|
|
5,334,411
|
|
|
|
5,310,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
$
|
0.58
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income numerator
|
|
$
|
1,274,652
|
|
|
$
|
623,962
|
|
|
$
|
3,095,686
|
|
|
$
|
1,571,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
5,334,901
|
|
|
|
5,316,751
|
|
|
|
5,334,411
|
|
|
|
5,310,501
|
|
Effect of dilutive securities
|
|
|
22,968
|
|
|
|
35,820
|
|
|
|
24,098
|
|
|
|
40,473
|
|
Diluted shares outstanding denominator
|
|
|
5,357,869
|
|
|
|
5,352,571
|
|
|
|
5,358,509
|
|
|
|
5,350,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
$
|
0.58
|
|
|
$
|
0.29
|
|
NOTE 4 – RECENTLY
ISSUED ACCOUNTING STANDARDS
Accounting Guidance Adopted
In January 2010, the Financial Accounting Standards
Board (FASB) issued a new standard related to fair value measurements and disclosures, that amends the earlier FASB standard to
provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which became effective for the interim
reporting period ended March 31, 2011. The Company adopted the new standard, and the adoption of the new standard did not have
a material impact on the Company’s consolidated financial statements.
Accounting Guidance Not Yet Adopted
In October 2010, the FASB issued ASU 2010-26,
“Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (ASC 944). The new standard modifies
the types of policy acquisition costs that can be capitalized and are eligible for deferral. Specifically, the new guidance limits
deferrable costs to those that are incremental direct costs of contract acquisition and certain costs related to acquisition activities
performed by the insurer, such as underwriting, policy issuance and processing, inspection costs and broker commissions. The ASU
defines incremental direct costs as those costs that result directly from and were essential to the contract acquisition and would
not have been incurred absent the acquisition. Accordingly, under the new guidance, deferrable acquisition costs are limited to
costs related to successful contract acquisitions. Acquisition costs that are not eligible for deferral are to be charged to expense
in the period incurred. The new guidance is effective for interim periods and annual fiscal years beginning after December 15,
2011, and may be applied prospectively or retrospectively. The Company is currently in the process of evaluating the impact
of adopting the new standard; however, it does not anticipate the impact to be material to the Company’s consolidated financial
statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs” (ASC 820). The new
standard does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already
is required and permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing
guidance or wording changes to align with IFRS 13. The new guidance is effective on a prospective basis for interim and annual
periods beginning after December 15, 2011, with early adoption not permitted. In the period of adoption, a reporting
entity will be required to disclose a change, if any, in valuation technique and related inputs that result from applying the new
standard and to quantify the total effect, if practicable. The adoption of the new standard will not have a material impact on
the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, “Presentation
of Comprehensive Income” (ASC 220). The new standard requires entities to report components of comprehensive income
in either a continuous statement of comprehensive income or two separate but consecutive statements. Under the continuous
statement approach, the statement would include the components and total of net income, the components and total of other comprehensive
income and the total of comprehensive income. Under the two statement approach, the first statement would include the
components and total of net income and the second statement would include the components and total of other comprehensive income
and the total of comprehensive income. The ASU does not change the items that must be reported in other comprehensive
income. The new guidance is effective retrospectively for interim and annual periods beginning after December 15, 2011,
with early adoption permitted. The adoption of the new standard will not have a material impact on the Company’s consolidated
financial statements.
NOTE 5 – ACCOUNTING FOR INCOME
TAXES
The Company and its wholly owned
subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader
Insurance Company and American Acceptance Corporation are allocated taxes or tax credits in the case of losses, at current
corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and
various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns
filed starting at taxable year 2007 and California state income tax authorities for tax returns filed starting at taxable
year 2006. On April 28, 2011, the Company’s U.S. federal income tax return for the 2009 tax year was selected to
undergo an examination by the Internal Revenue Service. On October 7, 2011, the Company received a letter from the Internal
Revenue Service stating that its review and examination of the Company’s 2009 federal income tax return had been
completed and that there were no changes to the reported tax.
ASC 740 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. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Since adoption of ASC 740 and as of September 30, 2011, the Company had no unrecognized tax benefits
and no additional liabilities or reduction in deferred tax asset. In addition, the Company had not incurred 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.
NOTE 6 – SEGMENT REPORTING
ASC 280 establishes standards for the way information
about operating segments are reported in financial statements. The Company has identified its insurance company operation as its
primary reporting segment. Revenues from this segment comprised 90% and 89% of consolidated revenues for the three and nine months
ended September 30, 2011, respectively, compared to 87% of consolidated revenues for the three and nine months ended September
30, 2010. The Company’s remaining operations constitute a variety of specialty insurance services, each with unique characteristics
and individually insignificant to consolidated revenues.
Revenues and income before income taxes
are as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30
|
|
September 30
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance company operation
|
|
$
|
8,180,266
|
|
|
$
|
7,936,476
|
|
|
$
|
23,404,839
|
|
|
$
|
24,668,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other insurance operations
|
|
|
3,010,115
|
|
|
|
3,378,259
|
|
|
|
9,484,569
|
|
|
|
10,596,238
|
|
Intersegment eliminations (1)
|
|
|
(2,112,562
|
)
|
|
|
(2,225,921
|
)
|
|
|
(6,624,745
|
)
|
|
|
(6,890,856
|
)
|
Total other insurance operations
|
|
|
897,553
|
|
|
|
1,152,338
|
|
|
|
2,859,824
|
|
|
|
3,705,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
9,077,819
|
|
|
$
|
9,088,814
|
|
|
$
|
26,264,663
|
|
|
$
|
28,373,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance company operation
|
|
$
|
2,846,242
|
|
|
$
|
1,516,934
|
|
|
$
|
6,534,840
|
|
|
$
|
4,311,570
|
|
Other insurance operations
|
|
|
(899,888
|
)
|
|
|
(829,613
|
)
|
|
|
(1,774,626
|
)
|
|
|
(2,225,147
|
)
|
Total income before income taxes
|
|
$
|
1,946,354
|
|
|
$
|
687,321
|
|
|
$
|
4,760,214
|
|
|
$
|
2,086,423
|
|
Assets by segment are as follows:
|
|
As of
|
|
|
September 30
|
|
December 31
|
|
|
2011
|
|
2010
|
Assets
|
|
|
|
|
|
|
|
|
Insurance company operation
|
|
$
|
139,506,977
|
|
|
$
|
140,555,882
|
|
Intersegment eliminations (2)
|
|
|
(2,313,009
|
)
|
|
|
(600,113
|
)
|
Total insurance company operation
|
|
|
137,193,968
|
|
|
|
139,955,769
|
|
Other insurance operations
|
|
|
14,990,485
|
|
|
|
17,718,951
|
|
Total assets
|
|
$
|
152,184,453
|
|
|
$
|
157,674,720
|
|
(1)
Intersegment revenue eliminations reflect commission paid by Crusader
to Unifax Insurance Systems, Inc., (Unifax) a wholly owned subsidiary of Unico.
(2)
Intersegment asset eliminations reflect the elimination of Crusader
receivables and Unifax payables.
NOTE 7 – FAIR VALUE
OF FINANCIAL INSTRUMENTS
In determining
the fair value of its financial instruments, the Company employs 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).
Financial assets and financial liabilities recorded on the consolidated balance sheets at fair value are categorized based on the
reliability of inputs to the valuation techniques as follows:
Level 1 – Financial assets and financial
liabilities whose values are based on unadjusted quoted prices in active markets for identical assets.
Level 2 – Financial assets and financial
liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical
or similar assets or liabilities in non-active markets; or valuation models whose inputs are observable, directly or indirectly,
for substantially the full term of the asset or liability.
Level 3 – Financial assets and financial
liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant
to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants
would use in valuing the financial assets and financial liabilities.
The hierarchy gives the highest priority to
Level 1 inputs and the lowest priority to Level 3 inputs. 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 carrying values and estimated fair
values of the Company’s consolidated financial instruments as of September 30, 2011, and December 31, 2010, were as follows:
|
|
September 30, 2011
|
|
December 31, 2010
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Investments*
|
|
$
|
104,343,391
|
|
|
$
|
104,343,391
|
|
|
$
|
126,711,982
|
|
|
$
|
126,711,982
|
|
* This table excludes
short-term investments which are carried at amortized cost in the consolidated balance sheets and approximate their fair values
given the short-term nature of these instruments.
The estimated carrying values of the Company’s
consolidated financial instruments as of September 30, 2011, and December 31, 2010, allocated among the three levels mentioned
above were as follows:
Fixed Maturities
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
86,339,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
86,339,391
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
18,004,000
|
|
|
|
—
|
|
|
|
18,004,000
|
|
Total fixed maturities
|
|
$
|
86,339,391
|
|
|
$
|
18,004,000
|
|
|
$
|
—
|
|
|
$
|
104,343,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
99,246,984
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
99,246,984
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
27,464,998
|
|
|
|
—
|
|
|
|
27,464,998
|
|
Total fixed maturities
|
|
$
|
99,246,984
|
|
|
$
|
27,464,998
|
|
|
$
|
—
|
|
|
$
|
126,711,982
|
|
The Company’s fixed maturity investments,
excluding long-term certificates of deposit, are all classified within Level 1 of the fair value hierarchy because they are valued
using unadjusted quoted market prices, broker or dealer quotations, or alternative pricing sources in active markets for identical
assets with reasonable levels of price transparency. Long-term certificates of deposit are classified within Level 2. Fair value
measurements are not adjusted for transaction costs.
The Company’s fair value measurements
are based on a combination of the market approach and the income approach. The market approach utilizes market transaction data
for the same or similar instruments. The income approach is based on a discounted cash flow methodology, where expected cash flows
are discounted to present value.
The Company did not have any transfers between
Levels 1, 2 and 3 of the fair value hierarchy during the three and nine months ended September 30, 2011 and 2010.
NOTE 8 – INVESTMENTS
The Company manages its own investment
portfolio. A summary of net investment and related income is as follows:
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
Fixed maturities
|
|
$
|
732,323
|
|
|
$
|
834,910
|
|
|
$
|
2,267,560
|
|
|
$
|
2,667,268
|
|
Short-term investments
|
|
|
1,412
|
|
|
|
5,245
|
|
|
|
6,473
|
|
|
|
20,684
|
|
Total investment income
|
|
$
|
733,735
|
|
|
$
|
840,155
|
|
|
$
|
2,274,033
|
|
|
$
|
2,687,952
|
|
The amortized cost and estimated fair
values of investments in fixed maturities by category are as follows:
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
Fixed Maturities
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
Available for Sale
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
18,004,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,004,000
|
|
U.S. treasury securities
|
|
|
83,714,787
|
|
|
|
2,624,604
|
|
|
|
—
|
|
|
|
86,339,391
|
|
Total fixed maturities
|
|
$
|
101,718,787
|
|
|
$
|
2,624,604
|
|
|
$
|
—
|
|
|
$
|
104,343,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
27,464,998
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27,464,998
|
|
U.S. treasury securities
|
|
|
95,836,282
|
|
|
|
3,410,702
|
|
|
|
—
|
|
|
|
99,246,984
|
|
Total fixed maturities
|
|
$
|
123,301,280
|
|
|
$
|
3,410,702
|
|
|
$
|
—
|
|
|
$
|
126,711,982
|
|
A summary of the unrealized appreciation
(depreciation) on investments carried at fair value and the applicable deferred federal income taxes are shown below:
|
|
September 30
|
|
December 31
|
|
|
2011
|
|
2010
|
Gross unrealized appreciation of fixed maturities
|
|
$
|
2,624,604
|
|
|
$
|
3,410,702
|
|
Gross unrealized (depreciation) of fixed maturities
|
|
|
—
|
|
|
|
—
|
|
Net unrealized appreciation on investments
|
|
|
2,624,604
|
|
|
|
3,410,702
|
|
Deferred federal tax expense
|
|
|
892,365
|
|
|
|
1,159,639
|
|
Net unrealized appreciation, net of deferred income taxes
|
|
$
|
1,732,239
|
|
|
$
|
2,251,063
|
|
The Company monitors its investments closely.
If an unrealized loss is determined to be other-than-temporary, the impairment representing a credit loss is written off as a realized
loss through the Consolidated Statements of Operations, and the impairment related to non-credit factors is recorded through the
Consolidated Statements of Comprehensive Income. 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 does
not have the intent to sell its fixed maturity investments, and it is not likely that the Company would be required to sell any
of its fixed maturity investments prior to recovery of its amortized costs.
The Company did not sell any fixed maturity
investments in the three and nine months ended September 30, 2011 and 2010.
Short-term investments consist of the
following:
|
|
September 30, 2011
|
|
December 31, 2010
|
U.S. government money market fund
|
|
$
|
56,369
|
|
|
$
|
121,751
|
|
Short-term U.S. treasury bills
|
|
|
24,999,972
|
|
|
|
4,398,003
|
|
Bank money market accounts
|
|
|
2,083,597
|
|
|
|
1,494,033
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
450,000
|
|
Bank savings accounts
|
|
|
1,862
|
|
|
|
1,862
|
|
Total short-term investments
|
|
$
|
27,141,800
|
|
|
$
|
6,465,649
|
|
NOTE 9 – OTHER INCOME
Included in Other Income for the three and nine
months ended September 30, 2011, is $626,073 relating to the final settlement of the Company’s provisional rated reinsurance
treaties. The Company had reinsurance treaties covering 1985 through 1997 with National Reinsurance Corporation (acquired by General
Reinsurance Corporation in 1996), and was charged a provisional ceded premium rate on losses and loss adjustment expenses incurred
up to $500,000 per risk from policies covered under those treaties. The provisional ceded premium rate was subject to adjustment
based on the amount of losses and loss adjustment expenses ceded to those treaties. The provisional ceded premium rate was also
subject to a minimum and a maximum amount. Those provisionally rated treaties were cancelled on a runoff basis and replaced by
a flat-rated treaty on January 1, 1998. On August 31, 2011, the Company received a notice from General Reinsurance Corporation
that all ceded claims had been closed and that there were no outstanding case or IBNR reserves on any claims subject to the provisional
rated treaties. During the quarter ended September 30, 2011, General Reinsurance Corporation settled its provisional liability
with the Company and the Company closed its estimated provisional liability reserves to General Reinsurance Corporation resulting
in income recognition of $626,073.
NOTE 10 – CONTINGENCIES
One of the Company’s agents that was appointed
in 2008 to help the Company get its Trucking Program started failed to pay the net premium and policy fees due Unifax, the exclusive
general agent for Crusader. The agent was initially late in paying its February 2009 production that was due to Unifax on April
15, 2009. In May 2009, as a result of the agent’s failure to timely pay its balance due to Unifax, the Company terminated
its agency agreement and assumed ownership and control of that agent’s policy expirations written with the Company. The agent
has not paid any subsequent premium to Unifax. The Company subsequently commenced legal proceedings against the agent corporation,
its principals (who personally guaranteed the agent’s obligations), and another individual for the recovery of the balance
due and any related recovery costs incurred. All related recovery costs have been expensed as incurred. The agent’s balance
due to Unifax was $1,495,226, as of September 30, 2011. No interest has been accrued on this balance. The bad debt reserve for
this agent is $1,101,835, as of September 30, 2011. The Company’s bad debt reserve is subject to change as more information
becomes available.
In June 2010, the Company completed its search
for a new policy administration software system to replace its existing Legacy system, and the Company signed related contracts
on July 8, 2010. The Company had discussions and negotiations with the vendor over concerns about the vendor’s delay
in the implementation of the system and the system’s functionality. As a result of the vendor’s inability to resolve
the issues related to the software’s operation and functionality, the Company unilaterally cancelled the contract and abandoned
the implementation of the policy administration software with the related vendor. The Company expensed all capitalized work-in-progress
costs paid to date of $80,038 and has cancelled the remaining unpaid capitalized balance of the accounts payable due the vendor.
The Company is currently reviewing its options regarding a renewed search for a new policy administration software system.
NOTE 11– INCENTIVE STOCK
PLANS AND STOCK BASED COMPENSATION
The
Company’s 1999 Omnibus Stock Plan that covered 500,000 shares of the Company’s common stock (subject to adjustment
in the case of stock splits, reverse stock splits, stock dividends, etc.) was approved by shareholders on June 4, 1999. This plan
terminated in accordance with its terms in March 2009. As of September 30, 2011, options to purchase up to 32,396 shares of common
stock were outstanding.
The
Unico American Corporation 2011 Incentive Stock Plan covers 200,000 shares of the Company’s common stock (subject to adjustment
in the case of stock splits, reverse stock splits, stock dividends, etc.) and was
approved by shareholders on May 26, 2011.
During the three and nine months ended September 30, 2011, options to purchase 91,240 shares of common stock were granted under
the 2011 plan to one non-executive employee.
As
of September 30, 2011, options to purchase an aggregate of 123,636 shares of common stock were outstanding under the 1999 and 2011
Plans, of which 41,520 were vested and exercisable.
The
exercise price, term and other conditions applicable to each stock option granted under the 2011 Plan are determined by the Company’s
compensation committee of the Board of Directors. The exercise price of the stock options is set on the grant date and may not
be less than the fair market value per share of the Company’s stock on that date (at market close). Options granted under
the 2011 Plan are vested 10% as of the grant date and 10% annually on the anniversary date thereafter and expire ten years after
the date of the grant.
The
Company recognized stock-based compensation expense in the amount of $23,103 and $0 for all awards issued under the Company’s
2011 Stock Option plan in the salaries and employee benefits line item in the consolidated statements of operations in the three
and nine months ended September 30, 2011 and 2010, respectively. No options were granted during the three and nine months ended
September 30, 2010.
The
fair value of each option award is estimated on the date of the grant using the Black-Scholes option-pricing model using a number
of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual
and projected employee stock option exercise behaviors, a risk-free interest rate and expected dividends.
Expected
dividend yield is based on the historical dividend behavior as well as the expected dividend behavior of the Company. Expected
volatility is based on the historical volatility of the Company’s stock. The risk-free rate for periods within the contractual
life of the option is based on the U.S. treasury yield curve for a ten-year treasury in effect at the time of grant. The expected
term represents an estimate of time the options are expected to remain outstanding. In accordance with ASC Topic 718, Compensation
– Stock Compensation, the Company estimates forfeitures at the time of the grant and revises those estimates in subsequent
periods if the actual forfeitures differ from those estimates. The average assumptions used to value each option award in the three
and nine months ended September 30, 2011 are as follows.
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
2011
|
|
2011
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
3.12
|
%
|
|
|
3.12
|
%
|
Expected volatility
|
|
|
28.74
|
%
|
|
|
28.74
|
%
|
Risk-free interest rate
|
|
|
2.02
|
%
|
|
|
2.02
|
%
|
Expected term (years)
|
|
|
10
|
|
|
|
10
|
|
Expected forfeiture
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The following table summarizes stock option activity for the
nine months ended September 30, 2011:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining Contractual Terms
|
|
Average
Intrinsic
Value
|
Outstanding at December 31, 2010
|
|
|
36,773
|
|
|
$
|
3.11
|
|
|
|
1.96
|
|
|
$
|
221,741
|
|
Granted
|
|
|
94,240
|
|
|
$
|
10.96
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
4,377
|
|
|
$
|
3.11
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2011
|
|
|
123,636
|
|
|
$
|
8.90
|
|
|
|
8.98
|
|
|
$
|
231,631
|
|
Exercisable at September 30, 2011
|
|
|
41,520
|
|
|
$
|
4.84
|
|
|
|
8.98
|
|
|
$
|
231,631
|
|
The
weighted average fair value per option granted during the three and nine months ended September 30, 2011, was $2.53. The total
intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date
of exercise) exercised during the nine months ended September 30, 2011 and 2010 was $29,461 and $69,130, respectively. During the
nine months ended September 30, 2011 and 2010, the amount of cash received from the exercise of stock options was $1,871 and $33,744,
respectively.
The
Company granted no options to non-employees during the three and nine months ended September 30, 2011 and 2010.
As
of September 30, 2011, there was $207,929 of total unrecognized compensation cost, adjusted for estimated forfeitures, related
to unvested stock-based payments which are expected to be recognized over a weighted average remaining period of 8.92 years.
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 subsidiary Crusader Insurance Company (Crusader); provides
property, casualty, and health insurance through its agency subsidiaries; and provides insurance premium financing and membership
association services through its other subsidiaries.
Total revenue for the three months ended September
30, 2011, was $9,077,819 compared to $9,088,814 for the three months ended September 30, 2010, a decrease of $10,995 (less than
1%). Total revenue for the nine months ended September 30, 2011, was $26,264,663 compared to $28,373,662 for the nine months ended
September 30, 2010, a decrease of $2,108,999 (7%). The Company had net income of $1,274,652 for the three months ended September
30, 2011, compared to $623,962 for the three months ended September 30, 2010, an increase of $650,690 (104%). For the nine months
ended September 30, 2011, the Company had net income of $3,095,686, compared to $1,571,378 for the nine months ended September
30, 2010, an increase of $1,524,308 (97%). Revenues for the three and nine months ended September 30, 2011 included other income
of $626,073 from the final settlement of provisional rated reinsurance treaties covering the years 1985 through 1997.
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 consolidated 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 company operation. The insurance company operation generated approximately
90% and 89% of
consolidated revenues for the three and nine months
ended September 30, 2011, respectively, compared to 87% of
consolidated
revenues for the three and nine months ended September 30, 2010. 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. As of September 30, 2011, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California,
Nevada, Oregon, and Washington. Since 2004, all of Crusader’s business has been written in the state of California.
A.M. Best Company assigned Crusader a financial
strength rating of A- (Excellent) and a rating outlook of “stable.” In addition, Crusader was assigned an Issuer Credit
Rating of a- (Excellent). These ratings were reaffirmed by A.M. Best Company in December of 2010.
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. Premium written
is earned on a pro-rata basis over the term of the policies.
Premium written before reinsurance decreased
$410,592 (5%) to $7,705,092 for the three months ended September 30, 2011, compared to $8,115,684 for the three months ended September
30, 2010. Premium written before reinsurance decreased $970,808 (4%) to $24,158,690 for the nine months ended September 30, 2011,
compared to $25,129,498 for the nine months ended September 30, 2010.
Crusader’s underwriting profit (before
income taxes) is as follows:
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
2011
|
|
2010
|
|
Increase (Decrease)
|
|
2011
|
|
2010
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium earned
|
|
$
|
6,700,560
|
|
|
$
|
6,947,069
|
|
|
$
|
(246,509
|
)
|
|
$
|
20,047,182
|
|
|
$
|
21,477,930
|
|
|
$
|
(1,430,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
3,357,803
|
|
|
|
4,501,433
|
|
|
|
(1,143,630
|
)
|
|
|
10,616,401
|
|
|
|
14,384,197
|
|
|
|
(3,767,796
|
)
|
Policy acquisition costs
|
|
|
1,778,105
|
|
|
|
1,805,586
|
|
|
|
(27,481
|
)
|
|
|
5,322,970
|
|
|
|
5,535,572
|
|
|
|
(212,602
|
)
|
Total
|
|
|
5,135,908
|
|
|
|
6,307,019
|
|
|
|
(1,171,111
|
)
|
|
|
15,939,371
|
|
|
|
19,919,769
|
|
|
|
(3,980,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Profit (Before Income Taxes)
|
|
$
|
1,564,652
|
|
|
$
|
640,050
|
|
|
$
|
924,602
|
|
|
$
|
4,107,811
|
|
|
$
|
1,558,161
|
|
|
$
|
2,549,650
|
|
The increase in underwriting profit (before
income tax) for the three and nine months ended September 30, 2011, compared to the prior year period, as shown in the above table,
is primarily the result of a decrease in losses and loss adjustment expenses and policy acquisition costs, offset in part by a
decrease in net earned premium. Losses and loss adjustment expenses were 50% and 53% of net premium earned for the three and nine
months ended September 30, 2011, respectively, compared to 65% and 67% of net premium earned for the three and nine months ended
September 30, 2010, respectively.
The following table provides an analysis
of the losses and loss adjustment expenses as follows:
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
2011
|
|
2010
|
|
Increase (Decrease)
|
|
2011
|
|
2010
|
|
Increase (Decrease)
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
$
|
5,040,499
|
|
|
$
|
4,741,432
|
|
|
$
|
299,067
|
|
|
$
|
14,398,512
|
|
|
$
|
18,523,660
|
|
|
$
|
(4,125,148
|
)
|
Less: favorable development of all prior accident years
|
|
|
1,682,696
|
|
|
|
239,999
|
|
|
|
1,442,697
|
|
|
|
3,782,111
|
|
|
|
4,139,463
|
|
|
|
(357,352
|
)
|
Total
|
|
$
|
3,357,803
|
|
|
$
|
4,501,433
|
|
|
$
|
(1,143,630
|
)
|
|
$
|
10,616,401
|
|
|
$
|
14,384,197
|
|
|
$
|
(3,767,796
|
)
|
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 10% and 11% of total revenues in the three and nine months ended September 30, 2011,
respectively, compared to 13% of total revenues in the three and nine months ended September 30, 2010.
Investments and Liquidity
The Company generates revenue from its investment
portfolio, which consisted of approximately $128,860,587 (at amortized cost) at September 30, 2011, compared to $129,766,929 (at
amortized cost) at December 31, 2010. Investment income decreased $106,420 (13%) and $413,919 (15%) for the three and nine months
ended September 30, 2011, respectively, as compared to the prior year periods. The decrease in investment income is primarily a
result of a decrease in invested assets and a decrease in the Company’s annualized weighted average investment yield on its
fixed maturity obligations to 2.3% for the three and nine months ended September 30, 2011, compared to 2.5% and 2.6% for the three
and nine months ended September 30, 2010, respectively. 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
Crusader generates a significant amount of
cash as a result of its holdings of unearned premium reserves, reserves for loss payments, and its capital and surplus. Crusader's
loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually
monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its
investments. As of September 30, 2011, the
Company had cash and investments of $128,931,695
(at amortized cost) of which $127,144,782 (99%) were cash and investments of Crusader.
As of September 30, 2011, the Company had
invested
$101,718,787 (at amortized cost) or 79%
of its invested assets in fixed maturity obligations. In accordance with ASC 320,
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 $101,718,787 (at amortized cost) include $83,714,787 (82%) of U.S. treasury securities
and $18,004,000 (18%) of long-term certificates of deposit.
The remaining balance of the Company’s
investments is in short-term investments that include bank money market accounts, U.S. treasury bills, 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. This dollar limitation excludes bond premiums paid in excess
of par value and U.S. government or U.S. government guaranteed issues. When the Company invests in fixed maturity municipal securities,
preference is given to issues that are 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, readily marketable, and could be liquidated
without any materially adverse financial impact.
On December 19, 2008, the Board of Directors
authorized a stock repurchase program to acquire from time to time up to an aggregate of 500,000 shares of the Company’s
common stock. This program has no expiration date and may be terminated by the Board of Directors at any time. During the nine
months ended September 30, 2011, the Company repurchased 1,124 shares of the Company’s common stock in unsolicited private
transactions at a cost of $10,959, of which $552 was allocated to capital and $10,407 was allocated to retained earnings. As of
September 30, 2011, the Company had remaining authority under the 2008 program to repurchase up to an aggregate of 246,232 shares
of its common stock. The 2008 program is the only program under which there is authority to repurchase shares of the Company’s
common stock. The Company has retired all stock repurchased.
In June 2010, the Company completed its search
for a new policy administration software system to replace its existing legacy system, and the Company signed related contracts
on July 8, 2010. The Company had discussions and negotiations with the vendor over concerns about the vendor’s delay
in the implementation of the system and the system’s functionality. As a result of the vendor’s inability to resolve
the issues related to the software’s operation and functionality, the Company unilaterally rescinded the contract and abandoned
the implementation of the policy administration software with the related vendor. The Company expensed all capitalized work-in-progress
costs paid to date of $80,038 and has cancelled the remaining unpaid capitalized balance of the accounts payable due the vendor.
The Company is currently reviewing its options regarding a renewed search for a new policy administration software system.
As reflected
on the Consolidated Statements of Cash Flows, the net cash used by operating activities in the nine months ended September 30,
2011 was $699,979, a decrease of $3,495,443 compared to the nine months ended September 30, 2010. The decrease in net cash used
by operating activities was primarily due to the decrease in loss and loss adjustment expense payments offset in part by
cash
used by the Company’s premium finance subsidiary, American Acceptance Corporation, due to increased premium financing resulting
from its 0% financing incentive program.
The variability of the Company’s losses and
loss adjustment expenses is primarily due to its small population of claims which may result in greater fluctuations in claim frequency
and/or severity. As of September 30, 2011, the Company had only 593 open claims. Cash flows can change from period to period depending
largely on the amount and the timing of claims payments and changes in premium earned. Although the Consolidated Statements of
Cash Flows continues to reflect net cash used by operating activities, the Company continues to be profitable, well capitalized,
and adequately reserved; and it does not anticipate future liquidity problems.
As of September 30, 2011, all of the Company’s
investments are in U.S. treasury securities, certificates of deposit and money market funds, which are readily marketable. The
weighted average maturity of the Company’s investments is approximately one year.
On September
28, 2011, Crusader declared a cash dividend of $1,250,000 payable to its sole shareholder, Unico. The dividend is to be used for
general corporate purposes. Although material capital expenditures may also be funded through borrowings, the Company believes
that its cash and short-term investments at September 30, 2011, net of trust restrictions of $839,722, statutory deposits of $700,000,
and California insurance company statutory dividend restrictions applicable to Crusader, 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 and nine months ended September 30, 2011, to the three and nine months ended September 30, 2010, unless otherwise
indicated.
The Company had net income of $1,274,652 for
the three months ending September 30, 2011, compared to net income of $623,962 for the three months ended September 30, 2010, an
increase in net income of $650,690 (104%). For the nine months ended September 30, 2011, the Company had net income of $3,095,686
compared to net income of $1,571,378 for the nine months ended September 30, 2010, an increase of $1,524,308 (97%). Total revenues
decreased $10,995 (less than 1%) to $9,077,819 for the three months and $2,108,999 (7%) to $26,264,663 for the nine months ended
September 30, 2011, compared to total revenues of $9,088,814 for the three months and $28,373,662 for the nine months ended September
30, 2010. Revenues for the three and nine months ended September 30, 2011 included other income of $626,073 from the final settlement
of provisional rated reinsurance treaties covering the years 1985 through 1997.
Premium written
(before reinsurance)
is a required statutory measure designed to determine written premium production levels. Direct written premium reported on the
Company’s statutory statement decreased $410,592 (5%) and $970,808 (4%) to $7,705,092 and $24,158,690 for the three and nine
months ended September 30, 2011, respectively, compared to $8,115,684 and $25,129,498 for the three and nine months ended September
30, 2010, respectively. The decrease in written premium in 2011 reflected heightened competition, weak economic growth and management’s
continued emphasis on rate adequacy and underwriting discipline.
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 and coverage may be more difficult to obtain. The Company
believes that California’s commercial property and casualty insurance market continues to be a “soft market.”
The Company cannot determine if the existing market conditions will continue nor in which direction they might change. Despite
the competition in the commercial property and casualty marketplace, the Company 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.
Premium earned
before reinsurance decreased
$762,043 (9%) and $3,114,058 (11%) to $8,021,982 and $24,021,550 for the three and nine months ended September 30, 2011, respectively,
compared to $8,784,025 and $27,135,608 for the three and nine months ended September 30, 2010, respectively. The Company writes
annual policies and, therefore, earns written premium over the one-year policy term. The decrease in earned premium before reinsurance
is a direct result of the decrease in written premium during the twelve-month period ended September 30, 2011, as compared to premium
written during the twelve-month period ended September 30, 2010.
Earned ceded premium decreased $515,534 (28%)
and $1,683,310 (30%) to $1,321,422 and $3,974,368 for the three and nine months ended September 30, 2011, respectively, compared
to $1,836,956 and $5,657,678 for the three and nine months ended September 30, 2010, respectively. Total earned ceded premium was
16% and 17% of direct earned premium in the three and nine months ended September 30, 2011, respectively, compared to 21% of direct
earned premium in the three and nine months ended September 30, 2010. The decrease in earned ceded premium is primarily a result
of a decrease in direct premium earned and due to decreases in the rates charged by Crusader’s reinsurers. The decrease in
the reinsurer’s rates is primarily due to changes in both the Company’s retention and participation in its reinsurance
treaties. In 2011 Crusader retained a participation in its excess of loss reinsurance treaties of 10% in its 1
st
layer
($500,000 in excess of $500,000), 5% in its 2
nd
layer ($1,000,000 in excess of $1,000,000), and 0% in its property and
casualty clash treaty. The Company evaluates each of its ceded reinsurance contracts at its 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
September 30, 2011, all such ceded contracts are accounted for as risk transfer reinsurance.
In calendar years 2010 and 2009 Crusader retained
a participation in its excess of loss reinsurance treaties of 20% in its 1
st
layer ($700,000 in excess of $300,000),
15% in its 2
nd
layer ($1,000,000 in excess of $1,000,000), and 0% in its property and casualty clash treaty.
Direct earned premium and earned ceded premium
are as follows:
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
(Decrease)
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct earned premium
|
|
$
|
8,021,982
|
|
|
$
|
8,784,025
|
|
|
$
|
(762,043
|
)
|
|
$
|
24,021,550
|
|
|
$
|
27,135,608
|
|
|
$
|
(3,114,058
|
)
|
Earned ceded premium
|
|
|
1,321,422
|
|
|
|
1,836,956
|
|
|
|
(515,534
|
)
|
|
|
3,974,368
|
|
|
|
5,657,678
|
|
|
|
(1,683,310
|
)
|
Net earned premium
|
|
$
|
6,700,560
|
|
|
$
|
6,947,069
|
|
|
$
|
(246,509
|
)
|
|
$
|
20,047,182
|
|
|
$
|
21,477,930
|
|
|
$
|
(1,430,748
|
)
|
The 2007 through 2011 excess of loss treaties
do not provide for a contingent commission. Crusader’s 2006 1
st
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 1
st
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 twelve-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. As of
September 30, 2011, the Company has received a total net contingent commission of $3,643,768 for the years subject to contingent
commission. Of this amount, the Company has recognized $2,742,509 of contingent commission income, of which $108,614 and $418,641
was recognized in the three and nine months ended September 30, 2011, respectively. The remaining balance of the net payments received
of $901,259 is currently unearned and included in “Accrued Expenses and Other Liabilities” in the consolidated balance
sheet at September 30, 2011. The unearned contingent commission may be subsequently earned or returned to the reinsurer depending
on the future development of the ceded IBNR for the years subject to contingent commission.
Investment income
decreased $106,420
(13%) and $413,919 (15%) to $733,735 and $2,274,033 for the three and nine months ended September 30, 2011, respectively, compared
to $840,155 and $2,687,952 for the three and nine months ended September 30, 2010, respectively. The Company had no realized gains
or losses for the three and nine months ended September 30, 2011 and 2010. The decrease in investment income in the current period
as compared to the prior year’s period is primarily a result of a decrease in invested assets and a decrease in the Company’s
annualized weighted average yield to 2.3% for the three and nine months ended September 30, 2011, compared to 2.5% and 2.6% for
the three and nine months ended September 30, 2010, respectively. 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 September 30
|
|
Nine Months Ended September 30
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
Average Invested Assets*
|
|
$
|
128,573,754
|
|
|
$
|
134,035,452
|
|
|
$
|
129,313,758
|
|
|
$
|
135,350,881
|
|
Total Investment Income
|
|
$
|
733,735
|
|
|
$
|
840,155
|
|
|
$
|
2,274,033
|
|
|
$
|
2,687,952
|
|
Annualized Yield on
Average Invested Assets
|
|
|
2.3
|
%
|
|
|
2.5
|
%
|
|
|
2.3
|
%
|
|
|
2.6
|
%
|
* 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 September 30, 2011, 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.
Maturities by
Calendar Year
|
|
Par
Value
|
|
Amortized Cost
|
|
Fair Value
|
|
Weighted
Average Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
$
|
20,533,000
|
|
|
$
|
20,537,562
|
|
|
$
|
20,632,375
|
|
|
|
1.5
|
%
|
December 31, 2012
|
|
|
58,080,000
|
|
|
|
58,134,282
|
|
|
|
59,934,375
|
|
|
|
3.3
|
%
|
December 31, 2013
|
|
|
22,791,000
|
|
|
|
22,846,943
|
|
|
|
23,576,641
|
|
|
|
1.7
|
%
|
December 31, 2015
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
1.9
|
%
|
December 31, 2016
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
1.9
|
%
|
Total
|
|
$
|
101,604,000
|
|
|
$
|
101,718,787
|
|
|
$
|
104,343,391
|
|
|
|
2.6
|
%
|
The weighted average maturity of the Company’s
fixed maturity investments was less than 1 year as of September 30, 2011, and 1.5 years as of September 30, 2010. 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.
As of September 30, 2011, the Company held fixed
maturity investments with unrealized appreciation of $2,624,604 and held no fixed maturity investments with unrealized depreciation.
The Company monitors its investments closely. If an unrealized loss is determined to be other-than-temporary, the amount related
to a credit loss is recognized in earnings and the amount related to other factors is recorded in the consolidated statements of
comprehensive income (loss) for fixed maturity investments. 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 did
not sell any fixed maturity investments in the three and nine months ended September 30, 2011 and 2010. 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.
Other Income
included in Insurance Company
Revenues increased $596,318 (398%) and $580,121 (115%) to $746,322 and $1,085,410 for the three and nine months ended September
30, 2011, respectively, compared to $150,004 and $505,289 for the three and nine months ended September 30, 2010, respectively.
The increase in other income is related to the settlement of provisionally rated reinsurance treaties. The Company had reinsurance
treaties covering 1985 through 1997 with National Reinsurance Corporation (acquired by General Reinsurance Corporation in 1996),
and was charged a provisional ceded premium rate on losses and loss adjustment expenses incurred up to $500,000 per risk from policies
covered under those treaties. The provisional ceded premium rate was subject to adjustment based on the amount of losses and loss
adjustment expenses ceded to those treaties. The provisional ceded premium rate was also subject to a minimum and a maximum amount.
Those provisionally rated treaties were cancelled on a runoff basis and replaced by a flat-rated treaty on January 1, 1998. On
August 31, 2011, the Company received a notice from General Reinsurance Corporation that all ceded claims had been closed and that
there were no outstanding case or IBNR reserves on any claims subject to the provisional rated treaties. During the quarter ended
September 30, 2011, General Reinsurance Corporation settled its provisional liability with the Company and the Company closed its
estimated provisional liability reserves to General Reinsurance Corporation resulting in income recognition of $626,073.
Gross commissions and fees
decreased
$202,272 (19%) and $665,240 (19%) to $875,959 and $2,791,244 for the three and nine months ended September 30, 2011, respectively,
compared to $1,078,231 and $3,456,484 for the three and nine months ended September 30, 2010, respectively.
The decreases in gross commission and
fee income for the three and nine months ended September 30, 2011, as compared to the three and nine months ended September 30,
2010, are as follows:
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
(Decrease)
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
(Decrease)
|
|
Policy fee income
|
|
$
|
454,060
|
|
|
$
|
490,339
|
|
|
$
|
(36,279
|
)
|
|
$
|
1,382,038
|
|
|
$
|
1,501,628
|
|
|
$
|
(119,590
|
)
|
Health insurance program
|
|
|
325,464
|
|
|
|
461,701
|
|
|
|
(136,237
|
)
|
|
|
1,049,348
|
|
|
|
1,492,189
|
|
|
|
(442,841
|
)
|
Membership and fee income
|
|
|
38,252
|
|
|
|
52,317
|
|
|
|
(14,065
|
)
|
|
|
118,787
|
|
|
|
164,601
|
|
|
|
(45,814
|
)
|
Other commission and fee income
|
|
|
—
|
|
|
|
24
|
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
170
|
|
|
|
(170
|
)
|
Daily automobile rental insurance program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission income (excluding contingent commission)
|
|
|
58,183
|
|
|
|
73,850
|
|
|
|
(15,667
|
)
|
|
|
176,363
|
|
|
|
230,114
|
|
|
|
(53,751
|
)
|
Contingent commission
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,708
|
|
|
|
67,782
|
|
|
|
(3,074
|
)
|
Total
|
|
$
|
875,959
|
|
|
$
|
1,078,231
|
|
|
$
|
(202,272
|
)
|
|
$
|
2,791,244
|
|
|
$
|
3,456,484
|
|
|
$
|
(665,240
|
)
|
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 non-refundable policy fee income that is directly related to the Crusader
policies it sells. For financial reporting purposes, 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 $36,279 (7%) and $119,590 (8%) in the three and nine months ended September 30,
2011, respectively, compared to the three and nine months ended September 30, 2010. The decrease in policy fee income is directly
related to a decrease in the number of policies issued in the three and nine months ended September 30, 2011, as compared to the
three and nine months ended September 30, 2010.
American Insurance Brokers, Inc. (AIB), a 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 decreased $136,237 (30%) and $442,841
(30%) in the three and nine months ended September 30, 2011, respectively, compared to the three and nine months ended September
30, 2010. The decrease is primarily due to the termination of AIB’s marketing and administrative agreement with CIGNA effective
August 31, 2010. The decision to terminate the agreement was primarily a result of CIGNA’s decision to reduce the number
of plans offered. On September 1, 2010, AIB stopped marketing all CIGNA products.
The Company's subsidiary Insurance Club, Inc.,
dba AAQHC An Administrator (AAQHC), is a third party administrator for contracted insurance companies 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. Membership and fee
income decreased $14,065 (27%) and $45,814 (28%) for the three and nine months ended September 30, 2011, respectively, compared
to the three and nine months ended September 30, 2010. This decrease was primarily a result of the termination of the marketing
and administrative agreement with CIGNA as discussed above.
AIB has developed a new partnership with Guardian
Life Insurance Company of America (GLIC). Effective October 1, 2010, AIB has been marketing GLIC’s dental and group life
products to both brokers and the public. GLIC has created plans specifically for AIB.
The daily automobile rental insurance program
is produced by Bedford Insurance Services, Inc. (Bedford), a wholly owned subsidiary of the Company. Bedford receives commission
from a non-affiliated insurance company based on premium written. Commission in the daily automobile rental insurance program (excluding
contingent commission) decreased $15,667 (21%) and $53,751 (23%) for the three and nine months ended September 30, 2011, respectively,
compared to the three and nine months ended September 30, 2010. The decrease in commission income is primarily due to the decrease
in premiums written in this program as a result of intense competition in the marketplace.
Finance charges and fees earned
by the
Company’s premium finance subsidiary, American Acceptance Corporation (AAC), decreased $53,752 (77%) and $182,206 (77%) for
the three and nine months ended September 30, 2011, respectively, compared to the three and nine months ended September 30, 2010.
The decrease is primarily attributable to AAC reducing the interest rate charged on premiums financed to 0% beginning July 20,
2010. AAC only provides premium financing for Crusader policies produced by Unifax in California. This reduction in the interest
rate charged was initiated in an effort to increase the sales of renewal and new business for Crusader.
Losses and loss adjustment expenses
were
50% and 53% of net premium earned for the three and nine months ended September 30, 2011, respectively, compared to 65% and 67%
of net premium earned for the three and nine months ended September 30, 2010, respectively.
The following table provides an analysis
of the losses and loss adjustment expenses:
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
Increase (Decrease)
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
Increase (Decrease)
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
$
|
5,040,499
|
|
|
$
|
4,741,432
|
|
|
$
|
299,067
|
|
|
$
|
14,398,512
|
|
|
$
|
18,523,660
|
|
|
$
|
(4,125,148
|
)
|
Less: favorable development
of all prior accident years
|
|
|
1,682,696
|
|
|
|
239,999
|
|
|
|
1,442,697
|
|
|
|
3,782,111
|
|
|
|
4,139,463
|
|
|
|
(357,352
|
)
|
Total
|
|
$
|
3,357,803
|
|
|
$
|
4,501,433
|
|
|
$
|
(1,143,630
|
)
|
|
$
|
10,616,401
|
|
|
$
|
14,384,197
|
|
|
$
|
(3,767,796
|
)
|
The decrease in net claim costs incurred in
the three months ended September 30, 2011, compared to the prior year is primarily due to an increase in favorable development
of prior year losses in the current period of $1,442,697. This was partially offset by an increase in current accident year losses
of $299,067 compared to the prior year-to-date period. The increase in favorable development of prior year losses and loss adjustment
expenses arose from lower than expected emergence of losses and loss adjustment expenses in the period relative to expectations
used to establish the loss reserves. The increase in current accident year losses in the current calendar year period compared
to the prior year period is the result of normal statistical variations due to the small population of claims.
The decrease in net claim costs incurred in
the nine months ended September 30, 2011, compared to the prior year to date period was primarily due to the decrease in current
accident year losses of $4,125,148, compared to the current accident losses incurred in the prior year-to-date period. This was
partially offset by a decrease in favorable development of prior accident year losses of $357,352 compared to the prior year-to-date
period. In the nine months ended September 30, 2010, the 2010 accident year losses and loss adjustment expenses were higher than
expected due to a higher than expected number of property claims on one of the Company’s relatively new programs. In 2010,
management took immediate corrective action on that program and the program’s loss ratio has improved during the past year
and management expects the program’s loss ratio will continue to improve over time.
The variability of the Company’s losses
and loss adjustment expenses for the periods presented is primarily due to the small population of the Company’s claims which
may result in greater fluctuations in claim frequency and/or severity.
The Company’s consolidated financial statements
include estimated reserves for unpaid losses and 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 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 the Company’s chief
executive officer, the Company’s chief financial officer, and an independent consulting actuary. The Company uses the industry
standard loss development and Bornhuetter-Ferguson methods to estimate ultimate claims costs. In general the loss development
methods are more appropriate for older more mature accident years, and the Bornhuetter-Ferguson methods are more appropriate for
recent accident years. The claims costs incurred during the three and nine months ended September 30, 2011, were below expected,
and the claims costs incurred during the three and nine months ended September 30, 2010, were above expected. Management reviews
such differences to determine whether they are merely statistical aberrations that are a normal part of the process or whether
they are an indication that a change in assumptions to estimate ultimate claims costs is appropriate. Management believes that
the lower claims costs incurred during the three and nine months ended September 30, 2011, and that the higher claims costs incurred
during the three and nine months ended September 30, 2010, are normal statistical aberrations, differences between actual and
expected claims costs. Such statistical aberrations can emerge from time to time, particularly in the claims costs of an insurer
the size of the Company. Management does not believe that a change in assumptions to estimate ultimate claims costs for the current
accident year is appropriate. The differences between actual and expected claims costs are typically not due to one specific factor,
but to 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. Any
differences between actual and expected claims costs are reflected in the operating results of the periods in which the actual
costs emerge. Management believes that the aggregate reserves for losses and loss adjustment expenses are reasonable estimates
of the amount that will ultimately be required to cover the cost of claims occurring on or before the valuation date for both
reported and unreported claims.
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 the 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 27% of net premium earned for the three and nine months ended September 30, 2011, respectively, compared to
26% of net premium earned for the three and nine months ended September 30, 2010.
Salaries and employee benefits
increased
$36,268 (3%) to $1,147,771 and decreased $10,554 (less than 1%) to $3,270,291 for the three and nine months ended September 30,
2011, respectively, compared to salary and employee benefits of $1,111,503 and $3,280,845 for the three and nine months ended September
30, 2010, respectively.
Commissions to agents/brokers
decreased
$98,214 (64%) and $349,687 (68%) to $55,718 and $166,986 for the three and nine months ended September 30, 2011, respectively,
compared to commission expense of $153,932 and $516,673 for the three and nine months ended September 30, 2010, respectively. The
decrease in commission to agents/brokers in the three and nine months ended September 30, 2011, compared to the prior year period
is primarily due to the decrease in written premium in the health insurance program and the corresponding decrease in commission
expense paid to agents and brokers producing the business for that program.
Other
operating expenses
decreased $36,971 (4%) and $442,151 (17%) to $792,068 and $2,127,801 for the three and nine months ended
September 30, 2011, respectively, compared to $829,039 and $2,569,952 for the three and nine months ended September 30, 2010, respectively.
The decrease in other operating expenses in the three and nine months
ended September 30, 2011, compared to the prior year period is primarily due to a decrease in bad debt expense, a decrease in the
general corporate legal expenses, and a decrease in general corporate advertising expenses.
Income tax provision
was an expense of
$671,702 (35% of pre-tax income) and $1,664,528 (35% of pre-tax income) for the three and nine months ended September 30, 2011,
respectively, compared to an income tax expense of $63,359 (9% of pre-tax income) and $515,045 (25% of pre-tax income) for the
three and nine months ended September 30, 2010, respectively. The increase in the Company’s effective income tax rate in
the three and nine months ended September 30, 2011, compared to the prior year periods is primarily due to the establishment of
a valuation allowance account that limited the carry-forward of certain state tax benefits in the current year. The increase in
income tax expense was primarily due to an increase in pre-tax income to $1,946,354 and $4,760,214 in the three months and nine
months ended September 30, 2011, respectively, compared to pre-tax income of $687,321 and $2,086,423 in the three months and nine
months ended September 30, 2010, respectively, and was also due to the effect of the adjustment to recognize a decrease in
the percentage of Crusader’s retained earnings subject to California franchise tax that reduced the Company’s deferred
tax liability by approximately $143,000 during the three and nine months ended September 30, 2010. Excluding the adjustment to
the deferred tax expense, the effective tax rate would have been 30% and 32% for the three and nine months ended September 30,
2010, respectively, and, therefore, would have been more comparable.
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,” “plan,”
“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 or marketing actions not being effective, rate increases for
coverages not being sufficient, premium rate adequacy relating to competition or regulation, actual versus estimated claim experience,
regulatory changes or developments, unforeseen calamities, general market conditions, and the Company’s ability to introduce
new profitable products.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company’s consolidated balance sheet includes a substantial
amount of invested assets whose fair values are subject to various market risk exposures including interest rate risk and equity
price risk.
The Company’s invested assets consist of the following:
|
|
September 30
2011
|
|
December 31
2010
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity bonds (at amortized value)
|
|
$
|
83,714,787
|
|
|
$
|
95,836,282
|
|
|
$
|
(12,121,495
|
)
|
Short-term cash investments (at cost)
|
|
|
27,141,800
|
|
|
|
6,465,649
|
|
|
|
20,676,151
|
|
Certificates of deposit (over 1 year, at cost)
|
|
|
18,004,000
|
|
|
|
27,464,998
|
|
|
|
(9,460,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
$
|
128,860,587
|
|
|
$
|
129,766,929
|
|
|
$
|
(906,342
|
)
|
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 its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of September 30, 2011, 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, 2010, in response to Item 1A to Part I
of Form 10-K.
ITEM 6 - EXHIBITS
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.
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.
101 The following
financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2011, formatted in XBRL
(Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated
Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows;
and (v) the Notes to Unaudited Consolidated Financial Statements.*
*XBRL information is furnished and
deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or
12
of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act and otherwise
is not subject to liability under these sections.
SIGNATURES
Pursuant to
the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
UNICO
AMERICAN CORPORATION
Date: November 8, 2011 By:
/s/ CARY L. CHELDIN
Cary L.
Cheldin
Chairman of the Board,
President and Chief
Executive Officer, (Principal
Executive Officer)
Date: November 8, 2011 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).
101 The
following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2011, formatted
in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii)
the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements
of Cash Flows; and (v) the Notes to Unaudited Consolidated Financial Statements.
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