Based on financial information made available to us, we estimate SCW’s net profits on the commission revenue earned from us in 2002 to be approximately $1.1 million. We have not attempted to independently audit or verify the information SCW has furnished, although we have no reason to believe it is inaccurate. For purposes of this disclosure, we have estimated the net profits that SCW earned on the revenue received from us by calculating the profit percentage that SCW’s net profit bears to its total revenue in 2002 and applying that percentage to the revenue earned from us.
Reinsurance. In accordance with industry practice, we cede to other insurance companies some of the potential liability under insurance policies we have underwritten. This practice, called reinsurance, helps us reduce our net liability on individual risks, stabilize our underwriting results and increase our underwriting capacity. As payment for sharing a portion of our risk, we are also required to share a part of the premium we receive on the related policies. We determine the amount and scope of reinsurance coverage to purchase each year based upon an evaluation of the risks accepted, consultations with reinsurance brokers and a review of market conditions, including the availability and pricing of reinsurance. Our reinsurance arrangements are generally renegotiated annually.
December 31, 2001 from 33.2% for 2000. The reduction was directly related to our expense reduction initiatives and premium increases.
On March 9, 2002, new tax laws extended the net operating loss (“NOL”) carryback period from two years to five years. As a result, approximately $9.3 million of the Company’s NOL carryforward at December 31, 2001 was utilized to recover taxes previously paid in tax years 1996, 1997, and 1998. In addition, the carryback of the 2001 NOL generated approximately $6.9 million of minimum tax credit that can be used to reduce taxable income in the future. This additional loss carryback resulted in an increase to the reported federal income taxes recoverable with a corresponding decrease in deferred federal income taxes in the first quarter of 2002.
On December 13, 2000, the conversion of APAssurance from a mutual company to a stock corporation was consummated according to a Plan of Conversion adopted by the Board of Directors of APAssurance on June 28, 2000, with subsequent amendment on October 2, 2000. This plan was approved by APAssurance policyholders at a special meeting held on November 29, 2000 and by the State of Michigan Office of Financial and Insurance Services. The Plan of Conversion included several key components, including: formation of APCapital to be the ultimate parent holding company; the conversion of APAssurance from a mutual insurance company to a stock company and wholly owned by APCapital; the transfer of ICA, APS, APConsulting, APDirect Sales, and Alpha Advisors, Inc. from APAssurance to wholly owned subsidiaries of APCapital.
Reinsurance premiums and losses related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reinsurance recoverables and prepaid reinsurance premiums are accounted for in accordance with Statement of Financial Accounting Standards No.»113, “Accounting and Reporting for Reinsurance.” Premiums ceded to other companies have been reported as a reduction of premium income. Reinsured losses incurred are reported as a reduction of gross losses incurred. The reserve for unpaid losses and loss adjustment expenses is presented gross of recoverables from reinsurers, which are included in the amounts recoverable from reinsurers.
Prior to January 1, 2002, the Company measured the potential impairment of recorded goodwill based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period. During 2001, it was determined that the goodwill associated with the purchase of Alpha Advisors, Inc. and ICA was impaired based on changes in organizational structure and ongoing operating losses. This resulted in additional amortization expense of $380,000.
During 2002 and 2001, the Company recorded losses of $520,000 and $5.9 million, respectively, on a security whose decline in market value was considered other than temporary.
During 2002, 2001, and 2000, management made adjustments to prior year reserves. These adverse/ (positive) adjustments totaled $5.6 million, $29.0 million, and ($11.5) million for the years ended December 31, 2002, 2001, and 2001, respectively. As a percentage of net reserves as of the beginning of the year, these adjustments were 1.1%, 7% and (2.9%), respectively.
The Company is not currently subject to any material litigation. Though routine litigation matters may arise in the ordinary course of the Company’s insurance business, management does not expect these cases to have a material adverse effect on the Company’s financial condition or results of operations.
On December 13, 2000, the conversion of APAssurance from a mutual company to a stock corporation was consummated according to a Plan of Conversion adopted by the board of directors of APAssurance on June 28, 2000, with subsequent amendment on October 2, 2000. This plan was approved by APAssurance policyholders at a special meeting held on November 29, 2000 and by the State of Michigan Office of Financial and Insurance Services. The Plan of Conversion included several key components, including: formation of APCapital to be the ultimate parent holding company; the conversion of APAssurance from a mutual insurance company to stock company and wholly-owned by APCapital; the transfer of ICA, APS, APConsulting, APDirect Sales, and Alpha Advisors, Inc. from APAssurance to wholly-owned subsidiaries of APCapital.