Unico American Corp. Reports Operating Results (10-Q)

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May 15, 2009
Unico American Corp. (UNAM, Financial) filed Quarterly Report for the period ended 2009-03-31.

Unico American Corporation is an insurance holding company which provides property casualty health and life insurance and related premium financing through its wholly owned subsidiaries. The insurance company operation is conducted through Crusader Insurance Company the company's property and casualty insurance company. Unico American Corp. has a market cap of $42 million; its shares were traded at around $7.54 with a P/E ratio of 8 and P/S ratio of 0.9. The dividend yield of Unico American Corp. stocks is 2.3%. Unico American Corp. had an annual average earning growth of 45.3% over the past 5 years.

Highlight of Business Operations:

The $382,558 (59%) increase in underwriting profit (before income tax) for the three months ended March 31, 2009, as compared to the prior year period is primarily the result of a $1,561,053 (25%) decrease in losses and loss adjustment expenses, offset by a $1,305,607 (15%) decrease in net premium earned. Losses and loss adjustment expenses were 61% of net premium earned for the three months ended March 31, 2009, compared to 69% of net premium earned for the three months ended March 31, 2008. The decrease in losses and loss adjustment expenses as compared to the prior year period is primarily due to a decrease in current accident year losses incurred and an increase in favorable development of prior accident years losses and loss adjustment expenses. In the three months ended March 31, 2009, current accident year losses incurred were approximately 70% of net premium earned and the Company incurred favorable development of prior years losses of $706,642. In the three months ended March 31, 2008, current accident year losses incurred were approximately 73% of net premium earned and the Company incurred favorable development of prior years losses of $358,773.

The Company generates revenue from its investment portfolio, which consisted of approximately $142.9 million (at amortized cost) at March 31, 2009, compared to $145.0 million (at amortized cost) at December 31, 2008. Investment income decreased $398,387 (25%) to $1,224,127 for the three months ended March 31, 2009, compared to $1,622,514 for the three months ended March 31, 2008. The decrease in investment income is primarily a result of a decrease in invested assets and a decrease in the Company s annualized weighted average investment yield on its fixed maturity obligations to 3.4% for the three months ended March 31, 2009, from 4.4% for the three months ended March 31, 2008. Due to the current interest rate environment, management believes it is prudent to purchase fixed maturity investments with maturities of five years or less and with minimal credit risk.

The Company had net income of $1,029,244 for the three months ending March 31, 2009, compared to net income of $959,990 for the three months ended March 31, 2008, an increase in net income of $69,254 (7%). Total revenue for the three months ended March 31, 2009, decreased $1,679,693 (14%) to $10,588,427, compared to total revenue of $12,268,120 for the three months ended March 31, 2008.

Earned ceded premium (excluding provisionally rated ceded premium) decreased $40,973 (2%) to $2,254,988 for the three months ended March 31, 2009, compared to $2,295,931 in the three months ended March 31, 2008. The decrease in earned ceded premium is primarily a result of a decrease in direct premium earned and changes in the rates charged by Crusader s reinsurers. The Company evaluates each of its ceded reinsurance contracts at their inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of March 31, 2009, all such ceded contracts are accounted for as risk transfer reinsurance. The earned ceded premium consists of both premium ceded under the Company s current reinsurance contracts and premium ceded to the Company s provisionally rated reinsurance contracts. Prior to January 1, 1998, the Company s reinsurer charged a provisional rate on exposures up to $500,000 that was subject to adjustment and was based on the amount of losses ceded, limited by a maximum percentage that could be charged. That provisionally rated treaty was cancelled on a runoff basis in 1997. Direct earned premium, earned ceded premium, and ceding commission are as follows:

In 2009 Crusader retained a participation in its excess of loss reinsurance treaties of 20% in its 1st layer ($700,000 in excess of $300,000), 15% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 0% in its property and casualty clash treaty. In 2008 Crusader retained a participation in its excess of loss reinsurance treaties of 20% in its 1st layer ($700,000 in excess of $300,000), 15% in its 2nd layer ($1,000,000 in excess of $1,000,000), and 0% in its property and casualty clash treaty.

The 2007 through 2009 excess of loss treaties do not provide for a contingent commission. Crusader s 2006 1st layer primary excess of loss treaty provides for a contingent commission equal to 20% of the net profit, if any, accruing to the reinsurer. The first accounting period for the contingent commission covers the period from January 1, 2006, through December 31, 2006. The 2005 excess of loss treaties do not provide for a contingent commission. Crusader s 2004 and 2003 1st layer primary excess of loss treaties provide for a contingent commission to the Company equal to 45% of the net profit, if any, accruing to the reinsurer. The first accounting period for the contingent commission covers the period from January 1, 2003, through December 31, 2004. For each accounting period as described above, the Company will calculate and report to the reinsurers its net profit (excluding incurred but not reported losses), if any, within 90 days after 36 months following the end of the first accounting period, and within 90 days after the end of each 12 month period thereafter until all losses subject to the agreement have been finally settled. Any contingent commission payment received is subject to return based on future development of ceded losses and loss adjustment expenses. In March 2007, the Company received an advance of $1 million from its reinsurer, and in February 2008, the Company received an additional $2,419,940 to be applied against future contingent commission earned, if any. Based on the Company s calculated and reported net profit (excluding incurred but not reported losses) as of December 31, 2008, the Company paid its reinsurer $311,616 in March 2009. Based on the Company s ceded losses and loss adjustment expenses (including ceded incurred but not reported losses) as of March 31, 2009, the Company recorded $2,001,465 of these net payments as an advance from its reinsurer and it is included in “Accrued Expenses and Other Liabilities” in the consolidated balance sheets. Thus, the Company has recognized $1,106,859 of contingent commission, of which $187,130 and $90,583 was recognized in the three months ended March 31, 2009 and March 31, 2008, respectively.

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