(*) The Company changed its fiscal year end from March 31, to December 31, effective December 31, 1996.
Although material capital expenditures may also be funded through borrowings, the Company believes that its cash and short-term investments at year end, net of trust restriction of $2,755,572, statutory deposits of $2,725,000, and dividend restriction between Crusader and Unico (See Item 1 - Business - Insurance Company Operation - Holding Company Act) 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.
In April 2000 the Company announced that its Board of Directors had authorized the repurchase 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 repurchase of an additional 315,000 shares of common stock of the Company and on September 6, 2000, the Board of Directors authorized the repurchase of another 315,000 shares of the common stock of the Company in the open market from time to time. This brings the total shares of the Company's common stock authorized to be repurchased to 945,000 shares. As of December 31, 2000, the Company had purchased an aggregate of 628,600 shares of its common stock at a cost of $4,130,068. These shares were purchased using cash-on-hand and the proceeds from the maturities of short-term investments.
Crusader's statutory capital and surplus as of December 31, 2000, was $39,626,269, a decrease of $1,326,187 (3%) over December 31, 1999. Crusader's statutory capital and surplus as of December 31, 1999, was $40,952,456, an increase of $3,341,367 (9%) over December 31, 1998.
Cash flow used by operations for the year ended December 31, 2000, was $1,374,774, a decrease of $5,074,800 from the $3,700,026 of cash provided by operations in the year ended December 31, 1999. The decrease was primarily due to an increase in claim payments during the year ended December 31, 2000.
The Company has initiated an upgrade and replacement of computer systems and expects to spend approximately $150,000 in the next twelve months to complete this project. There are no other material commitments for capital expenditures as of the date of this report.
For the year ended December 31, 2000, income before taxes decreased by $6,931,276 (97%) and net income decreased by $4,691,569 (91%) compared to the year ended December 31, 1999. The decrease in pre-tax income was primarily due to a decrease of $6,800,955 in the underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) from Crusader.
Insurance Company Operation - --------------------------- Premium and loss information of Crusader are as follows:
For the year ended December 31, 1999, gross written premium decreased by $3,939,942 (11%) compared to the year ended December 31, 1998. This decrease was due to intense price competition that adversely affected the premium written in nearly all states that the Company does business.
Although it appears that the intensity of price-based competition has somewhat subsided, the Company does not believe that it is in a " hard market." While some of its competitors have recently raised rates or adopted more restrictive rules, those changes have not yet been large enough to redirect the flow of new business to the Company. The Company cannot determine how long the existing market conditions will continue, nor in which direction they might change.
The Company continues to believe that it can compete effectively and profitably by offering better service and by marketing its policies through its current independent agents and brokers. In pursuing its growth plan, the Company adopted a geographic expansion plan several years ago. In 1992, 100% of the Company's sales were in California. As of December 31, 2000, the Company had established marketing relations and products in ten other states, decreasing the percentage of its California business to 86%. The Company has no short-term plan to expand into additional states, nor to expand upon its marketing channels. However, the Company does plan to adopt "fine-tuning" changes to its existing rates, rules and forms, and it plans to add new programs for the states where it currently operates.
The Company writes annual policies and therefore earns written premium over the one year policy term. Premium earned before reinsurance decreased $1,949,948 (6%) in the year ended December 31, 2000, compared to the year ended December 31, 1999, and decreased $5,922,304 (15%) in the year ended December 31, 1999, compared to the year ended December 31, 1998. The decrease in earned premium before reinsurance was directly related to the decrease in written premium discussed above.
Earned premium ceded increased $260,179 (4%) to $6,843,931 or 21% of earned premium before reinsurance in the year ended December 31, 2000, compared to $6,583,752 or 19% of earned premium before reinsurance for the year ended December 31, 1999. Earned premium ceded increased $883,530 (16%) to $6,583,752 or 19% of earned premium before reinsurance for the year ended December 31, 1999, compared to $5,700,222 or 14% of earned premium before reinsurance for the year ended December 31, 1998. Ceded premiums increased in the year ended December 31, 2000, primarily due to higher than anticipated loss experience on prior accident years that was subject to the Company's provisionally rated reinsurance contract. Premium ceded under this contract, which was canceled on a runoff basis effective December 31, 1997, is subject to adjustments based on the amount of losses ceded, limited by a maximum percentage that can be charged by the reinsurer. The decrease in earned ceded premium (excluding provisionally rated ceded premium) in 2000, 1999 and 1998 was primarily due to decreased earned premium before reinsurance.
The combined ratio is the sum of (1) the net ratio of losses and loss adjustment expenses incurred (including a provision for incurred-but-not-reported losses "IBNR") to net premiums earned ("loss ratio") and (2) the ratio of policy acquisition and general operating costs to net premiums earned ("expense ratio"). The following table shows the loss ratios, expense ratios, and combined ratios of Crusader as derived from data prepared in accordance with generally accepted accounting principles. As shown on the table below, the loss ratio increased to 83.7% in 2000 from 60.6% in 1999. This increase in the loss ratio was primarily due to a decreased earned premium before reinsurance (discussed above), an increase in earned premium ceded (discussed above), and an increase in incurred losses on prior years.
Loss ratio 83.7% 60.6% 50.4% Expense ratio 32.1% 29.8% 27.2% ----- ---- ---- Combined ratio 115.8% 90.4% 77.6% ===== ==== ====
The increase in incurred losses and loss adjustment expenses recognized in 2000 and 1999 was primarily due to the following:
The Company's future writings and growth are dependent on market conditions, competition, and the Company's ability to introduce new and profitable products. As of December 31, 2000, Crusader was licensed as an admitted insurance company in the states of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon, and Washington and is approved as a non-admitted surplus lines writer in other states.
NIB and AIB market health and life insurance through non-affiliated insurance companies for individuals and groups. Approximately 93% of the health and life commission income for the years ended December 31, 2000 and 1999, was from the CIGNA HealthCare medical and dental plan programs. Revenues for the year ended December 31, 2000, decreased $43,389 (2%) compared to the year ended December 31, 1999. The decrease in commission income in the health and life insurance programs is primarily a due to a one-time bonus commission of $143,191 which the Company received from CIGNA in 1999. Excluding the effect of the 1999 bonus commission, commission income for the current year increased $99,802 (4%) when compared to the prior year.
Since approximately 93% of the Company's health and life insurance income comes from CIGNA programs, future growth is dependent of the competitiveness of CIGNA's rates, products, and product enhancements.
Service fee income $1,654,735 $1,677,223 $1,896,258 Policies written 17,351 17,225 18,306
Service fee income is primarily related to the number of policies written by Unifax. In addition, in 1999, Unifax voluntarily discontinued charging service fees in several of states outside of California, contributing to the decrease in service fee income.
Daily auto rental program commission and claim administration fee $741,662 $731,884 $758,073 Contingent commission 69,979 28,735 49,430 ------- ------- ------- Total commission and fee income $811,641 $760,619 $807,503 ======= ======= =======
Revenues during the year ended December 31, 2000, were $811,641, an increase of $51,022 (7%) compared to the same period of the prior year. Revenue for the year ended December 31, 1999, decreased by $46,884 (6%) compared to the year ended December 31, 1998.
The daily automobile rental insurance program commission and fee income (excluding contingent commission) increased in 2000 only slightly due to continued price competition in the daily automobile insurance market. To avoid underwriting losses for the non-affiliated insurance company that it represents, Bedford continues to produce business only at rates which it believes to be adequate. The Company cannot determine how long the existing market conditions will continue, nor in which direction they might change.
Membership and fee income in the year ended December 31, 2000, was comparable to the year ended December 31, 1999. Membership income increased $41,177 (12%) in the year ended December 31, 1999, compared to the year ended December 31, 1998.
Unifax began producing commercial earthquake insurance policies in California for non-affiliated insurance companies in 1999. Unifax received a commission from the insurance company based on premium written. Commission income on the earthquake program for the year ended December 31, 2000, decreased $6,428 (29%) compared to the prior year as a result of the non-affiliated insurance company discontinuing writing earthquake insurance in California in October, 2000. Unifax expects to begin writing commercial earthquake insurance policies with a new non-affiliated insurance company in April, 2001.
Unifax began producing commercial liability insurance policies in California for non-affiliated insurance companies in 1999. Unifax receives a commission from the insurance company based on premium written and a service fee from the policyholder. Commission and fee income on the commercial liability program increased in the year ended December 31, 2000, $33,548 (151%) due to increased marketing and the expansion of the product lines written by non-affiliated insurance carriers.
Premium finance charges and late fees earned on loans decreased $78,038 (9%) in the year ended December 31, 2000, compared to the year ended December 31, 1999. The decrease was primarily a result of fewer policies being financed due to an overall decrease in the number of policyholders financing policies. For the year ended December 31, 1999, premium finance charges and late fees earned on loans decreased $117,539 (11%) compared to the year ended December 31, 1998, as a result of fewer policies being written by Crusader and fewer policies being financed.
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Interest and dividend income Insurance company operations $5,764,094 $5,706,945 $5,497,323 Other operations 335,984 283,942 234,580 --------- --------- --------- Total interest and dividend income 6,100,078 5,990,887 5,731,903 Net realized investment gains (losses) (135,389) 64,793 247,931 --------- -------- --------- Total investment income and realized gains (losses) $5,964,689 $6,055,680 $5,979,834 ========= ========= =========
The Company continually evaluates the recoverability of its investment holdings. When a decline in value of fixed maturities or equity securities is considered other than temporary, a loss is recognized in the consolidated statement of operations. During 2000, the Company realized a loss of $138,250 on one equity security where a decline in market value was considered other than temporary.
Investment interest and dividends earned (excluding net realized gains) increased $109,191 (2%) in the year ended December 31, 2000, compared to the year ended December 31, 1999, primarily as a result of an increase in return on the Company's investment portfolio. Average invested assets in the year ended December 31, 2000, (at amortized value) decreased $2,628,414 (3%) compared to the year ended December 31, 1999. Investment income return based on average invested assets was 6.0% for the year ended December 31, 2000, compared to 5.74% for the year ended December 31, 1999. The mix of taxable and tax-exempt securities in the portfolio affect the investment income return percentage. Tax-exempt securities, which generally carry a lower yield than taxable securities, decreased to $19,789,675 (20% of total investments) at December 31, 2000, compared to $28,078,605 (27% of total investments) at December 31, 1999.
amortized value) increased $6,400,046 (7%) compared to the year ended December 31, 1998. Investment income return based on average invested assets was 5.74% for the year ended December 31, 1999, compared to 5.85% for the year ended December 31, 1998. The mix of taxable and tax-exempt securities in the portfolio affect the above investment income return percentage. Tax-exempt securities, which generally carry a lower yield than taxable securities, decreased to $28,078,605 (27% of total investments) at December 31, 1999, compared to $34,144,344 (33% of total investments) at December 31, 1998.
Operating Expenses - ------------------ Policy Acquisition Costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are related to and vary with the production of Crusader insurance policies. These costs include both Crusader expenses and allocated expenses of other Unico subsidiaries. On certain reinsurance treaties, Crusader receives a ceding commission from its reinsurer that represents a reimbursement of the acquisition costs related to the premium ceded. No ceding commission is received on provisionally rated ceded premium. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. The ratio of policy acquisition cost to net earned premium increased in 1999 and 2000 primarily due to an increase in provisionally rated ceded premium. The provisionally rated reinsurance contract was cancelled on a run off basis on December 31, 1997. Policy acquisition costs, net of ceding commission, are as follows:
Salaries and Employee Benefits decreased $110,433 (3%) for the year ended December 31, 2000, compared to the year ended December 31, 1999. Salaries and employee benefits increased $135,797 (3%) in the year ended December 31, 1999, compared to the year ended December 31, 1998.
Income Taxes - ------------ Income tax benefit for 2000 was $246,184 compared to $1,993,523 income tax expense for 1999. The effective combined income tax rates for 2000 and 1999 were (127.2%) and 30.9%, respectively. The change in the effective tax rate is due to significantly larger portion of tax exempt interest in the income before taxes in 2000 than in 1999.
Consolidated Balance Sheets as of December 31, 2000, and December 31, 1999 27
Consolidated Statements of Operations for the years ended December 31, 2000, December 31, 1999, and December 31, 1998 28
Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, December 31, 1999, and December 31, 1998 29
Basis of Presentation - --------------------- The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP). As described in Note 14, the Company's insurance subsidiary also files financial statements with regulatory agencies prepared on a statutory basis of accounting that differs from generally accepted accounting principles.
Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While every effort is made to ensure the integrity of such estimates, actual results could differ.
Earnings Per Share - ------------------ Basic earnings per share excludes the impact of common share equivalents and is based upon the weighted average common shares outstanding. Diluted earnings per share utilize the average market price per share when applying the treasury stock method in determining common share dilution. Outstanding stock options are treated as common share equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding.
Restricted Funds - ---------------- Restricted funds are as follows: Year ended December 31 ---------------------- 2000 1999 ---- ---- Restricted Funds: Premium trust funds (1) 2,755,572 $3,071,696 Assigned to state agencies (2) 2,725,000 2,725,000 --------- --------- Total restricted funds $5,480,572 $5,796,696 ========= =========
Segment Reporting - ----------------- Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information," became effective for fiscal years effective after December 15, 1997. SFAS No. 131 establishes standards for the way information about operating segments is reported in financial statements. The Company has adopted SFAS No. 131 for the fiscal year ended December 31, 1997, and has identified its insurance company operation as its primary reporting segment. Revenues from this segment comprise 82.3% of consolidated revenues. The Company's remaining operations constitute a variety of specialty insurance services, each with unique characteristics and individually insignificant to consolidated revenues.
The insurance company operation is conducted through Crusader, which as of December 31, 2000, was licensed as an admitted insurance carrier in the states of Arizona, California, Colorado, Idaho, Montana, Nevada, Ohio, Oregon and Washington. Crusader is a multiple line property and casualty insurance company which began transacting business on January 1, 1985. As of December 31, 2000, 97% of Crusader's business was commercial multiple peril business package insurance policies. Commercial multiple peril policies provide a combination of property and liability coverage for businesses. Commercial property coverages insure against loss or damage to buildings, inventory and equipment from natural disasters, including hurricanes, windstorms, hail, water, explosions, severe winter weather and other events such as theft and vandalism, fires and storms and financial loss due to business interruption resulting from covered property damage. Commercial liability coverages insure against third party liability from accidents occurring on the insured's premises or arising out of its operations, such as injuries sustained from products sold. In addition to commercial multiple peril policies, Crusader also writes separate policies to insure commercial property and commercial liability risks on a mono-line basis.
Stock-Based Compensation - ------------------------ In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning after December 15, 1995. The Company accounts for stock-based compensation under the accounting methods prescribed by Accounting Principles Board (APB) Opinion No. 25, as allowed by SFAS No. 123. Disclosure of stock-based compensation determined in accordance with SFAS No. 123 is presented in Footnote 15. The adoption of this pronouncement did not have a material effect on the financial statements of the Company.
Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging Activities" is effective for fiscal years beginning after June 15, 2000, and establishes standards for the reporting for derivative instruments. It requires changes in the fair value of a derivative instrument and the changes in fair value of assets or liabilities hedged by that instrument to be included in income. To the extent that the hedge transaction is effective, income is equally offset by both investments. Currently the changes in fair value of derivative instruments and hedged items are reported in net unrealized gain (loss) on securities. The Company has not adopted SFAS 133. However, the effect of adoption on the consolidated financial statements at December 31, 2000, would not be material.
Gross realized gains: Fixed maturities $ 2,861 $ - $ 78,758 Equity securities - 190,169 170,540 Gross realized (losses): Equity securities (138,250) (125,376) (1,367) ------- ------- ------- Net realized investment gains $(135,389) $64,793 $247,931 ======= ====== =======
The amortized cost and estimated market value of fixed maturity investments at December 31, 2000, 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.
Due in one year or less $17,974,663 $18,059,680 Due after one year through five years 72,757,426 72,825,890 Due after five years through ten years 4,065,988 4,097,060 --------- --------- Total fixed maturities $94,798,077 $94,982,630 ========== ==========
Certificates of deposit $ 225,000 $ 425,000 Commercial paper 2,000,000 2,675,000 Commercial bank money market accounts 417,280 2,055,254 U.S. government obligation money market fund 28,778 78,799 Short-term U.S. treasury note 681,414 731,281 Savings account 2,882 2,839 --------- --------- Total short-term investments $3,355,354 $5,968,173 ========= =========
Bad debt expense for the fiscal year ended December 31, 2000, and the fiscal year ended December 31, 1999, was $19,878 and $20,736, respectively. Premium finance notes receivable represent the balance due to the Company's premium finance subsidiary from policyholders who elect to finance their premiums over the policy term. These notes are net of unearned finance charges.
NOTE 7 - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES - --------------------------------------------------- The following table provides an analysis of the roll forward of Crusader's losses and loss adjustment expenses, including a reconciliation of the ending balance sheet liability for the periods indicated:
1. Higher than anticipated claim cost from business outside of California. 2. The effect on settlements of escalating jury awards. 3. Increased development of losses due to the impact of changes in California law that expanded coverage and increased loss exposure, (e.g., Montrose Chemical Corp. v. Admiral Insurance Co. (1994), Montrose Chemical Corp. v. Admiral Insurance Co. (1995), Armstrong World Industries, Inc. v. Aetna Gas & Sur. Co. (1996), James Pepperell, et al., v. Scottsdale Insurance Company (1998), Pardee Construction Company v. Insurance Company of the West et al., (2000), Pershing Park Villas HOA v. United Pacific Ins. Co.(2000), Centex Golden Construction Co. v. Dale Tile Co. (2000)).
NOTE 12 - REINSURANCE - --------------------- A reinsurance transaction occurs when an insurance company transfers ("cedes") a portion of its exposure on business written by it to a reinsurer which assumes that risk for a premium ("ceded premium"). Reinsurance does not legally discharge the Company from primary liability under its policies. If the reinsurer fails to meet its obligations, the Company must nonetheless pay its policy obligations. The Company's reinsurance agreements help protect Crusader against liabilities in excess of certain retentions, including major or catastrophic losses which may occur from any one or more of the property and/or casualty risks which Crusader insures. The Company continually monitors and evaluates the liquidity and financial strength of its reinsurers to determine their ability to fulfill obligations assumed under the reinsurance contracts.
On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader which includes a reimbursement of the cost of acquiring the portion of the premium which is ceded. Crusader does not currently assume any reinsurance. The Company intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The unpaid losses ceded to the reinsurer are recorded as an asset on the balance sheet.
Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ---- Premiums written: Direct business $33,259,948 $33,139,361 $37,079,303 Reinsurance assumed - - - Reinsurance ceded (6,853,383) (6,595,440) (2,952,340) ---------- ---------- ---------- Net premiums written $26,406,565 $26,543,921 $34,126,963 ========== ========== ==========
Incurred losses and loss adjustment expenses: Direct $34,225,322 $23,189,173 $20,557,887 Assumed - - - Ceded (12,548,407) (6,161,983) (2,964,305) ---------- ---------- ---------- Net incurred losses and loss adjustment expenses $21,676,915 $17,027,190 $17,593,582 ========== ========== ==========
Year ended December 31, 2000 $624,388 Year ended December 31, 1999 $653,389 Year ended December 31, 1998 $563,160
NOTE 14 - STATUTORY CAPITAL AND SURPLUS - --------------------------------------- Crusader is required to file an annual statement with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities ("statutory"). Statutory accounting practices differ in certain respects from generally accepted accounting principles. The more significant of these differences for statutory accounting are (a) premium income is taken into earnings over the periods covered by the policies, whereas the related acquisition and commission costs are expensed when incurred; (b) all bonds are recorded at amortized cost, regardless of trading activity; (c) non-admitted assets are charged directly against surplus; (d) loss reserves and unearned premium reserves are stated net of reinsurance; and (e) federal income taxes are recorded when
payable. Additionally, the cash flow presentation is not consistent with generally accepted accounting principles and a reconciliation from net income to cash provided by operations is not presented. Comprehensive income is not presented under statutory accounting.
Year ended December 31, 2000 $214,787 Year ended December 31, 1999 $5,404,526 Year ended December 31, 1998 $8,243,434
As explained in Note 1, the Company applies APB Opinion No. 25 in accounting for its incentive stock option plans. Accordingly, no compensation cost has been recognized in the statements of operations. Had compensation cost for the Company plans been determined based on the fair value at the grant dates consistent
Weighted Average Options Exercise Price ------- -------------- Outstanding at December 31, 1997 373,948 $3.700 Options granted - - Options exercised (90,082) $3.455 Options terminated (89,320) $3.500 ------- Outstanding at December 31, 1998 194,546 $3.592 Options granted 135,000 $9.250 Options exercised (93,131) $3.691 Options terminated - - ------- Outstanding at December 31, 1999 236,415 $6.780 Options granted - - Options exercised (30,140) $3.500 Options terminated (2,500) $9.250 ------- Outstanding at December 31, 2000 203,775 $7.239 =======
The weighted average fair value of options granted during 1999 was $4.30. No options were granted in 1998. Options exercisable were 121,275 at December 31, 2000, at a weighted average exercise price of $5.87; 101,415 at December 31, 1999, at a weighted average exercise price of $3.50; 194,546 at December 31, 1998, at a weighted average exercise price of $3.59.
The income tax provision reflected in the consolidated statements of operations is less than the expected federal income tax on income as shown in the table below: Year ended December 31 ---------------------- 2000 1999 1998 ---- ---- ----
Year ended December 31 ---------------------- 2000 1999 ---- ---- Deferred tax assets: Discount on loss reserves $1,385,505 $1,371,087 Unearned premiums 1,159,690 1,125,191 Unrealized loss on investments - 559,745 Other 189,883 153,968 --------- --------- Total deferred tax assets $2,735,078 $3,209,991 --------- ---------
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------ Summarized unaudited quarterly financial data for each of the calendar years 2000 and 1999 is set forth below: