In December 1996, the Company changed its fiscal year from a year ending March 31 to a year ending December 31, effective December 31, 1996. As a result of this change, the Company's fiscal year ending December 31, 1996 consists of nine (9) months. For that reason, included in the discussion of results of operations are many comparisons of the Company's new fiscal year ended December 31, 1996, which consists of nine (9) months, to the comparable nine month period of the prior year. The financial information for the nine month period ended December 31, 1995 included in this report for comparisons is unaudited.
December 31, 1996 were $80,929,348 compared to $72,700,991 at March 31, 1996, an 11% increase. Crusader's cash and investments amounted to $77,833,104 or 96% of the Company's total.
The Company's premium finance subsidiary, American Acceptance Corporation, has a bank line of credit of $4,000,000 with a variable rate of interest based on fluctuations in the London Interbank Offered Rate ("LIBOR"). At the Company's request, this line of credit was decreased from $6,000,000 to $4,000,000 in September 1996. This credit line is only used to provide American Acceptance Corporation with funds to finance insurance premiums. Although premium notes receivable increased $78,725 to $5,751,709 in the nine months ended December 31, 1996, the bank note payable has been paid down by $1,250,000 during that period from cash generated from operations.
The maximum and average bank note payable and weighted average interest rate are as follows:
The effect of inflation on the net income of the Company during the nine months ended December 31, 1996, was not significant.
Gross written premium increased by $3,794,358 (14%) in the nine months ended December 31, 1996, compared to the same period of the prior year. The increase in gross written premium was attributable to a 9% increase to $24,983,270 in the Company's premium written in California and a 33% increase to $6,863,843, in premiums written outside of California. The Company's Commercial Package premium increased $2,492,080 (9%) while all other lines increased $1,302,278 from $127,056 in the same period of the prior year. Gross written premium decreased $1,408,192 (4%) in the fiscal year ended March 31, 1996 compared to the prior fiscal year. The decrease was primarily the result of a reduction in the Company's Other Liability written premium which decreased $4,679,191 when compared to the prior fiscal year. This decrease was attributable to Crusader's decision to intentionally reduce its Other Liability line in a effort to improve the utilization of its surplus. This premium decrease was partially offset by an increase of $3,304,242 (10%) in the Company's Commercial Package premium. For the
fiscal year ended March 31, 1996, the Commercial Package premium accounted for 98% of the Company's total written premium. The increase in the Commercial Package premium was primarily attributable to a $2,318,626 (46%) increase in premiums written outside of California which includes the states of Arizona, Nevada, Oregon and Washington. Gross premiums written in California increased 977,207 (3%) to $29,619,604.
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment expenses incurred (including a provision for incurred but not reported losses) to net premiums earned (the "loss ratio") and (2) the ratio of policy acquisition and general operating costs to net premiums earned (the "expense ratio"). The following table shows the loss ratios, expense ratios, and combined ratios of Crusader as derived from data prepared in accordance with generally accepted accounting principles. Generally, if the combined ratio is below 100% an insurance company has an underwriting profit; if it is above 100% a company has an underwriting loss.
Nine Months Ended Fiscal Year Ended December 31, March 31, ------------ --------- 1996 1995 1996 1995 ---- ---- ---- ---- Loss ratio 56.8% 55.5% 55.0% 59.8% Expense ratio 26.4% 27.3% 27.2% 28.5% ---- ---- ---- ---- Combined ratio 83.2% 82.8% 82.2% 88.3% ==== ==== ==== ====
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 nine months ended December 31, 1996, were $591,124 a decrease of $74,360 (11%) compared to the same period of the prior year. Revenue for the fiscal year ended March 31, 1996, increased 15% compared to the prior fiscal year.
The daily automobile rental insurance program experienced a decrease in commission and fee income in the current nine month period due to increased price competition which resulted in fewer policy renewals. To avoid underwriting losses for the non-affiliated insurance company which Bedford represents, it continues to produce business only at rates which it believes to be adequate. The Company cannot determine how long this "soft market" condition will continue. The increase in revenues in the fiscal year ended March 31, 1996 compared to the prior fiscal year was primarily attributed to an increase in the number of new policies written.
Unifax produces commercial auto policies in California for a non-affiliated insurer and received a commission from them based on premium written. In February 1997, management decided to discontinue writing new policies in the Unifax commercial automobile program, and will only service and renew existing policies after that date. NCC renewed and serviced existing commercial and personal automobile policies in California for a non-affiliated insurer until August 31, 1996 when the NCC program was discontinued. NCC received a commission and claim administration fee from the non-affiliated insurance company based on premium written. All commission and fee income due NCC is included in the table below. Unifax and NCC also received a service fee from the policyholder.
Commercial and personal auto program commission, service fee and claim administration income are as follows:
Commission income from the health and life insurance sales of NIB and AIB is as follows:
Individual medical and dental programs Individual medical programs are not affected by AB 1672 and all of the Company's major insurance carriers provide the Company with individual medical insurance programs. Commission income from the individual medical program continue to increase due to aggressive marketing and the quality of the Company's customer service. However, the increases in commission income on the individual programs, which generally have lower premiums than group programs, were not enough to offset the loss of commission income from the group program in the nine months ended December 31, 1996 compared to the same period of the prior year. The increase in commission income in the fiscal year ended March 31, 1996 compared to the prior fiscal year was primarily due to an increase in sales of policies covering individual and family members. This increase in sales was primarily attributable to rate reductions in March 1995 and July 1995 which made the products more competitive, and the addition of the CIGNA Dental Health program which began in July 1995.
Unifax produces workers' compensation policies in California and Arizona for a non-affiliated insurer and receives a commission from them based on premium written.
Membership and fee income in the nine months ended December 31, 1996, increased $48,737 (24%) compared to the same period of the prior year. Membership income increased 25% in the fiscal year ended March 31, 1996 compared to the prior fiscal year. These increases are attributable to an increase in individual and family members in the Association.
American Acceptance Corporation, the Company's insurance premium finance subsidiary, provides premium financing to Crusader and a non-affiliated insurer on commercial auto policies produced by Unifax. In February 1997, the commercial auto program with the non-affiliated insurer was discontinued. The growth of this program is dependent and directly related to the growth of Crusader's written premium and AAC's ability to market its competitive rates and service to finance those policies.
For the fiscal year ended March 31, 1996, investment interest and dividends earned (excluding net realized gains) increased approximately 16% 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. Tax-exempt investments decreased from $41,758,522 (65% of total investments) at March 31, 1995 to $38,126,835 (53% of total investments) at March 31, 1996. Tax-exempt securities carry a lower pre-tax yield than equivalent rated taxable securities.
Commissions to Agents/Brokers (not including commissions on Crusader policies which are reflected in policy acquisition costs) are generally related to gross commission income. Commissions to agents and brokers decreased 75,297 (7%) for the nine months ended December 31, 1996 compared to the same period of the prior year. This decrease was primarily related to the 6% decrease in health and life insurance commission income. During the fiscal year ended March 31, 1996, commission expense decreased $28,921 (2%) compared to the prior fiscal year.
Certain statements contained herein that are not historical facts are forward looking. These statements 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 those described under Item 1 - Business - "Competition", premium rate adequacy relating to competition or regulation, actual versus estimated claim experience, regulatory changes or developments, unforeseen calamities, general market conditions, the Company's ability to introduce new profitable products and the Company's ability to expand geographically.
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.
The Company had net unrealized investment gains of $742,004 as of December 31, 1996, and net unrealized investment gains of $531,787 as of March 31, 1996.
Investment Securities - Fair values for fixed maturity securities are obtained from a national quotation service. The fair values for equity securities are based on quoted market prices.
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. As required by FASB Statement No. 109 ("Accounting for Income Taxes"), 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 expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense provisions increase or decrease in the same period in which a change in tax rates is enacted.
Reclassifications Certain reclassifications have been made to prior year balances to conform to the current year presentation.
A summary of net investments and related income is as follows:
Certificates of deposit $ 125,000 $ 25,000 Commercial paper 2,810,000 2,230,000 Commercial bank money market accounts 1,144,292 1,186,602 Short term U.S. treasury note 757,653 - Savings account 24,800 24,430 ----------- ----------- Total short-term investments $4,861,745 $3,466,032 ========= =========
Premiums receivable $3,171,706 $2,493,592 Premium finance notes receivable 5,751,709 5,672,984 --------- --------- Total premiums and notes receivable 8,923,415 8,166,576 Less allowance for doubtful accounts 24,576 25,333 ----------- ----------- Net premiums and notes receivable $8,898,839 $8,141,243 ========= =========
Premium payable $ 708,733 $ 696,997 Unearned adjustment income 300,000 300,000 Profit sharing contributions 375,000 480,863 Accrued interest payable 300,000 300,000 Accrued salaries 404,350 406,638 Other 307,616 147,900 ---------- ---------- Total accrued expenses and other liabilities $2,395,699 $2,332,398 ========= =========
Nine Months Fiscal Year Ended Ended December 31, March 31, 1996 1996
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, 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.
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. The Company utilizes for its own operations 100% of the space it leases.
Crusader has reinsurance agreements with National Reinsurance Corporation, a California admitted reinsurance company which was acquired by General Reinsurance Corporation in 1996. These reinsurance agreements help protect Crusader 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.
Crusader Insurance Company statutory capital and surplus is as follows: As of December 31, 1996 $25,748,757 As of March 31, 1996 $22,721,183
Crusader Insurance Company statutory net income is as follows: Nine months ended December 31, 1996 $3,526,515 Fiscal year ended March 31, 1996 $4,639,537 Fiscal year ended March 31, 1995 $2,661,428
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 December 31, 1996, of the 560,699 options outstanding, 433,226 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:
Outstanding at March 31, 1994 609,836 $3.4375 to $3.85 Options granted 90,164 $4.375 Options exercised - Options terminated (20,000) $3.50 -------- Outstanding at March 31, 1995 680,000 $3.4375 to $4.375 Options granted - Options exercised - Options terminated - -------- Outstanding at March 31, 1996 680,000 $3.4375 to $4.375 Options granted - Options exercised (114,651) $3.4375 to $3.85 Options terminated (4,650) $3.50 -------- Outstanding at December 31, 1996 560,699 $3.4375 to $4.375 =======
Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.