Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, its 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 net unrealized losses) at December 31, 1999, were $105,380,057 compared to $103,713,721 at December 31, 1998, a 2% increase. Crusader's cash and investments at December 31, 1999, was $97,452,621 or 92% of the total held by the Company, compared to $97,597,956 or 94% of the total held by the Company at December 31, 1998.
The tax-exempt interest income earned (net of bond premium and discount amortization) during the year ended December 31, 1999, was $1,473,922 compared to $1,698,211 in the year ended December 31, 1998. In the year ended December 31, 1997, tax-exempt interest income earned totaled $1,809,043.
Unico has a $2,000,000 line of credit with Union Bank. Interest on this line is referenced to LIBOR and is payable monthly. The agreement contains certain covenants including maintenance of certain financial ratios. This credit line expires September 5, 2000, at which time it is expected to be renewed. Unico did not borrow against its line of credit in 1999 or 1998.
Cash flow from operations for the year ended December 31, 1999, was $3,700,026, a decrease of $8,358,253 from the year ended December 31, 1998. This decrease was primarily due to a decrease in net income of $3,577,303; a decrease in the change in accrued expenses and other liabilities of $2,315,747; a decrease in the change in loss reserves (net of reinsurance recoverable) of $2,312,870; and a decrease in the change in premium, notes and investment income receivable of $879,505. These decreases were partially offset by a decrease in the change in the unearned premium reserve, net of prepaid reinsurance premiums of $1,043,265.
Due to the fact that the Company has not experienced any adverse effects of Year 2000 issues through the date of this report, the Company does not anticipate it will be materially adversely affected by any future Year 2000 events from its internal operations or from others with whom the Company directly or indirectly does business.
Crusader's primary line of business is commercial multiple peril business package policies. This line of business represented approximately 97% of Crusader's total written premium for both fiscal years ended December 31, 1999 and 1998.
In the year ended December 31, 1998, gross written premium decreased $5,194,687 (12%) compared to the year ended December 31, 1997. This decrease in written premium was primarily due to a decrease in premiums written in the states of Oregon and Washington of $4,236,744 (56%) and represented 82% of the total decrease. This decrease in premium in Washington and Oregon, as previously discussed, resulted from the Company's change in its marketing strategy in these states to reduce its dependency on a single large producer. In addition, the intense price competition in the marketplace has contributed to a reduction in premium in all states that the Company writes business.
Premium earned before reinsurance decreased $5,922,304 (15%) in the year ended December 31, 1999, compared to the year ended December 31, 1998, and decreased $2,105,805 (5%) in the year ended December 31, 1998, compared to the year ended December 31, 1997. The decrease in earned premium before reinsurance was directly related to the decrease in written premium discussed above.
Earned premium ceded increased $883,530 (16%) to $6,583,752 or 19% of earned premium before reinsurance in the year ended December 31, 1999, compared to $5,700,222 or 14% of earned premium before reinsurance for the year ended December 31, 1998. Earned premium ceded decreased $694,106 (11%) to $5,700,222 or 14% of earned premium before reinsurance for the year ended December 31, 1998, compared to $6,394,328 or 15% of earned premium before reinsurance for the year ended December 31, 1997. Ceded premiums increased in the year ended December 31, 1999, primarily due to higher than anticipated loss experience on prior accident years that was subject to the Company's provisionally rated reinsurance contract. Premium ceded under this contract, which was canceled on a runoff basis effective December 31, 1997, is subject to adjustments based on the amount of losses ceded, limited by a maximum percentage that can be charged by the reinsurer. The decrease in earned ceded premium (excluding provisionally rated ceded premium) in 1999 and 1998 was primarily due to decreased earned premium before reinsurance.
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. As shown on the table, the loss ratio increased to 60.6% in 1999 from 50.4% in 1998. This increase in the loss ratio was primarily due to a decrease in favorable loss development due to an increase in the prior years losses incurred in 1999, which was greater than the prior years losses experienced in 1998. Favorable loss development of prior year losses were $1,241,520 in 1999, $4,860,647 in 1998, and $4,275,759 in 1997. The methodology used by the Company in determining case reserves and IBNR is consistent with prior years. In addition, the increase in provisionally rated earned ceded premium in 1999 over 1998 of $1,558,850 also contributed to the increase in loss ratio. 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.
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Loss ratio 60.6% 50.4% 53.1% Expense ratio 29.8% 27.2% 29.1% ---- ---- ---- Combined ratio 90.4% 77.6% 82.2% ==== ==== ====
NIB and AIB market health and life insurance through non-affiliated insurance companies for individuals and groups. Approximately 93% of the health and life commission income in the year ended December 31, 1999, was from the CIGNA HealthCare medical and dental plan programs compared to approximately 95% in the same period of the prior year. Revenues for the year ended December 31, 1999, increased $452,136 (20%) compared to the year ended December 31, 1998. Revenues for the year ended December 31, 1998, increased $132,664 (6%) compared the year ended December 31, 1997.
Individual medical and dental programs - Commission income from the individual medical and dental programs continues to increase due to aggressive marketing and the quality of the Company's customer service.
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Service fee income $1,677,223 $1,896,258 $2,182,074 Policies written 17,225 18,306 19,305
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Daily auto rental program commission and claim administration fee $731,884 $758,073 $757,098 Contingent commission 28,735 49,430 - ------- ------- ------- Total commission and fee income $760,619 $807,503 $757,098 ======= ======= =======
Revenues during the year ended December 31, 1999, were $760,619, a decrease of $46,884 (6%) compared to the same period of the prior year. Revenue for the year ended December 31, 1998, increased by $50,405 (7%) compared to the year ended December 31, 1997.
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Membership and fee income $396,958 $355,781 $336,968
Membership and fee income in the year ended December 31, 1999, increased $41,177 (12%) compared to the year ended December 31, 1998. Membership income increased $18,813 (6%) in the year ended December 31, 1998, compared to the year ended December 31, 1997. AAQHC recognized a greater increase in group memberships in 1999 compared to the increase in group memberships in 1998 and has continued to increase individual and family memberships.
Workers' Compensation Program - ----------------------------- Unifax produces workers' compensation policies primarily in California for non-affiliated insurers and receives a commission from them based on premium written. Unifax discontinued writing new business with one of its non-affiliated insurers in 1998.
Commission income for the year ended December 31, 1999, decreased $247,546 (75%) compared to the year ended December 31, 1998. For the year ended December 31, 1998, commission income increased $31,459 (11%) compared to the year ended December 31, 1997. Commission income in this program decreased in 1999, as a result of the discontinuance of writing new business with one of the non-affiliated insurers in October of 1998. In addition, the non-affiliated insurance company Unifax is currently writing with does not write all of the classes of business that were written by the previous company. Unifax is currently attempting to increase the classes of business that it is authorized to write through its current carrier and through affiliation with another carrier. Commission income for the year ended December 31, 1998, increased over the prior year primarily as the result of increased sales of workers' compensation insurance and incentive bonus commissions earned as a result of the increased sales.
Unifax began producing commercial earthquake and commercial liability insurance policies for unaffiliated insurance companies in 1999. Unifax receives a commission from the insurance company based on premium written and a service fee from the policyholder.
Other commission and fee income are as follows: Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Commercial and personal auto program commission and fee income $4,363 $1,843 $82,439 Earthquake program commission income $22,421 - - Commercial liability program commission and fee income $22,280 - - Miscellaneous fee income 177 242 222 ------ ----- ------ Total commission and fee income $49,241 $2,085 $82,661 ====== ===== ======
Investment Income and Net Realized Gains - ------------------------------------------- Investment income and net realized gains are as follows:
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ----
Policy acquisition costs $8,362,814 $9,497,857 $10,562,191 Ratio to net earned premium (GAAP ratio) 30% 27% 29%
Commissions to Agents/Brokers (not including commissions on Crusader policies that are reflected in policy acquisition costs) are generally related to gross commission income. Commissions to agents and brokers increased $261,833 (25%) for the year ended December 31, 1999, compared to the year ended December 31, 1998. The increase was primarily due to a $225,390 (26%) increase in the commission expense for the health and life programs and is directly related to the 20% increase in sales in the health and life programs discussed above. During the year ended December 31, 1998, commission expense increased $8,087 (1%) compared to the year ended December 31, 1997. This increase was primarily related to the 10% increase in the commission expense in the daily automobile program and a 3% increase in commission expense in the health and life insurance program and was offset by a decrease in commission expense as a result of the discontinuance of the commercial auto program.
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Commission to agents/brokers $1,305,519 $1,043,686 $1,035,599
Consolidated Balance Sheets as of December 31, 1999, and December 31, 1998 25
Consolidated Statements of Operations for the years ended December 31, 1999, December 31, 1998, and December 31, 1997 26
We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated 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 financial position of Unico American Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
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 of certain assets and liabilities and disclosure of contingent 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 losses of $1,086,565 as of December 31, 1999, and net unrealized investment gains of $1,998,536 as of December 31, 1998.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - -------------------------------------------------------------- Fair Value of Financial Instruments - ----------------------------------- The Company has used the following methods and assumptions in estimating its fair value disclosures:
Premiums and Notes Receivable - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
Losses and Loss Adjustment Expenses - ----------------------------------- The liability for unpaid losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period plus estimates based on experience and industry data for unreported losses and loss adjustment expenses.
There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for the Company. The long-tailed nature of liability claims exacerbates that uncertainty. Management has selected target loss and loss expense ratios that it believes are reasonable and reflective of anticipated ultimate experience. The ultimate cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Company claim reserving procedures and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Company operations and management philosophy also may cause actual developments to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle the liability may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- Restricted Funds Restricted funds are as follows:
Stock-Based Compensation - ------------------------ Stock-Based Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning after December 15, 1995. The Company accounts for stock-based compensation under the accounting methods prescribed by Accounting Principles Board (APB) Opinion No. 25, as allowed by SFAS No. 123. Disclosure of stock-based compensation determined in accordance with SFAS No. 123 is presented in Footnote 15. The adoption of this pronouncement did not have a material effect on the financial statements of the Company.
Recently Issued Accounting Standards - ------------------------------------ Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" is effective for financial statements beginning after December 15, 1998. SOP 98-1 requires that the cost of internally developed software be capitalized. There were no costs incurred for software purchased or developed in the year ending December 31, 1999, which were required to be capitalized.
Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging Activities" became effective for fiscal years beginning after June 15, 1999. Statement of Financial Accounting Standards No. 137 (SFAS No. 137) "Accounting for Derivative Instruments and Hedging Activities -Deferral of the Effective Date of FASB Statement No. 133" defers the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The Company is currently evaluating the impact that it will have on the consolidated financial statements. The Company will adopt this new Standard on January 1, 2001.
NOTE 2 - ADVANCE PREMIUM AND PREMIUM DEPOSITS - --------------------------------------------- Some of the Company's health and life programs require payments of premium prior to the effective date of coverage, and accordingly, invoices are sent out as early as two months prior to the coverage effective date. Insurance premiums received for coverage months effective after the balance sheet date are recorded as advance premiums.
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Gross realized gains: Fixed maturities $ - $ 78,758 $ - Equity securities 190,169 170,540 25,093 Gross realized (losses): Equity securities (125,376) (1,367) - ------- ------- ------ Net realized investment gains $64,793 $247,931 $25,093 ====== ======= ======
The amortized cost and estimated market value of fixed maturity investments at December 31, 1999, 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.
The amortized cost and estimated market values of investments in fixed maturities by categories are as follows:
NOTE 3 - INVESTMENTS (continued) - -------------------------------- Short-term investments have an initial maturity of one year or less and consist of the following:
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION) - ---------------------------------------------------------------- Property and equipment consist of the following: Year ended December 31 ---------------------- 1999 1998 ---- ---- Furniture, fixtures, computer, office, and transportation equipment $2,329,113 $2,304,799 Accumulated depreciation 2,180,446 2,099,430 --------- --------- Net property and equipment $ 148,667 $ 205,369 ======= =======
NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET - ------------------------------------------- Premiums and notes receivable are substantially secured by unearned premiums and funds held as security for performance. Year ended December 31 ---------------------- 1999 1998 ---- ---- Premiums receivable $1,615,238 $1,553,977 Premium finance notes receivable 3,903,586 4,388,900 --------- --------- Total premiums and notes receivable 5,518,824 5,942,877 Less allowance for doubtful accounts 21,934 20,161 --------- --------- Net premiums and notes receivable $5,496,890 $5,922,716 ========= =========
NOTE 9 - ACCRUED EXPENSES AND OTHER LIABILITIES - ----------------------------------------------- Accrued expenses and other liabilities consist of the following:
Year ended December 31 ---------------------- 1999 1998 ---- ---- Premium payable $5,208,491 $3,994,888 Unearned claim adjusting income 300,000 300,000 Profit sharing contributions 406,667 359,948 Accrued salaries 469,721 441,427 Other 6,258 322,196 --------- --------- Total accrued expenses and other liabilities $6,391,137 $5,418,459 ========= =========
December 31, 2000 $1,025,952 December 31, 2001 $1,025,952 December 31, 2002 $1,025,952 December 31, 2003 $1,025,952 December 31, 2004 (through March 31, 2007) $3,334,344 --------- Total minimum payments $7,438,152 =========
NOTE 11 - LEASE COMMITMENT (continued) - ------------------------------------- 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 Company believes that 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 non-affiliated third parties. The Company utilizes for its own operations 100% of the space it leases.
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.
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Premiums written: Direct business $33,139,361 $37,079,303 $42,273,990 Reinsurance assumed - - - Reinsurance ceded $(6,595,440) $(2,952,340) $(6,687,944)
NOTE 14 - STATUTORY CAPITAL AND SURPLUS - --------------------------------------- Crusader is required to file an annual statement with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities ("statutory"). Statutory accounting practices differ in certain respects from generally accepted accounting principles. The more significant of these differences for statutory accounting are (a) premium income is taken into earnings over the periods covered by the policies, whereas the related acquisition and commission costs are expensed when incurred; (b) all bonds are recorded at amortized cost, regardless of trading activity; (c) non-admitted assets are charged directly against surplus; (d) loss reserves and unearned premium reserves are stated net of reinsurance; and (e) federal income taxes are recorded when payable. Additionally, the cash flow presentation is not consistent with generally accepted accounting principles and a reconciliation from net income to cash provided by operations is not presented.
Year ended December 31, 1999 $5,404,526 Year ended December 31, 1998 $8,243,434 Year ended December 31, 1997 $6,658,352
The Company believes that Crusader's statutory capital and surplus were sufficient to support the insurance premiums written based on guidelines established by the NAIC.
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. The maximum dividend that may be made without prior approval as of December 31, 1999, is $5,404,526. After taking into account the dividends paid by Crusader to its parent in 1999 of $2,000,000, the remaining dividend which may be made without prior approval as of December 31, 1999, was $3,404,526.
The changes in the number of common shares under option are summarized as follows:
Weighted Average Options Exercise Price ------- -------------- Outstanding at December 31, 1996 560,699 $3.632 Options granted - - Options exercised (186,751) $3.495 Options terminated - - ------- Outstanding at December 31, 1997 373,948 $3.700 Options granted - - Options exercised (90,082) $3.455 Options terminated (89,320) $3.500 ------ Outstanding at December 31, 1998 194,546 $3.592 Options granted 135,000 $9.250 Options exercised (93,131) $3.691 Options terminated - - ------- Outstanding at December 31, 1999 236,415 $6.780 ======= The weighted average fair value of options granted during 1999 was $4.30. No options were granted in 1998 or 1997. Options exercisable were 101,415 at December 31, 1999, at a weighted average exercise price of $3.50; 194,546 at December 31, 1998, at a weighted average exercise price of $3.59; and 275,046 at December 31, 1997, at a weighted average exercise price of $3.69.
Year ended December 31 ---------------------- 1999 1998 ---- ---- Deferred tax assets: Discount on loss reserves $1,371,087 $1,682,596 Unearned premiums 1,125,191 1,291,298 Unrealized loss on investments 559,745 - Other 153,968 - --------- --------- Total deferred tax assets $3,209,991 $2,973,894 --------- --------- Deferred tax liabilities: Deferred acquisition costs $1,474,995 $1,633,021 Discount on salvage and subrogation 7,944 8,493 Unrealized gain on investments - 1,076,135 Other 185,810 47,269 --------- --------- Total deferred tax liabilities $1,668,749 $2,764,918 --------- --------- Net deferred tax assets $1,541,242 $208,976 ========= =======
As a California insurance company, Crusader is obligated to pay a premium tax on gross premiums written in the states of Arizona, California, Colorado, Montana, 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.
NOTE 17 - EARNINGS PER SHARE - ---------------------------- A reconciliation of the numerator and denominator used in the basic and diluted earnings per share calculation is presented below: