Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, health and life insurance through its agency subsidiaries, insurance premium financing, and membership association services.
For the year ended December 31, 2006, the Company had income before taxes of $18,153,986 compared to income before taxes of $10,466,430 in the year ended December 31, 2005, an increase in income before taxes of $7,687,556. The increase in pre-tax income was primarily due to an increase of $7,404,321 in the underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) from Crusader.
Expected losses and loss adjustment expenses are determined based on earned premiums. The portion of the premium dollar expected to pay claims costs is referred to as the expected loss and loss adjustment expense ratio. Accident years 2005 through 2007 had substantially the same expected loss and loss adjustment expense ratio. The Company’s emerging loss and loss adjustment expense ratios for each accident year are reviewed in detail at the end of each quarter as part of the reserve diagnostics testing.
Other operating expenses generally do not change significantly with changes in production. This is true for both increases and decreases in production. Other operating expenses decreased $72,554 (2%) for the year ended December 31, 2007, compared to the year ended December 31, 2006. Other operating expenses increased $138,653 (5%) for the year ended December 31, 2006, compared to the year ended December 31, 2005.
In October 2005, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (SOP 05-1). SOP 05-1 provides accounting guidance for deferred policy acquisition costs associated with internal replacements of insurance and investment contracts other than those already described in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. The provisions of SOP 05-1 became effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company’s adoption of SOP 05-1 did not have an effect on its results of operations or financial position.
The Company must estimate its ultimate losses and loss adjustment expenses using a very small claim population size. At the beginning of 2007, the Company had 717 open claim files. During 2007, 1,109 new claim files were opened and 1,087 claim files were closed, leaving 739 open claim files at the end of 2007. Due to the small size of the Company and the related small population of claims, the Company’s losses and loss adjustment expenses for any accident year can vary significantly from the initial expectations. Due to the small number of claims, changes in claim frequency and/or severity can materially affect the Company’s reserve estimate. The potential variability from management’s best estimate cannot be measured from any meaningful statistical basis due to the numerous uncertainties in the claims reserving process and the small population of claims.
At December 31, 2006, the fixed maturity investments with a gross unrealized loss for continuous periods of 0 to 6 months consisted of U.S. treasury securities. The fixed maturity investments with a gross unrealized loss position for continuous periods of 7 to 12 months consisted of both U.S. treasury securities and investment grade industrial securities. The fixed maturity investments with a gross unrealized loss position for a continuous period over 12 months consisted of U.S. treasury securities, investment grade industrial securities, and pre-refunded municipal bonds. The unrealized loss was primarily due to rising interest rates.
Crusader is restricted in the amount of dividends it may pay to its parent in any twelve (12) month period without prior approval of the California Department of Insurance. Presently, without prior approval, Crusader may pay a dividend in any twelve (12) month period to its parent equal to the greater of (a) 10% of Crusader's statutory policyholders' surplus or (b) Crusader's statutory net income for the preceding calendar year. Based on Crusader’s statutory net income for the year ended December 31, 2007, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2008 is $8,194,562. There were no dividends paid by Crusader to Unico in 2007, 2006, or in 2005.