Unico Ends Family Feud but Battles Soft Market : Insurance: All but one of six lawsuits have been settled. Now the small Woodland Hills company is getting back to business in a tough climate.
A few years ago, Unico American Corp., a Woodland Hills insurance holding company, was embroiled in a family battle that was also a corporate power struggle. The dispute pitted brother against brother, cousin against cousin, and prompted half a dozen lawsuits involving allegations of fraud, embezzlement and conspiracy.
Today, all but one of the lawsuits have been settled. Erwin Cheldin, Unico’s founder and longtime president, is now chairman. His brother, former chairman Jack Cheldin, has been ousted, along with three of Jack’s children.
With the legal battles basically done, Erwin Cheldin is getting Unico back to business. But what a tough business it is.
“The entire insurance business is in a very soft market right now,” said Roger Platten, Unico’s vice president and general counsel. Erwin Cheldin declined to be interviewed for this story.
Unico is a small insurance company that writes property and casualty, automobile and rent-a-car insurance. It also finances insurance premiums and earns commissions from other insurers by providing services such as marketing, issuing policies, monitoring claims and doing claims adjusting. About 95% of its business is in California.
Unico has some daunting challenges. Its biggest subsidiary is Crusader Insurance Co., which writes property and casualty insurance and accounts for nearly two-thirds of Unico’s revenues. Crusader faces intense competition in the state, which is driving prices down.
Unico’s business of marketing and administering plans for other insurers has also been hurt because its main customer raised its rates and lost revenues. Also, Unico is still waiting to hear if the California Department of Insurance will grant the two exemptions that it seeks from Proposition 103, which requires insurers to roll back insurance rates. If the exemptions aren’t granted, Crusader would have to refund more than $1 million of premiums and commissions for auto service station and repair shop insurance.
Given the tough business environment, it’s hardly surprising that Unico’s profits have taken a downward turn. In the nine months that ended Dec. 31, 1990, profits tumbled 30% to $3 million from $4.4 million a year earlier. Revenues fell 12% to $20.7 million.
Unico’s stock has also been languishing. Unico’s executives and directors together own about 53% of the company’s stock, which traded as high as about $8.50 a share in late 1987. But it has traded at about half that level during the past few years, and closed Monday at $3.8125.
Analyst Michael M. LeConey at Baird, Patrick & Co. blamed much of the drop in profits on Unico’s health-care underwriting arm, which until recently had just one big client--CIGNA Corp. (Baird, Patrick, a New York brokerage firm, makes a market in Unico stock, meaning that it stands ready to buy and sell shares of Unico to help keep the price firm.)
LeConey said CIGNA had overpriced its health maintenance organization packages last year and as a result it lost business. That translated into a decline in business for Unico, which markets and administers Cigna’s HMO, LeConey said.
Like other insurance companies licensed in California, Unico has also been hurt by out-of-state companies that are not technically licensed to write policies here, but get around the state regulations by acting as “reinsurers”--companies that share the risk by buying some of the insurance written by other insurers.
These out-of-state companies have helped fuel a highly competitive market and driven down property and casualty insurance prices. This, at a time when companies licensed in California are faced with regulations making it ever more expensive to do business here. “Costs are higher to be licensed in the state of California,” said John McCann, editor of Insurance Journal, a Pasadena-based trade magazine. Moreover, McCann said, companies licensed in the state could be assessed money to help bail out other California insurance companies that have failed. “That’s the cost of doing business . . . in this state,” McCann said.
Nonetheless, analyst LeConey said he’s upbeat about Unico’s prospects, and expects the company’s profit to rebound from an estimated $4.5 million for all of fiscal 1991 to between $5.5 million and $6.6 million for fiscal 1992.
LeConey says Unico’s health care underwriting business “has a tremendous future.” Since the problems with CIGNA last year, LeConey said, CIGNA has since lowered its rates and Unico has signed on other HMOs, including FHP International Corp., as well as small employers, and will administer and market those programs as well. That business is poised for strong growth, LeConey said.
More ominous warnings have been sounded recently about the health of the insurance industry generally, in light of the highly publicized failures of Executive Life Insurance Co. and First Capital Holdings Corp., which have raised fears of a savings-and-loan-style collapse among insurance companies.
The failures of First Capital and Executive Life have been blamed on their heavy investments in junk bonds. Platten said, however, that Unico invests its cash in high-rated industrial and municipal bonds and does not hold any junk bonds, real estate or stocks.
A few years ago, Erwin Cheldin had other problems on his mind.
Cheldin, 58, a former USC football and All-America volleyball player, founded what is now Unico as an insurance brokerage firm in 1953 while still a college student. When he joined the Air Force in 1955, Erwin asked brother Jack, four years his senior, to mind the store.
For more than 20 years, the Cheldins worked literally side by side--they had adjoining offices--building Unico into a multi-service insurance company. Unico went public in 1969. Erwin, who was president, and Jack, Unico’s chairman, each owned 30% of the company’s stock.
But in 1987, Jack had a heart attack. While he was in the hospital, Erwin and other Unico officials uncovered alleged discrepancies in Unico’s stock transfers, an area which Jack had long overseen, according to a suit later filed by Unico against Jack Cheldin.
After an investigation, the suit says, it was found that Jack had “carried out a scheme to defraud Unico” by issuing and transferring what it says were improperly issued or nonexistent shares into the accounts of Jack’s friends, relatives and associates. In all, the suit says, 757,046 excess shares were issued as part of this alleged scheme.
The suit, filed in district court in Van Nuys in February, 1989, and later transferred to federal court in Los Angeles, charged Jack with embezzlement, fraud, violation of federal racketeering laws and breach of fiduciary duty. It asked for more than $3 million in damages.
Jack, who resigned as Unico’s chairman shortly after his heart attack, simultaneously filed a suit against Unico and his brother, charging breach of fiduciary duty and denial of his $1.1 million in pension benefits.
In his suit, Jack denied that he issued fraudulent stock and alleged that Erwin’s action against him was part of a plan to remove Jack and his three children--all Unico employees--from power, clearing the way for Erwin and his two sons to control the company. Cary and Ted Cheldin, Erwin’s sons, are now Unico vice presidents and board members.
Jack’s children, Daniel, Ellen and Laura, left Unico shortly after their father’s heart attack. In a separate suit alleging breach of contract and intentional infliction of emotional distress, Jack’s children claimed that they were “harassed and intimidated” before being fired and received unsigned “hate mail” at their homes.
It got even messier. Erwin sued Jack for allegedly transferring some of Erwin’s stock without his knowledge. Jack filed a worker’s compensation claim. Unico sued its former accountants, Rootenberg & Rosenthal, alleging negligence and breach of contract for not uncovering the allegedly illegal stock transfers. The accounting firm countersued, claiming fraud and conspiracy.
In all, six suits were filed. All but one--the suit involving Unico and its former accounting firm--have been settled. Platten said the only payment Unico made--other than certain legal fees--was an undisclosed amount of pension funds it paid to Jack Cheldin. Jack returned some of his shares to Unico, and now owns about 18% of the company’s stock. Erwin Cheldin’s stake is now 39%.
Attorney Platten said the legal tangle had “no impact on the company’s operations” but was “a very unfairly distressing situation for Erwin.”
Erwin Cheldin’s fiscal 1990 salary may have softened the blow. With $1.75 million in cash and stock options paid to him, Cheldin was the fifth highest paid executive at a public company in the San Fernando Valley that year, according to a Times survey. He was surpassed only by three Walt Disney Co. officials and the chief executive of Zenith National Insurance, a property-casualty insurer about 16 times the size of Unico.
Unico American Corp. at a Glance Unico American is a Woodland Hills-based insurance holding company. Through various subsidiaries, Unico writes property and causalty insurance, underwrites health maintenance organizations and provides other insurance services. It also finances insurance premiums. For fiscal years ended Mar. 31; in millions
