Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company's critical accounting policies are described below. For a detailed discussion on the application of these and other accounting policies see Note (1) of the Notes to Consolidated Financial Statements.
Policy acquisition costs, principally commissions, premium taxes and certain marketing and underwriting expenses, are deferred and charged to operations over periods in which the related premiums are earned. Ceding commission income, which is realized on a written basis, is deferred and recognized over periods in which the related premiums are earned. Deferred ceding commission income is netted against deferred policy acquisition costs. The change in the resulting deferred asset is charged (credited) to operations. The Company utilizes investment income when assessing recoverability of deferred policy acquisition costs. Estimates of recoverability are based upon assumptions as to loss ratios, investment income and maintenance expenses.
The annual dividend rate on the Series C Preferred Stock is 10% until March 23, 2004 and 20% thereafter. Unpaid dividends are cumulative and compounded. The Series C Preferred Stock is redeemable at the Company's option after March 23, 2006 and at the option of the majority holders after March 23, 2007 at a price of $1,000 per share plus accrued and unpaid dividends. The Series C Preferred Stock is not convertible into Common Stock.
Claims and claim adjustment expenses ("C & CAE") decreased $31,012,337 in 2002 from 2001 and decreased $56,013,096 in 2001 from 2000. The C & CAE ratio was 93.6% in 2002, 127.2% in 2001 and 94.7% in 2000. The decrease in the C & CAE ratio in 2002 is primarily due to smaller increases in estimated ultimate liabilities recorded in 2002 for commercial lines than was recorded in 2001. The C & CAE ratio in 2001 was above the 2000 level primarily because of continued adverse development in commercial lines. The Company began to cease writing new policies in the trucking portion of this line of business in the fourth quarter of 2000. Reinsurance agreements were in place effective December 31, 2000 that are expected to minimize future adverse results from this line of business. Under the reserve reinsurance cover agreement approximately $3,855,000 of C & CAE as of December 31, 2002 will ultimately be amortized as a deferred gain on reinsurance arrangements in future periods. In accordance with U.S. GAAP, the reinsurance recoveries from these reserve increases are recorded as deferred revenue and not immediately recognized as reductions to C & CAE. Recognition of this deferred revenue item occurs through insurance service revenues in the future based upon claims recovered from the reinsurer in relation to the total amount of the reinsured layer under the reserve reinsurance cover agreement. With regard to environmental and product liability claims, the Company has an immaterial amount of exposure. The Company does not provide environmental impairment coverage and excludes pollution and asbestos related coverages in its policies. The Company's premium writings for product liability coverages are immaterial. Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.
Underwriting and operating expenses were down 45% in 2002 but were up 12% in 2001. The decrease for 2002 was primarily due to expense reductions implemented as a result of the decision to discontinue writing commercial lines. The increase for 2001 was the result of the Company recording a provision for potentially uncollectible reinsurance balances receivable of $2,653,597. Without this provision underwriting and operating expenses were down 4% primarily as a result of a decrease in personnel costs.
Effective December 31, 2000, the Company entered into a quota share reinsurance agreement whereby the Company ceded 100% of its commercial auto liability unearned premiums and 50% of all other commercial business unearned
Ceded unpaid claims and claim adjustment expenses decreased as a result of the decrease in unpaid claims and claim adjustment expenses and the decrease in cessions under the quota share reinsurance agreements. This balance