As of December 31, 1996, the Company had invested $75,984,966 (at amortized cost) or 94% of its investments in fixed maturity obligations. The balance of the Company's investments were in high-quality, short-term investments which included bank money market accounts, certificates of deposit and commercial paper. The Company had no investments in equity securities as of December 31, 1996, compared to $995,237 as of March 31, 1996. The Company's investments in fixed maturity obligations included $39,634,159 (52%) of tax-exempt pre-refunded state and municipal bonds, $22,447,391 (30%) of U.S. treasury securities, and $13,903,416 (18%) in high-quality industrial bonds and certificates of deposit. This compares to fixed maturity obligations in the prior fiscal year ended March 31, 1996 of $68,085,376 that included $38,126,835 (56%) of tax-exempt pre-refunded state and municipal bonds, $18,191,847 (27%) of U.S. treasury securities, and $11,766,694 (17%) in high-quality industrial bonds and certificates of deposit. The tax-exempt interest income earned (net of bond premium and discount amortization) during the nine months ended December 31, 1996, was $1,359,894 compared to $1,328,311 in the same period of the prior year. In the fiscal year ended March 31, 1996, tax exempt interest income earned totaled $1,738,799.
For the nine months ended December 31, 1996, income before taxes increased by $1,367,786 (23%) and net income increased by $901,846 (21%) compared to the same period of the prior year. The increase in net income was primarily due to an increase of $378,236 (9%) in the pre-tax underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) from Crusader, an increase in investment income of $369,637 (13%) (excluding realized gains), a decrease in other operating expenses of $383,821 (16%), and an increase in gross commissions and fees of $177,172 (4%).
a. General Agency Operations Commissions and service fees due the Company are recognized as income on the effective date of the insurance policies.
Policy acquisition costs consist of direct and indirect costs associated with the production of insurance policies such as commissions, premium taxes and certain other underwriting expenses which vary with and are primarily related to the production of the insurance policy. Policy acquisition costs are deferred and amortized as the related premiums are earned and are limited to their estimated realizable value based on the related unearned premiums plus investment income less anticipated losses and loss adjustment expenses.
American Acceptance Corporation ("AAC"), the Company's premium finance subsidiary, has a line of credit with Union Bank which can be used only to fund its premium finance operation. At the Company's request, this line of credit was decreased from $6,000,000 to $4,000,000 in September 1996. Interest on the note is referenced to the London Interbank Offered Rate ("LIBOR"). The note amount is collateralized by the assets of AAC and is guaranteed by the Company. The loan agreement contains certain covenants including restrictions on certain transactions between AAC and the Company and the maintenance of certain financial ratios. The note matures September 2, 1997, and is expected to be renewed. The terms of the note call for monthly payments of interest only. The interest rate at December 31, 1996, was 7.25%
Crusader is required to file an annual statement with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (i.e., statutory basis). Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices not so prescribed.