Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, health and life insurance through its agency subsidiaries; insurance premium financing; and membership association services.

The Company's net income was $5,283,016 in 2008, $6,712,444 in 2007, and $11,925,466 in 2006.

This overview discusses some of the relevant factors that management considers in evaluating the Company's performance, prospects and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety of the management discussion and analysis, the Company's financial statements and notes thereto, and all other items contained within the report on this Annual Report on Form 10-K.

Revenue and Income Generation

The Company receives its revenue primarily from earned premium derived from the insurance company operations, commission and fee income generated from the insurance agency operations, finance charges and fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. The insurance company operation generates approximately 87% of the Company's total revenue. The Company's remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually not material to consolidated revenues.

Insurance Company Operation

The property and casualty insurance industry is highly competitive and includes many insurers, ranging from large companies offering a wide variety of products worldwide to smaller, specialized companies in a single state or region offering only a single product. Many of the Company's existing or potential competitors have considerably greater financial and other resources, have a higher rating assigned by independent rating organizations such as A.M. Best Company, have greater experience in the insurance industry and offer a broader line of insurance products than the Company. As of December 31, 2008, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. However, all Crusaders' business was written in the State of California. During the year ended December 31, 2008, 98% of Crusader's business was commercial multiple peril policies. Effective January 27, 2009, A.M. Best Company upgraded Crusader's financial strength rating to A- (Excellent) from B++ (Good), and revised Crusader's rating outlook to stable from positive. In addition, Crusader's Issuer Credit Rating was upgraded to a- (Excellent) from bbb+ (Good).

A primary challenge of the property and casualty insurance company operation is contending with the fact that the Company sells its products before the ultimate costs are actually known. That is, when pricing its products, the Company must forecast the ultimate claim and loss adjustment costs. In addition, factors such as changes in regulations and legal environment, among other things, can all impact the accuracy of such cost.

The property and casualty insurance industry is characterized by periods of soft market conditions, in which premium rates are stable or falling and insurance is readily available, and by periods of hard market conditions, in which premium rates rise, coverage may be more difficult to find, and insurers' profits increase. The Company believes that the California property and casualty insurance market has transitioned to a "soft market" in the last few years. The Company cannot determine how long the existing market conditions will continue nor in which direction they might change. Despite the increased competition in the property and casualty marketplace, 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. Nonetheless, Crusader believes that it can grow its sales and profitability by continuing to focus upon three key areas of its operations:
(1) product development, (2) improved service to retail brokers, and (3) appointment of captive and independent retail agents. Crusader's underwriting profit (before income taxes) is as follows:

                                                                 Year ended December 31
                                                         2008             2007             2006

Net premium earned                                   $ 33,949,695     $ 37,129,665       42,933,789
Less:
Losses and loss adjustment expenses                    20,592,730       22,182,237       17,826,979
Policy acquisition costs                                8,261,324        8,465,047        9,250,989
Total                                                  28,854,054       30,647,284       27,077,968

Underwriting profit (before income taxes)            $  5,095,641     $  6,482,381     $ 15,855,821

The following table provides an analysis of the losses and loss adjustment expenses:

                                                                 Year ended December 31
                                                         2008             2007             2006
Losses and loss adjustment expenses

Current accident year                                  24,149,531       26,300,338       29,997,662
Favorable development of all prior accident years       3,556,801        4,118,101       12,170,683

Total loss and loss adjustment expenses              $ 20,592,730     $ 22,182,237     $ 17,826,979

Losses and loss adjustment expenses were 61% of net premium earned for the year ended December 31, 2008, compared to 60% of net premium earned for the year ended December 31, 2007, and compared to 42% of net premium earned for the year ended December 31, 2006.

Other Operations

The Company's other operations generate commissions, fees, and finance charges from various insurance products. The events that have the most significant economic impact are as follows:

Unifax primarily sells and services insurance policies for Crusader. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the financial statements. Policy fee income for the twelve months ended December 31, 2008, decreased 10% as compared to the prior year. The decrease in policy fee income is a result of a decrease in the number of policies issued during the twelve months ended December 31, 2008, as compared to 2007.

AIB sells and services health insurance policies for individual/family and small business groups and receives commissions based on the premiums that it writes. Commission income increased 19% for the year ended December 31, 2008, compared to 2007. The increase is primarily due to the increase in sales of small group medical insurance offered through CIGNA HealthCare. All CIGNA small group medical insurance policyholders are members of AAQHC. In November 2008, AIB entered into a General Agent Contract with Blue Shield of California who will pay AIB override commissions for all business submitted to them. In June 2009, CIGNA plans to substantially reduce the medical plans offered to Small Group Employers in the state of California, from sixteen current plans to four. All new employer groups and existing employer groups, on their anniversary date, will have the option to choose from the four available plans. AIB will be assisting its CIGNA policyholders in obtaining new coverage in one of the four CIGNA plans or with other contracted carriers. This reduction in CIGNA medical plans offered to Small Group Employers in the state of California may result in a decrease in AIB commission income and AAQHC fee income. AAQHC will continue to underwrite and administer all remaining CIGNA business, including dental plans for Individuals and Small Group Employers.

AAQHC provides various consumer benefits to its members, including participation in group health care insurance policies. For these services, AAQHC receives membership and fee income from its members. Membership and fee income decreased 3% in the year ended December 31, 2008, compared to 2007. The decrease is a result of a decrease in the number of members.

AAC provides premium financing for Crusader policies that are produced by Unifax in California. Finance charges and fees earned by AAC during 2008 decreased 17% as compared to 2007. The decrease is primarily a result of a 11% decrease in the number of loans issued in 2008 compared to 2007. Average premium financed by AAC decreased to $2,653 in 2008 from $2,769 in 2007.

The daily automobile rental insurance program is produced by Bedford Insurance Services, Inc. Bedford receives a commission from a non-affiliated insurance company based on premium written. Commission in the daily automobile rental insurance program increased 3% as compared to 2007.

Investments and Liquidity

The Company generates revenue from its investment portfolio, which consisted of approximately $145.0 million (at amortized cost) as of December 31, 2008, and $147.3 million (at amortized cost) as of December 31, 2007. Investment income for the twelve months ended December 31, 2008, decreased $1.0 million (14%) as compared to the twelve months ended December 31, 2007. The decrease was primarily due to a decrease in the Company's annualized yield on average invested assets to 4.0% in 2008 from 4.6% in 2007. The decrease in the annualized yield on average invested assets is a result of lower yields in the marketplace on both new and reinvested assets. 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.

As of December 31, 2008, the weighted average maturity of the Company's fixed maturity investments was 2.1 years compared to 2.0 years and 1.3 years as of December 31, 2007, and December 31, 2006, respectively.

Due to the nature of the Company's business (insurance and insurance services) and whereas Company growth does not normally require material reinvestments of profits into property or equipment, the cash flow generated from operations usually results in improved liquidity for the Company. Because the Company is a holding company and operates through its subsidiaries, its cash flow is dependent upon the earnings of its subsidiaries and the distributions of those earnings to the Company.

Cash flow used by operations in the year ended December 31, 2008, was $1,675,603, a decrease in cash flow of $1,561,963 compared to the cash flow for the year ending December 31, 2007. In 2008 the Company primarily utilized the cash from the maturity of its fixed maturity investments to purchase $63.6 million of fixed maturity securities.

Cash flow used by operations in the year ended December 31, 2007, was $113,640, a decrease in cash flow of $6,411,534 compared to the cash flow for the year ending December 31, 2006. In 2007 the Company primarily utilized the cash from the maturity of its fixed maturity investments to purchase $69.7 million of fixed maturity securities.

The most significant liquidity risk faced by the Company is adverse development of the insurance company's loss and loss adjustment expense reserves. Based on the Company's current loss and loss expense reserves and expected current and future payments, the Company believes that there are no current liquidity issues. However, no assurance can be given that the Company's estimate of ultimate loss and loss adjustment expense reserves will be sufficient.

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 (at amortized cost) at December 31, 2008, were $145,070,097 compared to $147,457,231 at December 31, 2007. Crusader's cash and investments at December 31, 2008, was 98% of the total held by the Company, compared to 97% of the total held by the Company at December 31, 2007.

The Company's investments are as follows:

                             December 31, 2008               December 31, 2007               December 31, 2006
                        Amount                %         Amount                %         Amount                %

Fixed maturities (at
amortized cost)
  Certificates of
deposit                 $     400,000             -     $     400,000             -     $     400,000             -
  U.S. treasury
securities                124,526,227            92       130,211,428            93       127,553,801            91
  Industrial and
miscellaneous
(taxable)                  10,614,127             8         9,365,735             7        12,523,393             9
  State and municipal
(tax exempt)                        -             -            15,045             -            15,134             -
    Total fixed
maturity investments      135,540,354           100       139,992,208           100       140,492,328           100

Short-term cash
investments (at cost)
  Certificates of
deposit                       200,000             2           200,000             3           200,000             3
  Commercial paper                  -             -         3,887,322            53         1,665,000            25
  Bank money market
accounts                    3,312,140            35           444,781             6           210,270             3
  U.S. government
money market fund           5,585,395            59         2,425,807            33           411,206             6
  Short-term U.S.
treasury bills                399,953             4           393,768             5         4,322,048            63
  Bank savings
accounts                        4,545             -             4,481             -            11,483             -
    Total short-term
cash investments            9,502,033           100         7,356,159           100         6,820,007           100

    Total investments   $ 145,042,387                   $ 147,348,367                   $ 147,312,335

In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS No. 115), the Company is required to classify its investment securities into one of three categories: held-to-maturity, available-for-sale, or trading securities. Although all of the Company's investment in fixed maturity securities are classified as available-for-sale and the Company may sell investment securities from time to time in response to economic and market conditions, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity.

The Company's investment guidelines on equity securities limit investments in equity securities to an aggregate maximum of $2,000,000. The Company's investment guidelines on fixed maturities limit those investments to high-grade obligations with a maximum term of eight years. The maximum investment authorized in any one issuer is $2,000,000 and the maximum in any one U.S. government agency or U.S. government sponsored enterprise is $3,000,000. This dollar limitation excludes bond premiums paid in excess of par value and U.S. government or U.S. government guaranteed issues. Investments in municipal securities are primarily pre-refunded and secured by U.S. treasury securities. The short-term investments are either U.S. government obligations, FDIC insured, or are in an institution with a Moody's rating of P2 and/or a Standard & Poor's rating of A1. All of the Company's fixed maturity securities are rated and readily marketable and could be liquidated without any material adverse financial impact.

The investment marketplace in general, and in certain asset classes specifically, has been impacted by volatility as a result of uncertainty in the credit markets that began in 2007 and continued throughout 2008. The Company's fixed maturity investment portfolio as of December 31, 2008, consisted of 92% U.S. treasury securities and 8% highly rated industrial and miscellaneous taxable issues bonds. As of December 31, 2008, the Company's industrial and miscellaneous taxable bonds were all rated "A" or better by Standard & Poors.

Crusader's statutory capital and surplus as of December 31, 2008, was $64,736,230, an increase of $6,873,896 (12%) from December 31, 2007. Crusader's statutory capital and surplus as of December 31, 2007, was $57,862,334, an increase of $7,838,566 (16%) from December 31, 2006.

No dividends were declared or paid by Crusader to Unico in 2008, 2007, or 2006. Based on Crusader's statutory net income for the year ended December 31, 2008, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2009 is $7,067,715.

In April 2000, the Company announced that its Board of Directors had authorized the purchase in the open market from time to time of up to an aggregate of 315,000 shares of the common stock of the Company. On August 8, 2000, the Board of Directors authorized the purchase of an additional 315,000 shares and on September 6, 2000, the Board of Directors authorized the purchase of another 315,000 shares of the common stock of the Company in the open market from time to time. On December 19, 2008, the Board of Directors authorized an additional stock repurchase program to acquire up to 500,000 shares of the Company's common stock in the open market from time to time. This brought the total shares of the Company's common stock authorized to be repurchased to 1,445,000 shares since the year 2000 (see Note 16 of "Notes to Consolidated Financial Statements"). The programs have no expiration date and may be terminated by the Board of Directors at any time. During the twelve months ended December 31, 2008, the Company repurchased 51,092 shares of the Company's common stock at a cost of $416,583 of which $25,108 was allocated to capital and $391,475 was allocated to retained earnings. As of December 31, 2008, under the stock repurchase programs previously adopted by the Company, the Company had remaining authority to repurchase up to an aggregate of 515,467 shares of common stock. During the months of January and February 2009, the Company purchased and retired an additional 6,688 shares of its common stock at a total cost of $51,866. The Company has or will retire all stock purchased.

Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments at year end, net of trust restrictions of $236,104, statutory deposits of $700,000, and California insurance company statutory dividend restrictions applicable to Crusader plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next twelve months without the necessity of borrowing funds.

As a California insurance company, Crusader is obligated to pay a premium tax on gross premiums written in all states that Crusader is admitted. Premium taxes are deferred and amortized as the related premiums are earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.

The Company has certain obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2008, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:

Contractual Obligations               Total          Within 1 Year       1-3 Years        3-5 Years        After 5 years

Building lease                     $  3,467,717     $     1,066,990     $  2,133,980     $    266,747                   -
Loss and loss adjustment expense

* Unlike many other forms of contractual obligations, loss and loss adjustment expense reserves do not have definitive due dates and the ultimate payment dates are subject to a number of variables and uncertainties. As a result, the total loss and loss adjustment expense reserve payments to be made by period, as shown above, are estimates.

General

The Company had net income of $5,283,016 for the year ended December 31, 2008, compared to net income of $6,712,444 for the year ended December 31, 2007, and net income of $11,925,466 for the year ended December 31, 2006. Total revenue for the year ended December 31, 2008, was $46,769,444 compared to $50,372,895 for the year ended December 31, 2007, and $54,916,206 for the year ended December 31, 2006.

For the year ended December 31, 2008, the Company had income before taxes of $7,984,466 compared to income before taxes of $10,073,153 in the year ended December 31, 2007, a decrease of $2,088,687 (21%) in income before taxes. The decrease in income before taxes was primarily due to a decrease of $1,386,740 in the underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs), and a decrease of $956,385 in investment income.

For the year ended December 31, 2007, the Company had income before taxes of $10,073,153 compared to income before taxes of $18,352,811 in the year ended December 31, 2006, a decrease in income before taxes of $8,279,658 (45%). The decrease in income before tax was primarily due to a decrease of $9,373,440 in the underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs).

The effect of inflation on the net income of the Company during the years ended December 31, 2008, 2007, and 2006 was not significant.

The Company derives revenue from various sources as discussed below:

Insurance Company Operation

Premium and loss information of Crusader are as follows:

                                                                 Year ended December 31
                                                         2008             2007             2006

Gross written premium                                $ 39,940,270     $ 44,970,399     $ 51,913,967
Net written premium (net of reinsurance ceded)       $ 31,175,204     $ 33,412,745     $ 38,166,864
Earned premium before reinsurance ceded              $ 42,720,764     $ 48,661,973     $ 56,692,213
Earned premium (net of reinsurance ceded)            $ 33,949,695     $ 37,129,665     $ 42,933,789
Losses and loss adjustment expenses                  $ 20,592,730     $ 22,182,237     $ 17,826,979
Gross unpaid losses and loss adjustment expenses     $ 78,654,590     $ 94,730,711     $ 93,596,117
Net unpaid losses and loss adjustment expenses       $ 58,839,017     $ 66,305,287     $ 70,076,430

Crusader's primary line of business is commercial multiple peril policies. This line of business represented approximately 98% of Crusader's total written premium for the year ended December 31, 2008, 96% for the year ended December 31, 2007, and 97% for the year ended December 31, 2006.

As of December 31, 2008, Crusader was licensed as an admitted insurance company in the states of Arizona, California, Nevada, Oregon, and Washington and is approved as a non-admitted surplus lines writer in other states.

For the year ended December 31, 2008, gross written premium decreased by $5,030,129 (11%) over 2007. For the year ended December 31, 2007, gross written premium decreased by $6,943,568 (13%) over 2006. The decrease in written premium in both 2008 and 2007 reflected heightened competition and management's continued emphasis on rate adequacy and underwriting discipline. The Company cannot determine how long the existing market condition will continue, nor in which direction it might change.

The insurance marketplace continues to be intensely competitive as more insurers are competing for the same customers. Many of Crusader's competitors price their insurance at rates that the Company believes are inadequate to support any profit. Nonetheless, Crusader believes that it can grow its sales and profitability by continuing to focus upon three key areas of its operations: (1) product development, (2) improved service to retail brokers, and (3) appointment of captive and independent retail agents. During 2008, Crusader began to introduce many product changes such as to its rates, eligibility guidelines, rules and coverage forms. Improved service to retail brokers is primarily focused upon transacting business through the internet, as well as providing more options to make the brokers' time more efficiently spent with us (i.e., as opposed to spending time with our competitors). In October 2008, the Company hired a marketing manager, bringing the total number of employees dedicated exclusively to marketing to three. Those representatives are charged with the responsibility of identifying product development opportunities, promoting the Company and its products to the insurance brokerage community, and with the duty to appoint retail agents so as to introduce the Crusader brand at the consumer's level of distribution (i.e., retail). Crusader appointed twelve retail agents as of December 31, 2008, and plans to have approximately twenty-four by the end of year 2009. Presently it is expected that each such retail agent should be able to reach an annual sales volume of approximately one to two million dollars of Crusader's products within three to five years of their appointment by the Company.

The Company writes annual policies and, therefore, earns written premium daily over the one-year policy term. Premium earned before reinsurance decreased $5,941,209 (12%) in the year ended December 31, 2008, compared to the year ended December 31, 2007, and decreased $8,030,240 (14%) in the year ended December 31, 2007, compared to the year ended December 31, 2006. The decrease in earned premium before reinsurance in both 2008 and 2007 is a direct result of the decrease in written premium in 2008 and 2007, respectively.

Earned ceded premium for the 12 months ended December 31, 2008, decreased $2,761,239 (24%) to $8,771,069 compared to $11,532,308 for the 12 months ended December 31, 2007. Earned ceded premium for the 12 months ended December 31, 2007, decreased $2,226,116 (16%) to $11,532,308 compared to $13,758,424 for the 12 months ended December 31, 2006. Earned ceded premiums as a percentage of direct earned premiums were 21% in 2008, and 24% for 2007 and 2006, respectively.

The Company evaluates each of its ceded reinsurance contracts at its 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 December 31, 2008, all such ceded contracts are accounted for as risk transfer reinsurance. The earned premium ceded consists of both premium ceded under the . . .