Overview

General

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; and through its other subsidiaries provides insurance premium financing and membership association services.

The Company had a 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%). 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 Form 10-Q.

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 generated approximately 85% of consolidated revenues for the three months ended March 31, 2009, and approximately 87% of consolidated revenues for the three months ended March 31, 2008. 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 in the areas of price, coverage, and service. It is highly cyclical, characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. The property and casualty insurance industry 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. In addition, Crusader competes not only with other insurance companies but also with other general agencies. Many of those general agencies offer more products than the Company.

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).

For the three months ended March 31, 2009, premium written before reinsurance increased $665,796 (7%) to $10,617,009 for the three months ended March 31, 2009, compared to $9,951,213 for the three months ended March 31, 2008. The increase in premium written before reinsurance is primarily attributed to new products introduced by the Company beginning in July 2008. The principal method of competition among competitors is based on price. While the Company attempts to meet such competition with competitive prices, its emphasis is on service, promotion, and distribution. 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 continue to 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:

                                                              Three Months Ended March 31
                                                                                       Increase
                                                        2009            2008          (Decrease)

Net premium earned                                   $ 7,619,159     $ 8,924,766     $  (1,305,607 )

Less:
Losses and loss adjustment expenses                    4,634,653       6,195,706        (1,561,053 )
Policy acquisition costs                               1,953,859       2,080,971          (127,112 )
   Total                                               6,588,512       8,276,677        (1,688,165 )

Underwriting Profit (Before Income Taxes)            $ 1,030,647     $   648,089     $     382,558

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.

Other Operations

The Company's other revenues from insurance operations consist of commissions, fees, finance charges, and investment and other income. Excluding investment and other income, these operations accounted for approximately 15% of total revenues in the three months ended March 31, 2009, and approximately 13% of total revenues in the three months ended March 31, 2008.

Investments and Liquidity
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.

Liquidity and Capital Resources

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.

Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, 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. As of March 31, 2009, the Company had cash and investments of $142,969,996 (at amortized cost) of which $137,427,865 (96%) were investments of Crusader.

As of March 31, 2009, the Company had invested $130,451,606 (at amortized cost) or 91% of its invested assets in fixed maturity obligations. In accordance with Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company is required to classify its investments in debt and equity securities into one of three categories:
held-to-maturity, available-for-sale, or trading securities. Although all of the Company's investments are classified as available-for-sale, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments until maturity.

The Company's investments in fixed maturity obligations of $130,451,606 (at amortized cost) includes $118,761,922 (91.0%) of U.S. treasury securities, $9,093,685 (7.0%) of industrial and miscellaneous securities, and $2,595,999 (2.0%) of long-term certificates of deposit.

The remaining balance of the Company's investments is in short-term investments that include U.S. treasury bills, bank money market accounts, certificates of deposit, and a short-term treasury money market fund.

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. 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 investment securities are rated and readily marketable and could be liquidated without any materially adverse financial impact.

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. The programs have no expiration date and may be terminated by the Board of Directors at any time. During the three months ended March 31, 2009, the Company repurchased 6,688 shares of the Company's common stock at a cost of $51,866 of which $3,286 was allocated to capital and $48,580 was allocated to retained earnings. As of March 31, 2009, under the stock repurchase programs previously adopted by the Company, the Company had remaining authority to repurchase up to an aggregate of 508,779 shares of common stock.

The Company announced that, at a meeting of the Board of Directors held on March 23, 2009, the Board declared a cash dividend of $0.18 per common share. The dividend aggregating $1,002,172.86 was paid on May 1, 2009, to shareholders of record on April 10, 2009.

Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments as of the date of this report, net of trust restriction of $579,130, statutory deposits of $700,000, and the dividend restriction between Crusader and Unico, 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.

Results of Operations

All comparisons made in this discussion are comparing the three months ended March 31, 2009, to the three months ended March 31, 2008, unless otherwise indicated.

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.

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 increased $665,796 (7%) to $10,617,009 for the three months ended March 31, 2009, compared to $9,951,213 for the three months ended March 31, 2008.

The $665,796 increase in written premium in the three months ended March 31, 2009, as compared to the three months ended March 31, 2008, is primarily attributed to new products introduced by the Company beginning in July 2008. The principal method of competition among competitors is based on price. While the Company attempts to meet such competition with competitive prices, its emphasis is on service, promotion, and distribution. 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 continue to 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.

Premium earned before reinsurance decreased $1,272,799 (11%) to $9,874,147 for the three months ended March 31, 2009, compared to $11,146,946 for the three months ended March 31, 2008. The Company writes annual policies and, therefore, earns written premium over the one-year policy term. The decrease in earned premium before reinsurance despite an increase in premium written before reinsurance during the three months ended March 31, 2009, is a direct result of the decrease in written premium during year 2008 as compared to premium written during year 2007.

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:

                                                                Three Months Ended March 31
                                                                                          Increase
                                                           2009            2008          (Decrease)

Direct earned premium                                  $ 9,874,147     $ 11,146,946     $ (1,272,799 )

Earned ceded premium
   Excluding provisionally rated ceded premium           2,254,988        2,295,931          (40,943 )
   Provisionally rated ceded premium                             -          (73,751 )         73,751
      Total earned ceded premium                         2,254,988        2,222,180           32,808
Ceding commission                                          668,594          689,403          (20,809 )
      Earned ceded premium, net of ceding commission   $ 1,586,394     $  1,532,777     $     53,617

Total earned ceded premium was 23% of direct earned premium in the three months ended March 31, 2009, and 20% of direct earned premium in the three months ended March 31, 2008. There was no significant change in the ceding commission rate.

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.

Investment income decreased $398,387 (25%) to $1,224,127 for the three months ended March 31, 2009, compared to investment income of $1,622,514 for the three months ended March 31, 2008. The Company had no realized gains or losses for the three months ended March 31, 2009. The Company sold one fixed maturity investment in the three months ended March 31, 2008, with net realized gain of $6,306. The decrease in investment income in the current period as compared to the prior year period is primarily a result of a decrease in invested assets and a decrease in the Company's annualized weighted average yield to 3.4% for the three months ended March 31, 2009, from 4.4% in the prior year period. 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.

The average annualized yields on the Company's average invested assets are as follows:

                                                    Three Months Ended
                                                          March 31
                                                  2009              2008

Average Invested Assets*                      $ 143,989,819     $ 148,222,568
Total Investment Income                       $   1,224,127     $   1,622,514
Annualized Yield on Average Invested Assets             3.4 %             4.4 %

* The average is based on the beginning and ending balance of the amortized cost of the invested assets.

The par value, amortized cost, estimated market value and weighted average yield of fixed maturity investments at March 31, 2009, 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.

  Maturities by          Par                                                    Weighted
  Calendar Year         Value          Amortized Cost       Fair Value        Average Yield

December 31, 2009   $  35,500,000     $     35,602,783     $  35,903,383                 4.0 %
December 31, 2010      37,298,999           37,358,642        38,049,284                 2.4 %
December 31, 2011      10,347,000           10,430,103        11,184,109                 3.9 %
December 31, 2012      38,000,000           37,967,916        41,881,250                 4.4 %
December 31, 2013       9,100,000            9,092,162         9,794,031                 3.3 %
  Total             $ 130,245,999     $    130,451,606     $ 136,812,057                 3.6 %

The weighted average maturity of the Company's fixed maturity investments was 1.9 years as of March 31, 2009, and March 31, 2008. Due to the current interest rate environment, management believes it is prudent to purchase fixed maturity investments with maturities of 5 years or less and with minimal credit risk.

As of March 31, 2009, the Company held fixed maturity investments with unrealized appreciation of $6,374,316 and fixed maturity investments with unrealized depreciation of $13,865. The Company monitors its investments closely. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Consolidated Statements of Operations. The Company's methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity, the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The Company has the ability and intent to hold its fixed maturity investments for a period of time sufficient to allow the Company to recover its costs. The Company has concluded that the gross unrealized losses of $13,865 as of March 31, 2009, were temporary in nature. However, facts and circumstances may change which could result in a decline in fair value considered to be other than temporary. The following table summarizes all fixed maturities in an unrealized loss position as of March 31, 2009, and the aggregate fair value and gross unrealized loss by length of time those fixed maturities have been continuously in an unrealized loss position:

                    Fair               Gross
                    Value         Unrealized Loss

0-6 months       $ 2,048,520     $           3,275
7-12 months        1,489,410                10,590
Over 12 months             -                     -
 Total           $ 3,537,930     $          13,865

As of March 31, 2009, the fixed maturity investments with a gross unrealized loss for a continuous period of 0 to 6 months and for a continuous period of 7 to 12 months consisted of a single industrial issuer in each indicated period. There were no fixed maturity investments with a gross unrealized loss position for a continuous period of over 12 months.

Gross commission and fee income decreased $31,510 (2%) to $1,439,854 for the three months ended March 31, 2009, compared to commission and fee income of $1,471,364 for the three months ended March 31, 2008.

The decreases in gross commission and fee income for the three months ended March 31, 2009, as compared to the three months ended March 31, 2008, are as follows:

                                                            Three Months Ended
                                                                 March 31                 Increase
                                                           2009            2008          (Decrease)

Policy fee income                                       $   532,691     $   578,858     $    (46,167 )
Health insurance program                                    686,942         672,458           14,484
Membership and fee income                                    71,407          76,917           (5,510 )
Other commission and fee income                                 582             997             (415 )
Daily automobile rental insurance program:
  Commission income (excluding contingent commission)        82,718          83,541             (823 )
  Contingent commission
                                                             65,514          58,593            6,921
      Total                                             $ 1,439,854     $ 1,471,364     $    (31,510 )

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. Unifax also receives policy fee income that is directly related to the Crusader policies it sells. Policy fees are earned ratably over the life of the related . . .