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

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May 14, 2010
Unico American Corp. (UNAM, Financial) filed Quarterly Report for the period ended 2010-03-31.

Unico American Corp. has a market cap of $51.3 million; its shares were traded at around $9.47 with a P/E ratio of 18.2 and P/S ratio of 1.2.

Highlight of Business Operations:

The Company generates revenue from its investment portfolio, which consisted of approximately $137.0 million (at amortized cost) at March 31, 2010, compared to $137.6 million (at amortized cost) at December 31, 2009. Investment income decreased $284,809 (23%) to $939,318 for the three months ended March 31, 2010, compared to $1,224,127 for the three months ended March 31, 2009. 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 2.7% for the three months ended March 31, 2010, from 3.4% for the three months ended March 31, 2009. 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's investments in fixed maturity obligations of $121,226,729 (at amortized cost) includes $94,862,045 (78%) of U.S. treasury securities, $4,032,687 (3%) of industrial and miscellaneous securities, and $22,331,997 (19%) of long-term certificates of deposit.

The Company had net income of $499,193 for the three months ending March 31, 2010, compared to net income of $1,029,244 for the three months ended March 31, 2009, a decrease in net income of $530,051 (51%). Total revenue for the three months ended March 31, 2010, decreased $690,614 (7%) to $9,897,813, compared to total revenue of $10,588,427 for the three months ended March 31, 2009.

Premium written (before reinsurance) is a non-GAAP financial measure which is defined, under statutory accounting, as the contractually determined amount charged by the Company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies. Premium earned, the most directly comparable GAAP measure, represents the portion of premiums written that is recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the term of the policies. Direct written premium reported on the Company s statutory statement decreased $2,148,050 (20%) to $8,468,959 for the three months ended March 31, 2010, compared to $10,617,009 for the three months ended March 31, 2009. In addition to the increased competition in the property and casualty marketplace, the Company took action on two of its programs that it believed was necessary due to higher than expected losses. The corrective actions took place in 2009 after the first quarter of 2009, and included a rate increase on one of the programs, the termination of certain brokers and the non-renewal of policies associated with those brokers on the other program. These two programs accounted for approximately 63% of the $2,148,050 decrease in written premium before reinsurance for the three months ended March 31, 2010, compared to the prior year period The Company believes that rate adequacy is more important than premium growth and that underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) is its primary goal.

In 2009 and 2010 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 2010 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 2003 and 2004 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 twelve-month period thereafter until all losses subject to the agreement have been finally settled. Any contingent commission received is subject to return based on future development of ceded losses and loss adjustment expenses. As of March 31, 2010, the Company has received a total net contingent commission of $3,668,198 for the years subject to contingent commission. Of this amount, the Company has recognized $1,847,658 of contingent commission income, of which $161,278 was recognized in the three months ended March 31, 2010. The remaining balance of the net payments received of $1,820,540 is currently unearned and included in “Accrued Expenses and Other Liabilities” in the consolidated balance sheets. The unearned contingent commission may be subsequently earned or returned to the reinsurer depending on the future development of the ceded IBNR for the years subject to contingent commission.

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