As of March 31, 1996, the Company had invested $68,085,376 (at amortized cost) or 94% of its investments in fixed maturity obligations. The balance of the Company's investments were in equity securities consisting of common shares in two regional telephone companies and high-quality, short-term investments which included bank money market accounts, certificates of deposit and commercial paper. The Company's investments in fixed maturity obligations included $38,126,835 (56%) of tax-exempt, pre-refunded state and municipal bonds, $18,191,847 (27%) of U.S. treasury securities, and $11,766,694 (17%) in high- quality industrial bonds and certificates of deposit. This compares to fixed maturity obligations in the prior fiscal year of $60,707,261 that included $41,758,522 (69%) of tax-exempt, pre-refunded state and municipal bonds, $4,884,350 (8%) of U.S. treasury notes, and $14,064,389 (23%) in high-quality industrial bonds and certificates of deposit. The tax-exempt interest income earned (net of bond premium/discount amortization) during the fiscal year ended March 31, 1996, was $1,738,799 compared to $1,898,772 in the fiscal year ended March 31, 1995.
The Company's investment policy limits investments in any one company to no more than $1,000,000. This limitation excludes bond premiums paid in excess of par value and U.S. Government or U.S. Government guaranteed issues. All of the Company's investments are high grade investment quality.
The Company's premium finance subsidiary, American Acceptance Corporation, has a bank credit line of $6,000,000 with a variable rate of interest based on fluctuations in the London Interbank Offered Rate ("LIBOR"). This credit line is only used to provide American Acceptance Corporation with funds to finance insurance premiums.
On June 15, 1995, the Company repaid from its cash flow the remaining $500,000 of its related party debt. This debt was incurred by Unico in June of 1992 to increase Crusader's surplus following the Los Angeles riot.
Crusader's statutory capital and surplus as of March 31, 1996, was $22,721,183, an increase of $3,135,344 from the surplus balance at March 31, 1995, of $19,585,839.
The effect of inflation on the net income of the Company during the year ended March 31, 1996, was not significant.
The combined ratio is the sum of (1) the 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% the company has an underwriting loss.
Loss ratio 55.0% 59.8% 58.5% Expense ratio 27.2% 28.5% 28.9% Combined ratio 82.2% 88.3% 87.4%
Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Daily auto rental program commission & claim administration fee $871,841 $756,162 $695,330
Although the daily automobile rental insurance program experienced an increase in commission and fee income in the current and prior fiscal years, price competition remains intense in this market. 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.
Commercial & personal auto program commission, service fee & claim administration income $183,519 $257,775 $240,076
Revenue for the fiscal year ended March 31, 1996, decreased $74,256 (29%) from the prior fiscal year while revenue for the fiscal year ended March 31, 1995, increased $17,699 (7%) from the prior fiscal year.
The increase in revenues in the fiscal year ended March 31, 1996, was primarily due to an increase in sales of policies covering individual and family members resulting from rate reductions in March 1995 and July 1995 which made the products more competitive. The increase in sales is also due to aggressive marketing of quality products to customers along with outstanding customer service. Because of the intense competition among carriers for small groups (as discussed below), many carriers have begun 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. Future incentive, if any, cannot yet be determined.
The decrease in the health and life revenues in the fiscal year ended March 31, 1995, was due to changes in the commission structure resulting from intense rate competition and the effects of the recession in California. Regulations on California health care medical providers to small businesses 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 covered 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 22 insurance companies in the alliance, and this number is expected to increase. The premiums charged by the 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 and costs. Insurance carriers are paying lower commissions to keep their rates low and competitive. The health insurance market for small business has become a level playing
field because the rates charged by any California health insurance carrier are the same rates charged by all their administrators and general agents. Therefore, the health insurance rates charged by the company are the same rates charged by its competitors. 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.
Individual medical programs are not covered by AB 1672 and all of the company's major insurance carriers have now provided the company with individual medical insurance programs. The company is now marketing these individual programs and anticipates growth in this area. The company is also continuing its efforts to provide more choices to its customers by offering a wide variety of products and expanding its marketing area.
American Acceptance Corporation, the Company's insurance premium finance subsidiary, provides premium financing to Crusader and to a non-affiliated insurer on commercial auto policies produced by Unifax. AAC is continuing to finance approximately 85% of those Crusader policies which are financed. Since this program is financing only policies produced by Unifax, the further growth of this program is dependent and directly related to the growth of Crusader's written premium and the commercial auto program produced by Unifax.
Fiscal Year Ended March 31, 1996 1995 1994 ---- ---- ---- Service fee income $1,891,405 $1,884,041 $1,716,937 Policies written 16,881 17,830 17,067
Investment income consists of interest, dividends and net realized investment gain as follows:
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
Consolidated Statements of Operations for the three years ended March 31, 1996, 1995, and 1994 24
Consolidated Statements of Changes in Stockholders' Equity for the three years ended March 31, 1996, 1995, and 1994 25
Consolidated Statements of Cash Flows for the three years ended March 31, 1996, 1995, and 1994 26
We have audited the accompanying consolidated balance sheets of Unico American Corporation and its subsidiaries as of March 31, 1996, and 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1996. 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.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1996, 1995, and 1994
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31,
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.
INVESTMENTS The Company adopted FASB Statement No. 115 ("Accounting for Certain Investments in Debt and Equity Securities") in the fiscal year ended March 31, 1994. Statement No. 115 requires investments in all debt securities and equity securi- ties to be classified in one of three categories: held-to-maturity securities, available-for-sale securities and trading securities. Held-to-maturity securities are recorded at amortized cost. Available-for-sale securities are recorded at market value with unrealized gains and losses reported as a separate component of stockholders' equity. Trading securities are recorded at market value with unrealized gains and losses reported in earnings. At the time the Company adopted FASB Statement No. 115, all of its fixed income securities were classified as held-to-maturity.
The Company reclassified all of its fixed maturity securities as available-for-sale beginning with the quarter ended March 31, 1995. This transaction did not have a material effect on the Company's financial statements. Although all of the Company's fixed maturity investments are classified as available-for-sale and are stated at market value, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments. Short-term investments are carried at cost, which approximates market value.
Market value for fixed maturities are obtained from a national quotation service. Market value for equity securities are determined by quotations on national securities exchanges. When a decline in the 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 upon 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.
Premium trust funds (1) $2,465,923 $ 2,931,786 Assigned to state agencies (2) 725,000 725,000 ----------- ----------- Total restricted funds $ 3,190,923 $ 3,656,786 ----------- ----------- ----------- -----------
(1) As required by law, the Company segregates from its operating accounts the premiums collected from insurers which are payable to insurance companies into separate trust accounts. These amounts are included in cash and short-term investments.
The Company cedes reinsurance to provide for greater diversification of business, to allow management to control exposure to potential losses arising from large risks by reinsuring certain levels of risk in various areas of exposure, to reduce the loss that may arise from catastrophes, and to provide additional capacity for growth. Prepaid reinsurance premiums and reinsurance receivables are reported as assets and represent ceded unearned premiums and reinsurance recoverable on both paid and unpaid losses, respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies.
Fixed maturities $ 3,587,856 $ 3,085,667 $ 2,863,866 Equity securities 5,886 15,909 192,438 Short-term investments 264,956 234,909 192,701 Notes receivable - - 9,029 ----------- ----------- ----------- Total investment income 3,858,698 3,336,485 3,258,034 Less, investment expenses (5,035) 18,535 7,027 ----------- ----------- ----------- Net investment income $ 3,863,733 $ 3,317,950 $ 3,251,007 ----------- ----------- ----------- ----------- ----------- -----------
Gross Realized Gains: Fixed maturities $ 7,193 131,199 $ 83,360 Equity securities 48,550 - 100,853 Gross Realized Losses: Equity securities - (123,647) (153,474) -------- -------- -------- Net realized investment gains $ 55,743 $ 7,552 $ 30,739 -------- -------- -------- -------- -------- --------
Gross Unrealized Appreciation: Fixed maturities $ 954,381 $ - $ - Equity securities 2,838 - - Gross Unrealized (Depreciation): Fixed maturities (151,480) $(268,331) - Equity securities - - (108,129) --------- --------- --------- Net unrealized appreciation (depreciation) on investments 805,739 (268,331) (108,129) Deferred federal income taxes (273,952) 91,233 36,764 --------- --------- --------- Net unrealized appreciation (depreciation),net of deferred federal income taxes $ 531,787 $(177,098) $ (71,365) --------- --------- --------- --------- --------- ---------
Estimated Amortized Market Cost Value Due in one year or less $ 7,143,065 $ 7,179,768 Due after one year through five years 37,148,831 37,499,245 Due after five years through ten years 23,793,480 24,209,264 ---------- ----------
NOTE 4 - PREMIUM AND NOTES RECEIVABLE, NET Premium and notes receivable consist of the following: March 31, March 31, 1996 1995 --------- ---------
Premiums receivable $2,493,592 $1,585,702 Premium finance notes receivable 5,672,984 6,493,879 --------- --------- Total premiums and notes receivable 8,166,576 8,079,581 Less allowance for doubtful accounts 25,333 18,229 --------- --------- Net premiums and notes receivable $8,141,243 $8,061,352 --------- --------- --------- ---------
Furniture, fixtures, computer, office & transportation equipment $2,414,739 $2,339,329 Accumulated depreciation 2,136,121 2,003,834 --------- --------- Net property & equipment $ 278,618 $ 335,495 --------- --------- --------- ---------
The following table sets forth a reconciliation of the liabilities for losses and loss adjustment expenses for the periods shown:
Accrued expenses and other liabilities consist of the following: March 31, March 31, 1996 1995 --------- ---------
Premium payable $ 696,997 $ 717,842 Unearned adjusting income 300,000 300,000 Profit sharing contributions 480,863 477,028 Accrued interest payable 300,000 300,000 Accrued salaries 206,638 Other 347,900 379,690 --------- --------- Total accrued expenses and other liabilities $2,332,398 $2,174,560 --------- --------- --------- ---------
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.
Year Ended Year Ended Year Ended March 31, March 31, March 31, 1996 1995 1994 ---------- ---------- ---------- Premiums written: Direct business $37,631,357 $39,039,549 $37,278,300 Reinsurance assumed Reinsurance ceded $(4,437,446) $(8,614,685) $(9,815,136) Premiums Earned: Direct business $37,554,830 $38,466,825 $31,400,463 Reinsurance assumed Reinsurance ceded $(6,077,403) $(9,258,535) $(8,685,638)
During the fiscal year ended March 31, 1986, the Company adopted the Unico American Corporation Profit Sharing Plan. Employees who are at least 21 years of age and have been employed by the Company for at least two years are participants in the Plan. Pursuant to the terms of the Plan, the Company annually contributes to the account of each participant an amount equal to a percentage of the
March 31, 1996 $484,715 March 31, 1995 $477,028 March 31, 1994 $419,505
Options Exercise Price ------- -------------- Outstanding at March 31, 1993 619,836 $3.4375 to $3.85 Options terminated July 1, 1993 (5,000) $3.50 Options terminated December 21, 1993 (5,000) $3.50 ------- Outstanding at March 31, 1994 609,836 $3.4375 to $3.85 Options exercised May 16, 1994 (5,000) $3.50 Options terminated July 1, 1994 (10,000) $3.50 Options exercised July 5, 1994 (5,000) $3.50 Options granted August 17, 1994 90,164 $4.375 ------- 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 ------- -------
The provision for deferred income taxes results from the following temporary differences between taxable income and income reported in the accompanying financial statements.
The components of the net federal income tax asset included in the financial statements at March 31, 1996, and 1995, as required by the asset and liability method, are as follows:
Deferred tax liabilities: - ------------------------- Deferred acquisition costs $1,473,461 $1,398,739 Unrealized gain on investments 273,952 - --------- --------- Total deferred tax liabilities $1,747,413 $1,398,739 --------- ---------
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, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
As a California insurance company, Crusader is obligated to pay a premium tax on gross premiums written in the states of California, Oregon, Washington, Nevada and Arizona. The premium tax is in lieu of state franchise taxes; thus, the above provision for state taxes does not include the premium tax.
First Second Third Fourth ----- ------ ----- ------ March 31, 1996 - -------------- Total revenue $10,169,592 $10,400,201 $10,903,066 $10,995,615 Earnings before taxes 1,827,849 2,003,588 2,179,764 2,397,090 Net earnings 1,327,306 1,414,145 1,531,213 1,674,817 Earnings per share $0.22 $0.23 $0.25 $0.27
March 31, 1995 - -------------- Total revenue $9,571,300 $9,826,331 $10,074,930 $9,971,662 Earnings before taxes 993,697 993,313 1,367,575 1,603,092 Net earnings 746,663 763,070 1,032,089 1,250,357 Earnings per share $0.12 $0.13 $0.17 $0.21