Due to the nature of the Company's business (insurance and insurance services) and whereas Company growth does not normally require material reinvestments of profits into property or equipment, the cash flow generated from operations usually results in improved liquidity for the Company.
Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, reserves for loss payments, and its capital and surplus. Crusader's losses 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
Maximum bank note payable $2,000,001 $3,975,001 Average bank note payable $1,387,038 $3,388,334 Weighted average interest rate 7.2% 7.7%
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 $2,642,932, 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.
Crusader's statutory capital and surplus as of December 31, 1996, was $25,748,757, an increase of $3,027,574 from the surplus balance at March 31, 1996, of $22,721,183.
There are no material commitments for capital expenditures as of the date of this report.
The Company had net income after taxes of $5,174,510 for the nine months ended December 31, 1996, an increase of 21% when compared to $4,272,664 in the same period of the prior year. For the fiscal year ended March 31, 1996, the Company had net income after taxes of $5,947,481 compared to $3,792,179 in the prior fiscal year. Total revenue for the nine months ended December 31, 1996 was $34,884,657 compared to $31,472,859 in the same period of the prior year. For the fiscal year ended March 31, 1996, total revenue was $42,468,474 compared to $39,444,223 in the prior fiscal year.
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 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%).
Crusader's net earned premium was $26,066,289, an increase of $2,802,689 (12%) in the nine months ended December 31, 1996, compared to the same period of the prior year. The increase in net earned premium was primarily the result of an increase of $1,112,736 (4%) in earned premium before reinsurance and a decrease in earned premium ceded. The percentage of earned ceded premium to premium earned was 11% for the nine months ended December 31, 1996, and 18% for the same period of the prior year. For fiscal year end March 31, 1996, Crusader's net earned premium was $31,477,427, an increase of $2,269,137 (8%) when compared to the prior fiscal year. Although earned premium before reinsurance decreased by $911,995, the increase in net earned premium was primarily the result of a decrease in earned ceded premium. The percentage of earned premium ceded to premium earned for the fiscal year ended March 31, 1996, was 16% compared to 24% for the prior fiscal year. The decrease in earned ceded premium from March 31, 1995, through December 31, 1996, 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, to reduced reinsurance cost related to an increase in loss retention from $100,000 to $150,000 on April 1, 1995, and to other rate decreases due to the Company's favorable loss experience with its reinsurers and competition in the reinsurance marketplace.
The daily automobile rental insurance program is produced by Bedford. Bedford receives a commission and a claim administration fee from a non-affiliated insurance company based on premium written. Commission and fee income from the daily automobile rental insurance program are as follows:
Revenue for the nine months ended December 31, 1996, increased $36,988 (29%) compared to the same period of the prior year. Revenue for the fiscal year ended March 31, 1996, decreased $74,256 (29%) compared to the prior fiscal year.
NIB and AIB market health and life insurance through non-affiliated insurance companies for individuals and groups. Approximately 90% of the health and life commission income in the nine months ended December 31, 1996 was from the CIGNA HealthCare medical and dental plan programs compared to approximately 87% in the same period of the prior year. Revenues for the nine months ended December 31, 1996 were $1,786,012, a decrease of $107,593 (6%) compared to the same period of the prior year. Revenues for the fiscal year ended March 31, 1996 increased 3% compared to the prior fiscal year.
Group health and life insurance programs Regulations on California health care medical providers to small business of 5 to 50 employees became effective on July 1, 1993 (AB 1672). In July, 1995, small businesses with as few as 3 employees became affected by these regulations. These regulations, among other things, created an alliance of health insurance companies called the Health Insurance Plan of California ("HIPC"). There are currently 20 insurance companies in the alliance. The premiums charged by the insurance companies in the alliance were approved by the State of California and are very competitive. To meet this competition, insurance companies marketing programs outside of HIPC are forced to lower their rates to small groups. The impact of these regulations on the Company was and will continue to be, lower revenues from reduced sales on its small business group programs. Because of the intense competition among carriers for small groups, many carriers have an incentive program to increase business. These incentives are based on business written and retained for a minimum of one year. The incentive program for the Company began in October 1994. In the fiscal year ended March 31, 1996, $31,575 was earned on this incentive program. In the nine months ended December 31, 1996, $2,310 was earned. Future incentive, if any, cannot yet be determined. In addition, in July 1996, CIGNA revised its rates. Some rates were increased which resulted in loss of business, others were decreased to retain existing business. The decrease in health and life insurance commission income for the nine months ended December 31, 1996 compared to the same period of the prior year was primarily from the effect of these CIGNA rate revisions.
Premium finance charges and late fees earned on loans decreased $88,054 (9%) in the nine months ended December 31, 1996 compared to the same period of the prior year. For the fiscal year ended March 31, 1996, premium finance charges and late fees earned on loans decreased $27,103 (2%) compared to the prior fiscal year. The number of AAC loans decreased in the current nine month period and the prior fiscal year compared to the same periods of the prior year primarily due to increased competition from other premium finance companies.
Service fee income is primarily related to the number of policies written by Unifax.
Investment interest and dividends earned (excluding net realized gains) increased approximately 13% in the nine months ended December 31, 1996, compared to the same period of the prior year. This increase was primarily due to an increase in invested assets (at amortized value) of $10,330,317 (15%) at December 31, 1996 compared to December 31, 1995. The Company's investments at December 31, 1996 are comprised of $39,634,159 (49%) of tax exempt investments (at amortized value) and $41,212,552 (51%) of taxable investments.
Policy Acquisition Costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs which are related to and vary with the production of Crusader insurance policies. These costs include both Crusader expenses and allocated expenses of other Unico subsidiaries. On 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:
Salaries and Employee Benefits increased $78,677 (3%) for the nine months ended December 31, 1996 compared to the same period of the prior year. Salaries and employee benefits decreased $40,214 (1%) during the fiscal year ended March 31, 1996 compared to the prior fiscal year.
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 $383,821 (16%) during the nine months ended December 31, 1996, compared to the same period of the prior year. This decrease was primarily due to a decrease in interest expense of $166,893 as a result of the reduction in the Company's bank note payable.
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 expense of $353,424 as a result of the reduction in the Company's bank note payable and related party note payable.
We have audited the accompanying consolidated balance sheets of Unico American Corporation and its subsidiaries as of December 31, 1996 and March 31, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the nine months ended December 31, 1996 and each of the years ended March 31, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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 December 31, 1996 and March 31, 1996, and the consolidated results of operations and cash flows for the nine months ended December 31, 1996 and each of the years ended March 31, 1996 and 1995 in conformity with generally accepted accounting principles.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND FISCAL YEARS ENDED MARCH 31, 1996 AND 1995
Change of Fiscal Year On December 16, 1996, the Board of Directors approved a change in the Company's fiscal year end from March 31 to December 31 effective December 31, 1996. As a result of the change, the Company's Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the period ended December 31, 1996 covers nine months.
Principles of Consolidation The consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Basis of Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP). As described in Note 16, 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.
Investments In accordance with FASB Statement No. 115 ("Accounting for Certain Investments in Debt and Equity Securities") all of the Company's fixed maturity investments are classified as available-for sale and are stated at market value. Although all of the Company's fixed maturity investments are classified as available-for-sale, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates market value. Investments in equity securities are carried at market value. The unrealized gains or losses from fixed maturities and equity securities are reported as a separate component of stockholders' equity, net of any deferred tax effect. When a decline in value of a fixed maturity or equity security is considered other than temporary, a loss is recognized in the consolidated statement of operations. Realized gains and losses are included in the consolidated statements of operations based on the specific identification method.
Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using accelerated depreciation methods over the estimated useful lives of the related assets.
Note Payable - Bank - The carrying amounts reported in the balance sheet for the bank note payable approximates the fair value due to the variable rate nature of the line of credit.
Earnings Per Share Earnings per share is computed by dividing the net income by the weighted average number of common shares outstanding.
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 interest is charged to policyholders who choose to finance insurance premiums. Interest is charged at rates that vary with the amount of premium financed. Premium finance interest is recognized using a method which approximates the interest (actuarial) method.
Losses and Loss Adjustment 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.
Nine Months Fiscal Year Ended Ended December 31, March 31, 1996 1996 Restricted Funds: Premium trust funds (1) $2,642,932 $2,465,923 Assigned to state agencies (2) 725,000 725,000 ---------- ---------- Total restricted funds $3,367,932 $3,190,923 ========= =========
A summary of the net change in unrealized appreciation (depreciation) on investments carried at market and the applicable deferred federal income taxes is shown below:
The amortized cost and estimated market value of fixed maturity investments at December 31, 1996, by contractual maturity are as follows:
Due in one year or less $ 9,203,735 $ 9,274,016 Due after one year through five years 46,501,041 47,051,996 Due after five years through ten years 20,280,190 20,783,202 ---------- ---------- Total fixed maturities $75,984,966 $77,109,214 ========== ==========
Deferred policy acquisition costs, net of ceding commission, consist of commissions, premium taxes, inspection fees, and certain other underwriting costs which are related to and vary with the production of Crusader Insurance Company policies. These costs are incurred by Crusader and include allocated expenses of other Unico subsidiaries. Policy acquisition costs are deferred and amortized as the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, including investment income.
Likewise, the Company is sometimes named as a cross-defendant in litigation which is principally directed against that insurer who has issued a policy of insurance directly or indirectly through the Company. Incidental actions are sometimes brought by customers or other agents which relate to disputes concerning the issuance or non-issuance of individual policies. These items are also handled on a routine basis by the Company's general counsel and they do not materially affect the operations of the Company. Management is confident that the ultimate outcome of pending litigation should not have an adverse effect on the Company's consolidated operation or financial position.
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 $769,464 for the nine month period ended December 31, 1996 and $1,025,952 for the fiscal years ended March 31, 1996 and March 31, 1995.
December 31, 1997 $ 1,025,952 December 31, 1998 $ 1,025,952 December 31, 1999 $ 1,025,952 December 31, 2000 $ 1,025,952 December 31, 2001 $ 1,025,952 December 31, 2002 (through March 31, 2007) $ 5,386,248 ---------- Total minimum payments $10,516,008
A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on business written by it to a reinsurer which assumes that risk for a premium (ceded premium). Reinsurance does not legally discharge the company from primary liability under its policies and if the reinsurer fails to meet the obligations, the company must nonetheless pay its policy obligations. The Company continually monitors and evaluates the liquidity and financial strength of its reinsurers to determine their ability to fulfill obligations assumed under the reinsurance contracts.
The Company's federal income tax returns for the fiscal years ended March 31, 1990, through March 31, 1994, were examined by the Internal Revenue Service. The primary issue of the examination was 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. The issue is currently under appeal. Management estimated and accrued $300,000 of interest expense in the fiscal year ended March 31, 1995, related to this temporary difference. No change was made to this accrual as of December 31, 1996.
Contributions to the plan were as follows: Profit Sharing Plan Nine months ended December 31, 1996 $364,226 Fiscal year ended March 31, 1995 $484,715 Fiscal year ended March 31, 1994 $477,028
Crusader is restricted in the amount of dividends it may pay to its parent Unico without prior approval
the California Department of Insurance. Presently, without prior approval, Crusader may pay a dividend to Unico equal to the greater of (1) 10% of Crusader's statutory policyholders' surplus or (2) Crusader's statutory net income for the preceding calendar year. The maximum dividend which may be made without prior approval in calendar year 1997 is $3,862,115.
The components of the net federal income tax asset included in the financial statements as required by the assets and liability method, are as follows: Nine Months Fiscal Year Ended Ended December 31, March 31, 1996 1996 Deferred tax asset: Discount on loss reserves $2,121,793 $2,000,235 Unearned premiums 1,335,620 1,194,244 Other 121,284 86,330 ---------- ----------- Total deferred tax assets $3,578,697 $3,280,809 --------- ---------
Deferred tax liabilities: Deferred acquisition costs $1,684,049 $1,473,461 Discount on salvage & subrogation 8,749 9,618 Unrealized gain on investments 382,244 273,952 ---------- ---------- Total deferred tax liabilities $2,075,042 $1,757,031 --------- ---------
As a California insurance company, Crusader is obligated to pay a premium tax on gross premiums written in the states of California, Arizona, Nevada, Oregon, and Washington. The premium tax is in lieu of state franchise taxes; thus, the above provision for state taxes does not include the premium tax.