The Company presently occupies a 46,000 square foot building located at 23251 Mulholland Drive, Woodland Hills, California, under a master lease expiring March 31, 2007. The lease provides for an annual gross rental of $1,025,952. Erwin Cheldin, the Company's president, chairman and principal stockholder, is the owner of the building. On February 22, 1995, the Company signed an extension to the lease with no increase in rent to March 31, 2007. The terms of the lease at inception and at the time the lease extension was signed were at least as favorable to the Company as could have been obtained from unaffiliated third parties.
(1) The calculation of earnings per share was based on the weighted average number of common shares outstanding and common stock equivalents.
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. Cash and investments (excluding unrealized gains) at March 31, 1996 were $72,700,991 compared to $64,262,794 in the prior year, a 13% increase. Crusader's cash and investments amounted to $69,332,581 or 95% of the Company's total.
In accordance with Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company is required to classify its investments in debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading securities. In the quarter ended March 31, 1995 the company reclassified all of its securities from held-to-maturity to the available-for-sale category. 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.
Year Ended Year Ended March 31, March 31, 1996 1995 ---------- ----------
Maximum bank note payable $3,975,001 $4,467,001 Average bank note payable $3,388,334 $4,229,418 Weighted average interest rate 7.7% 7.2%
Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments at year end, net of trust restriction of $2,465,923, statutory deposits of $725,000, and dividend restriction between Crusader and Unico (as discussed under "Insurance Company Operation - Holding Company Act") plus the cash to be generated from operations, should be sufficient to meet its operating requirements (excluding AAC's credit line discussed above) during the next twelve months without the necessity of borrowing funds.
For the fiscal year ended March 31, 1996, income before taxes increased by $3,450,614 (70%) and net income increased by $2,155,302 (57%) compared to the prior fiscal year. The increase in net income was primarily due to an increase of $2,175,220 in the pre-tax underwriting profit (net earned premium less loss and loss adjustment expenses and policy acquisition costs) from Crusader, an increase in investment income of $545,783 (16%) (excluding realized gains), a decrease in other operating expenses of $451,145 (12%), and an increase in gross commissions and fees of $192,311 (3%).
For the fiscal year ended March 31, 1995, income before taxes decreased by $90,495 (2%) while net income increased by $270,392 (8%) compared to the prior fiscal year. Although total investment income increased by $66,943 (2%), tax-exempt investment income increased by $798,586 (73%) which resulted in a tax benefit of approximately $231,000. The increase in net income was due primarily to this tax benefit.
Gross written premium decreased by $1,408,192 (4%) in the fiscal year ending March 31, 1996, compared to an increase of $1,761,249 (5%) for the fiscal year ended March 31, 1995. The decrease in written premium was primarily attributable to Crusader's decision to intentionally reduce its Other Liability line in an effort to improve the utilization of its surplus. Other Liability gross written premium for the fiscal year ended March 31, 1996, was $289,364, a $4,679,191 (94%) decrease from the prior fiscal year. The decrease in Other Liability written premium was offset by growth of $3,304,242 (10%) in Crusader's Commercial Package business. The Commercial Package premium for the fiscal year March 31, 1996 totaled $36,960,933 compared to written premium of $33,656,691 in the prior fiscal year. The Commercial Package line is Crusader's primary line of business and represents approximately 98% of its total premiums written. The increase in gross written premiums in the Commercial Package line was primarily due to increases in premiums in states outside of California. Gross premiums written in Washington, Oregon, Arizona and Nevada increased $2,318,626 (46%) to $7,341,329 while gross written premiums in California increased $977,207 (3%) to $29,619,604. In the fiscal year ending March 31, 1995, the increase in gross written premium was primarily the result of an increase of $5,993,669 (22%) in the company's Commercial Package business to $33,656,691. This increase was offset by a $3,831,980 (44%) decrease in the company's Other Liability line of business. The company began its deliberate reduction of Other Liability premium in fiscal year 1995.
Crusader's net earned premium was $31,477,427, an increase of $2,269,137 (8%) when compared to net earned premium in the fiscal year ending March 31, 1995. The increase in net earned premium was primarily the result of a decrease in earned ceded premium in the current fiscal year. The percentage of earned premium ceded to premium earned for the fiscal year ended March 31, 1996, was 16%. This compares to 24% for the fiscal year ended March 31, 1995, and 28% for the fiscal year ended March 31, 1994. The decrease in the fiscal year ended March 31, 1996, compared to March 31, 1995, was primarily attributable to a reduction in Crusader's Other Liability line of business which cedes a higher percentage of premium than its other lines, and to an increase in loss retention from $100,000 to $150,000 on April 1, 1995. The decrease in fiscal year ended March 31, 1995 compared to March 31, 1994 was primarily attributable to the reduction in Crusader's Other Liability line of business.
Year Ended Year Ended Year Ended March 31, March 31, March 31, 1996 1995 1994 --------- ---------- ----------
The company's future writings and growth is dependent on market conditions, competition, the company's ability to introduce new profitable products, and its ability to expand geographically. Crusader is currently licensed as an admitted insurance company in the states of California, Arizona, Nevada, Oregon and Washington and is approved as a non-admitted surplus lines writer in several other states. Crusader is currently writing in all the states in which it is licensed.
Revenues during the fiscal year ended March 31, 1996, increased 15% from the fiscal year ended March 31, 1995. Revenues for the fiscal year ended March 31, 1995, increased 9% from the fiscal year ended March 31, 1994.
NCC renews and services existing commercial automobile and personal automobile physical damage policies in California for a non-affiliated insurer. NCC receives a commission and claim administration fee from a non-affiliated insurance company based on premium written; however, NCC plans to discontinue these programs. Unifax produces commercial auto policies in California for a non-affiliated insurer and receives a commission from them based on premium written. Unifax and NCC also receive a service fee from the policyholder.
Unifax commission and fee income on this program was $166,189 in the fiscal year ended March 31, 1996, compared to $233,267 in the fiscal year ended March 31, 1995, and $205,937 in the fiscal year ended March 31, 1994. NCC commission and fee income was $17,330 in the fiscal year ended March 31, 1996, compared to $23,849 in the year ending March 31, 1995, and $34,139 in the fiscal year ended March 31, 1994. By increasing its marketing effort, Unifax intends to increase revenues on this program.
Commission income from the health and life insurance sales of NIB and AIB are as follows:
NIB and AIB market health and life insurance through non-affiliated insurance companies for individuals and groups. Approximately 84% of the health and life commission income in the current fiscal year is from the CIGNA HealthCare medical and dental plan programs compared to approximately 79% in the prior fiscal year. Revenue for the year ended March 31, 1996, increased by 3% from the prior fiscal year compared to a decrease in revenues of 9% for the fiscal year ended March 31, 1995 compared to March 31, 1994.
NIB and AIB currently market health and life insurance for the following companies:
CIGNA HealthCare Group & Individual Medical & Dental FHP, Inc. Group & Individual Medical & Dental Foundation Health Group & Individual Medical & Dental Universal Care Group & Individual Medical Greater California Dental Plan Group & Individual Dental Vision Plan of America Group & Individual Vision Plan MDC (Managed Dental Care) Group Dental Blue Cross Individual Medical Life Insurance Company of Group Term Life & Group & North America (LINA) Individual Accidental Death & Dismemberment (AD&D)
Membership and fee income from the Association program of AAQHC is as follows:
The increase in membership and fee income in the fiscal year ending March 31, 1996, was attributed to an increase in individual and family members in the Association. Membership income had decreased in the prior fiscal year as a result of a decrease in membership in the Association.
Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Premium finance charges and late fees earned $1,279,850 $1,306,953 $1,136,977 New loans 10,212 10,523 9,893
Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Interest and dividend income Insurance company operations $3,708,891 $3,181,791 $3,115,516 Other operations 154,842 136,159 135,491 ---------- ---------- ---------- Total interest and dividends on investments 3,863,733 3,317,950 3,251,007 Net realized investment gains 55,743 7,552 30,739 ---------- ---------- ---------- Total investment income $3,919,476 $3,325,502 $3,281,746 ---------- ---------- ---------- ---------- ---------- ----------
Investment interest and dividends earned (excluding net realized gains) increased approximately 16% during the fiscal year ended March 31, 1996, compared to the prior fiscal year. This increase was primarily due to an increase in invested assets (at amortized value) of $8,457,083 (13%) and, to a lesser extent, to the mix of taxable and tax-exempt securities in the portfolio. The mix of tax-exempt investments to total investments decreased from $41,758,522 (65%) to $38,126,835 (53%) at March 31, 1996. Tax-exempt securities carry a lower pre-tax yield than equivalent rated taxable securities.
Investment interest and dividends earned (excluding net realized gains) increased approximately 2% in the fiscal year ended March 31, 1995, compared to the prior fiscal year. Although total invested assets (at amortized value) increased $10,090,333 (19%) during that period, investment income only increased slightly due to maturing investments being invested at lower yields (due to the general decline in yields in the marketplace) and the increase in tax exempt investments. The mix of tax-exempt investments to total investments increased from $34,118,102 (63%) at March 31, 1994, to $41,758,522 (65%) at March 31, 1995.
certain reinsurance treaties, Crusader receives a ceding commission from its reinsurer which represents a reimbursement of the acquisition costs related to the premium ceded. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. Policy acquisition costs, net of ceding commission, are as follows:
Policy acquisition costs $8,569,395 $8,314,727 $6,564,746 Ratio to net earned premium 27% 28% 29%
SALARIES AND EMPLOYEE BENEFITS decreased $40,214 (1%) during the fiscal year ended March 31, 1996, compared with an increase of $102,097 (3%) in the fiscal year ending March 31, 1995.
COMMISSIONS TO AGENTS/BROKERS (not including commissions on Crusader policies which are reflected in policy acquisition costs) are generally related to gross commission income. During the fiscal year ended March 31, 1996, commission expense decreased $28,921 (2%).
Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ----
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 $451,145 (12%) during the fiscal year ended March 31, 1996, compared to the prior fiscal year. This decrease was primarily due to a decrease in interest and legal expenses. Included in the prior fiscal year was a $300,000 provision for interest due the Internal Revenue Service relating to the tax effect from timing differences of loss reserve deductions in prior years. Legal expenses declined in the current fiscal by $110,644.
Other operating expenses increased $459,888 (15%) during the fiscal year ended March 31, 1995, compared to the fiscal year ended March 31, 1994, as a result of a $300,000 interest expense provision to the Internal Revenue Service (discussed above) and an increase of $74,579 in interest expense from the Company's premium finance operation.
Consolidated Balance Sheets as of March 31, 1996, and 1995 23
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Unico American Corporation and its subsidiaries as of March 31, 1996, and 1995 and the consolidated results of operations and cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles.
UNICO AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATION FOR THE YEARS ENDED MARCH 31,
NATURE OF BUSINESS Unico American Corporation is an insurance holding company. Unico American Corporation and its subsidiaries, all of which are wholly owned (the "Company"), provides primarily in California, property, casualty, health and life insurance and related premium financing.
BASIS OF PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP). As described in Note 17, the Company's insurance subsidiary also files financial statements with regulatory agencies prepared on a statutory basis of accounting which differs from generally accepted accounting principles.
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While every effort is made to ensure the integrity of such estimates, actual results could differ from those estimates.
The Company had net unrealized investment gains of $531,787 as of March 31, 1996, and net unrealized investment losses of $177,098 as of March 31, 1995.
INCOME TAXES The provision for federal income taxes is computed on the basis of income as reported for financial reporting purposes under generally accepted accounting principles. Deferred income taxes arise principally from certain revenues and expenses which are recognized for income tax in different periods than for financial statements. Effective April 1, 1993, the Company changed its method of accounting for income taxes from the "deferred" method to the "asset and liability" method required by FASB Statement No. 109. Under the "asset and liability" method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
EARNINGS PER SHARE Earnings per share is computed by dividing the net income by the weighted average number of common shares outstanding.
a. GENERAL AGENCY OPERATIONS Commissions and service fees due the Company are recognized as income on the effective date of the insurance policies.
b. INSURANCE COMPANY OPERATIONS Premiums are earned on a pro-rata basis over the terms of the policies. Premiums applicable to the unexpired terms of policies in force are recorded as unearned premiums. The Company earns a commission on policies that are ceded to its reinsurers. This commission is considered earned on a pro-rata basis over the terms of the policies. Ceding commission applicable to the unexpired terms of policies in force are recorded as unearned ceding commission which is included in deferred policy acquisition costs.
c. INSURANCE PREMIUM FINANCING OPERATIONS Premium finance fees are charged to policyholders who choose to finance insurance premiums. Fees are charged at rates that vary with the amount of premium financed. Premium finance fees are recognized over the term of the premium note based upon the effective yield.
LOSSES AND LOSS ADJUSTING EXPENSES The process of establishing loss reserves involves significant judgmental factors. The reserves for unpaid losses and loss adjustment expenses are based on estimates of ultimate claim cost, including claims incurred but not reported. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in results of operations in the period in which they become known. Management believes that the aggregate reserves for losses and loss adjustment expenses are reasonable and adequate to cover the cost of claims, both reported and unreported.
Unico subsidiaries selling auto, health, life and dental insurance policies require payments of premium prior to the effective date of coverage. To conform with the above requirement, invoices are sent out as early as two months prior to the effective date of the policy and payments are received prior to the policy effective date. Insurance premiums received by these subsidiaries for coverage effective after the balance sheet date are recorded as advance premiums.
The amortized cost and estimated market value of fixed maturity investments at March 31, 1996, 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. Short-term investments have an initial maturity of one year or less and consist of the following: March 31, March 31, 1996 1995 --------- ---------
Certificates of deposit $ 25,000 $ 25,000 Commercial paper 2,230,000 2,700,000 Commercial bank money market accounts 1,186,602 633,355 Savings account 24,430 23,946 --------- --------- Total short-term investments $3,466,032 $3,382,301 --------- ---------
The allowance for doubtful accounts is maintained at a minimum since the receivables are secured by unearned premiums and funds held as security for performance. Bad debt expense for the fiscal years ended March 31, 1996 and 1995 was $38,815 and $51,042 respectively. Premium finance notes receivable represent the balance due to the Company's premium finance subsidiary from policyholders who elect to finance their premiums over the policy term. These notes are net of unearned finance charges.
(1) As of January 1, 1994, Crusader began processing its own claims. This claim processing function had previously been provided by its sister company, U.S. Risk Managers, Inc.
Funds held as security for performance represent funds received in order to guarantee the contractual obligations entered into with customers and are treated as restricted funds.
American Acceptance Corporation ("AAC"), the Company's premium finance subsidiary, has a line of credit with Union Bank which can be used only to fund its premium finance operation. This line of credit was increased from $5,000,000 to $6,000,000 in December 1994. Interest on the note is referenced to the London Interbank Offered Rate ("LIBOR"). The note amount is collateralized by the assets of AAC and is guaranteed by the Company. The loan agreement contains certain covenants including restrictions on certain transactions between AAC and the Company and the maintenance of certain financial ratios. The note matures August 31, 1996, and is expected to be renewed. The terms of the note call for monthly payments of interest only. The interest rate at March 31, 1996, was 7.16%
Note payable bank $2,000,001 $3,975,001 --------- --------- --------- --------- Maximum bank note payable $3,975,001 $4,467,001 Average bank note payable $3,388,334 $4,229,418 Weighted average interest rate 7.7% 7.2%
In June, 1992, the Company borrowed $500,000 from Erwin Cheldin, its president, chairman and principal stockholder. This note bore interest at 8% per annum. Principal and accrued interest were paid in full on the due date of June 15, 1995.
March 31, March 31, 1996 1995 --------- --------- Note payable related party $ - $ 500,000
The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings in which it may be named as either plaintiff or defendant. The Company is required to resort to legal proceedings from time-to-time in order to enforce collection of premiums and other commissions or fees for the services rendered to customers or to their agents. These routine items of litigation do not materially affect the Company and are handled on a routine basis by the Company through its general counsel.
The Company presently occupies a 46,000 square foot building located at 23251 Mulholland Drive, Woodland Hills, California, under a master lease expiring March 31, 2007. The total rent expense under this lease agreement was $1,025,952 for each of the fiscal years ended March 31, 1996; March 31, 1995; and March 31, 1994.
Fiscal Year Ending - ------------------ March 31, 1997 $ 1,025,952 March 31, 1998 $ 1,025,952 March 31, 1999 $ 1,025,952 March 31, 2000 $ 1,025,952 March 31, 2001 $ 1,025,952 March 31, 2002 (through March 31, 2007) $ 6,155,712 ---------- Total minimum payments $ 11,285,472 ---------- ----------
Crusader has reinsurance agreements with National Reinsurance Corporation, a California admitted reinsurance company, which helps protect it against liabilities in excess of certain retentions, including major or catastrophic losses which may occur from any one or more of the property and/or casualty risks which Crusader insures. In August 1992 Crusader purchased additional catastrophe reinsurance from various California admitted reinsurance companies. Crusader's retention increased from $100,000 to $150,000 per risk on April 1, 1995. This retention is subject to a maximum dollar amount and to catastrophe and clash covers. The catastrophe and clash covers (subject to a maximum occurrence and annual aggregate amount) help protect the company from one loss occurrence affecting multiple policies. The premium ceded to the reinsurers for the catastrophe and clash covers and for all exposures over $500,000 is a fixed percentage of the premium charged by Crusader. On exposures up to $500,000, the reinsurer charges a provisional rate which is subject to adjustment and is based on the amount of losses ceded, limited by a maximum percentage that can be charged by the reinsurer. On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader, which includes a reimbursement of the cost of acquiring the portion of the premium that is ceded. Crusader does not currently assume any reinsurance from other insurance companies. The company intends to continue obtaining reinsurance although the availability and cost may vary from time to time.
The Company's federal tax returns for the fiscal years ended March 31, 1990, through March 31, 1994, are currently being examined by the Internal Revenue Service. The primary issue of the examination is the loss reserve deductions for the fiscal years under audit. Any changes in the these deductions resulting from the examination would be a temporary difference. Since any tax increase from this temporary difference should be offset by a tax decrease in subsequent years, no tax liability has been accrued. Management estimated and accrued $300,000 of interest expense in the fiscal year ending March 31, 1995, related to this temporary difference.
participant's eligible compensation as determined by the Board of Directors. Participants are entitled to receive benefits under the plan upon the later of the following: the date 60 days after the end of the plan year in which the participant's retirement occurs or one year and 60 days after the end of the plan year following the participant's termination with the Company. However the participant's interest must be distributed in its entirety no later than April 1 of the calendar year following the calendar year in which the participant attains age 70 1/2 or otherwise in accordance with the Treasury Regulations promulgated under the Internal Revenue Code of 1954 as amended.
Crusader Insurance Company statutory capital and surplus is as follows: As of March 31, 1996 $22,721,183 As of March 31, 1995 $19,585,839
Crusader's statutory capital and surplus was deemed sufficient to support the insurance premiums written based on guidelines established by the NAIC.
The Company under its 1985 stock option plan provides for the grant of "incentive stock options" to officers and key employees. The options and prices set forth below have been adjusted, where applicable, for all subsequent stock splits, reverse stock splits and stock dividends. All options were granted at fair market value. As of March 31, 1996, of the 680,000 options outstanding, 552,527 options were currently exercisable. There are no additional options available for future grant under the 1985 plan. The changes in the number of common shares under option are summarized as follows:
Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Current provision: Federal $2,574,766 $1,583,545 $1,489,242 State 164,931 102,529 167,675 --------- --------- --------- Total federal and state 2,739,697 1,686,074 1,656,917 Deferred (278,887) (520,576) (130,532) --------- --------- --------- Provision for taxes $2,460,810 $1,165,498 $1,526,385 --------- --------- --------- --------- --------- ---------
The income tax provision reflected in the consolidated statement of operations is less than the expected federal income tax on income as shown in the table below.
Computed tax expense at 34% $2,858,819 $1,685,610 $1,716,378 Tax effect of: Tax exempt income (502,513) (548,745) (317,954) Dividend exclusion (1,191) - - Other (49,847) (69,580) (36,989) State income tax expense 155,542 98,213 164,950 --------- --------- --------- Tax per financial statement $2,460,810 $1,165,498 $(1,526,385) --------- --------- --------- --------- --------- ---------
Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Deferred policy acquisition costs $74,722 $65,066 $406,996 Discounting of losses and unearned premium reserves (295,375) (439,127) (480,512) Accrued interest not currently deductible - (102,000) - Other (58,234) (44,515) (57,016) -------- -------- -------- Total deferred tax (benefit) $(278,887) $(520,576) $(130,532) -------- -------- -------- -------- -------- --------
1996 1995 ---- ---- Deferred tax assets: - -------------------- Discount on loss reserves $2,000,235 $1,828,443 Discount on salvage & subrogation 8,589 1,727 Unearned premiums 1,194,244 1,077,523 Unrealized loss on investments - 91,233 Other 68,123 9,888 --------- --------- Total deferred tax assets $3,271,191 $3,008,814 --------- ---------