space in East Lansing, Michigan; Chicago, Illinois; Louisville, Kentucky; Boca Raton, Florida; Eden Prairie, Minnesota; Las Vegas, Nevada; and Albuquerque, New Mexico. We also own various real estate investment properties as part of our investment portfolio.
Net income for the year ended December 31, 2002 includes a $9.1 million charge, net of tax, for the write-off of goodwill related to the adoption of Statement of Financial Accounting Standard No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets.” In accordance with the transitional guidance given in SFAS No. 142, this write-off, related to the adoption of the standard, was treated as a cumulative effect of a change in accounting principle.
Net income for the year ended December 31, 1999 includes the effects of a large settlement with the Internal Revenue Service. Without this settlement, net income for the year ended December 31, 1999 would have been approximately $4.6 million.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion contains certain forward-looking statements relating to our anticipated future financial condition, operating results, cash flows and our current business plans. These forward-looking statements represent our outlook only as of the date of this report. While we believe any forward-looking statements we have made are reasonable, actual results could differ materially since the statements are based on our current expectations and are subject to risks and uncertainties. These risks and uncertainties are detailed elsewhere in this report and from time to time in other reports filed by the Company with the Securities and Exchange Commission. See the disclosures under “Item 1 - Business - Uncertainties Relating to Forward-Looking Statements.”
We purchase reinsurance to limit risk on our individual exposures, stabilize underwriting results and increase our capacity to write insurance. By purchasing reinsurance, we transfer a portion of our loss exposure to a reinsurer. Purchasing reinsurance does not discharge us from our obligation to our insureds. If the reinsurer fails to meet its obligations, we remain liable to pay the insured. We have various reinsurance agreements in place. In general, we retain the first $500,000 of a medical professional liability claim and $1,000,000 of a workers’ compensation claim; and reinsurers pay the portion of the claim in excess of those amounts.
SCW has been a significant agent for us for many years. The commission rates we pay to SCW are either the same or less than the commission rates we pay to our other agents. In addition, SCW has agreed that, with limited exceptions, the only medical professional liability insurance it will sell will be written by the Company.
The Company is not required to sell insurance solely through SCW. We believe these factors create a more favorable agency relationship for us than we have with our other agents.
An interruption in our relationship with SCW, whether due to Mr. Cheeseman’s sale of his ownership interest in SCW or otherwise, could significantly reduce our premiums written because SCW represents such a significant portion of our premiums written. In addition, because the commission rates we pay to SCW are sometimes less than we pay to other agents, an interruption in our relationship could result in an increase in the commission rates we must pay and a decrease in our net income.
“case reserve” for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon insurance reserving practices appropriate for the relevant line of business, and on the experience and knowledge of the estimator regarding the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. Case reserves are periodically reviewed and adjusted as necessary by the claims staff as more information becomes available. Reserves for claims “incurred but not reported” provide for the future reporting of claims already incurred, and development on claims already reported. The reserve for claims incurred but not reported is determined based on historical loss trends. We do not discount our reserves to recognize the time value of money.
Although considerable variability is inherent in such estimates, we believe that the reserve for unpaid losses and loss adjustment expenses is adequate. However, there can be no assurance that losses will not exceed the reserve for unpaid losses and loss adjustment expenses, as future trends related to the frequency and severity of claims may develop differently than management has projected.
During the year ended December 31, 2002, we generated approximately $2.3 million of realized losses on the sales of securities. The sale of one security in particular, United Airlines bonds, generated approximately
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. Premiums ceded to other companies are reported as a reduction of premium income. Reinsured losses incurred are reported as a reduction of gross losses incurred.
Under our primary professional liability reinsurance contract, the portion of the policyholder premium ceded to the reinsurers is “swing-rated,” or experience rated on a retrospective basis. This swing-rated contract is subject to a minimum and maximum premium range to be paid to the reinsurers in the future, depending upon the extent of losses actually paid by the reinsurers. We pay a provisional premium during the initial policy year. A liability is recorded to represent an estimate of net additional payments to be made to the reinsurers under the program, based on the level of loss and LAE reserves recorded.
Underwriting expense ratio - This ratio compares our expenses to obtain new business and renew existing business, plus normal operating expenses, to our net premiums earned. The ratio is used to measure how efficient we are at obtaining business and operating the insurance segments. The lower the percentage, the more efficient we are, all else being equal. Sometimes, however, a higher underwriting expense ratio can result in better business and improve our loss ratio, and overall profitability.
Medical professional liability direct premiums written were $177.3 million for the year ended December 31, 2002, an increase of $28.0 million, or 18.8% compared to 2001. The increase in direct premiums written was primarily the result of premium rate increases and reduced discounts instituted by the Company in 2002. The Company is seeking regulatory approval of additional rate increases in 2003.
reinsurance options with respect to the premiums and risks associated with these extended reporting coverages. In January 2003, the Company invested $3 million in a start up insurance company managed by the Company’s former third-party-administrator who underwrote its Florida medical professional liability business. This start up insurance company, Physicians Insurance Company, would seek to write as many of the tail policies as its capital and surplus levels would permit, thereby limiting APCapital’s direct exposure to future losses associated with underwriting Florida medical professional liability extended reporting period coverages.
Net premiums earned were $148.6 million for the year ended December 31, 2002, an increase of $29.0 million, or 24.2% compared to 2001. As with the increases in direct premiums written, the increase in net premiums earned was primarily due to premium rate increases and reduced discounts instituted in 2002, as policy counts were relatively flat.
Incurred loss and loss adjustment expenses totaled $162.3 million for the year ended December 31, 2002, a decrease of $6.3 million, or 3.8% compared to 2001. The incurred loss and loss adjustment expense ratio decreased to 109.2% for 2002 from 140.9% for 2001.
During 2002 and 2001, we experienced adverse development on prior year loss reserves. In the second half of 2001, we encountered a large increase in reported losses, primarily in our Florida, Ohio and Kentucky markets. This increase in reported losses was the result of an over 20% increase in the average severity of claims in these markets. The 2001 prior year development of $22.7 million was also unusually large because the Florida and Ohio markets were relatively new to us, making our initial reserve estimates difficult to predict. These higher than expected reported losses continued into 2002, but at a much lower level than in 2001. As a result, we also increased prior year reserves in 2002 by approximately $4.5 million. The accident year loss ratio was 106.1% for the year ended December 31, 2002, compared to 121.9% for 2001. The decrease in the accident year loss ratio is the direct result of premium rate increases, and reduced discounts granted in 2002.
Underwriting expenses were $27.2 million for the year ended December 31, 2002, an increase of $3.9 million, or 16.6% compared to 2001. The underwriting expense ratio was 18.3% for the year ended December 31, 2002, compared to 19.5% for 2001. Commission expense, a component of overall underwriting expense, for the year ended December 31, 2002 was $12.8 million compared with $8.9 million for 2001. The decrease in the medical professional liability underwriting expense ratio was primarily the result of holding underwriting salaries and other 2002 employee costs relatively constant with 2001, while net premiums earned increased 24.2% during the year ended December 31, 2002, as compared to 2001.
The following table sets forth summary premium, loss and expense information regarding the underwriting results of our workers’ compensation insurance operations for the years ended December 31, 2002 and 2001.
Workers’ compensation direct premiums written were $64.2 million for the year ended December 31, 2002, an increase of $217,000, or 0.3% compared to 2001. The increase in direct premiums written was primarily the result of premium rate increases and reduced discounts, offset by our exit of certain markets as described below. The Company is seeking regulatory approval of additional rate increases in 2003.
In June 2002, the Company filled several executive and management positions in its workers’ compensation segment to improve the overall performance of this segment, reduce risk exposures and improve profitability. We expect to see growth in our worker’s compensation segment, but not until the second half of 2003, as management is still implementing its business plans for this segment. These business plans include
exiting certain high-risk specialties (e.g., construction policies) and poor performing markets, and replacing this business with lower risk, more profitable accounts as described more fully in “Item 1 - Business.”
Underwriting expenses were $16.2 million for the year ended December 31, 2002, a decrease of $180,000, or 1.1% compared to 2001. The underwriting expense ratio decreased to 25.5% for the year ended December 31, 2002, from 28.1% for 2001. Commission expense for the year ended December 31, 2002 was $5.5 million, compared to $7.7 million during 2001. The decrease in the workers’ compensation underwriting expense ratio resulted primarily from the 8.8% growth in net premiums earned for the year ended December 31, 2002 as compared with 2001. Management expects that the workers’ compensation underwriting expense ratio will increase in the near future due to the hiring of several workers’ compensation executives and managers as described above. However, the addition of these executives and managers is expected to have a positive impact on premium growth, and the underwriting expense ratio should eventually return, approximately, to its present level.
The following table sets forth summary premium, loss and expense information regarding the underwriting results of our health insurance operations for the years ended December 31, 2002 and 2001.
Incurred loss and loss adjustment expenses totaled $23.3 million for the year ended December 31, 2002, an increase of $4.8 million, or 26.2% compared to 2001. The incurred loss and loss adjustment expense ratio decreased to 97.6% for 2002, from 98.7% for 2001.
Incurred loss and loss adjustment expenses totaled $1.4 million for the year ended December 31, 2002, a decrease of $6.7 million, or 83.2% compared to 2001. Incurred loss and loss adjustment expenses for the year ended December 31, 2002 represent unfavorable development on December 31, 2001 unpaid loss and loss adjustment expenses of $1.1 million, and current year incurred losses of $237,000 related to the alternative-risk-transfer program mentioned above.
Net underwriting expenses during the year ended December 31, 2002 were $365,000, a decrease of $870,000, or 70.4%, compared to 2001.
Investment income, excluding realized investment losses, was $45.5 million for the year ended December 31, 2002, a decrease of $2.4 million, or 4.9 % compared to 2001. Net realized losses were $913,000 and $5.7 million during the years ended December 31, 2002 and 2001, respectively. The decline in investment income was primarily the result of a lower interest rate environment in 2002, compared to 2001. In addition, the Company spent $27.5 million to fund its share repurchase program during the year ended December 31, 2002, which reduced the amount of funds available for investment in 2002. The Company maintains a portfolio of cash and short-term investments to meet operating cash needs, and to fund the Company’s share repurchase program.
Investment expenses were $2.5 million during the year ended December 31, 2002. This represents an increase of $727,000, or 40.7%, compared to the year ended December 31, 2001. The increase in investment expenses was primarily due to increased depreciation expense on several of the Company’s investment real estate properties.
In accordance with the provisions of SFAS No. 142, the Company did not record any amortization expense during the year ended December 31, 2002. Amortization expense for the year ended December 31, 2001 was $2.5 million. See “Effects of New Accounting Pronouncements” and Note 4 to the Consolidated Financial Statements for further discussion regarding amortization expense and the effect of SFAS No. 142 on the Company’s future operating results.
The following table sets forth summary premium, loss and expense information regarding the underwriting results of our medical professional liability insurance operations for the years ended December 31, 2001 and 2000.
Workers’ compensation direct premiums written were $64.0 million for the year ended December 31, 2001, an increase of $13.2 million, or 26.1% compared to 2000. The increase in direct premiums written was primarily due to retroactive premium adjustments and reduced credits following audits, as well as growth in the number of policies written in Minnesota, Illinois, and Indiana.
Net premiums earned were $58.4 million for the year ended December 31, 2001, an increase of $11.4 million, or 24.3%, compared to 2000. The increase in net premiums earned approximated the increase in direct premiums written in 2001.
Personal and commercial direct premiums written were $(466,000) for the year ended December 31, 2001, a decrease of $15.8 million, or 103.0% compared to 2000. In the fourth quarter of 2000, we announced our plan to exit the personal and commercial lines of business. As a result, no new premiums were written during 2001 and the negative direct written premiums were the result of premiums returned to policyholders.
Net investment income, excluding realized losses, was $47.9 million for the year ended December 31, 2001, an increase of $11.1 million, or 30.2%, compared to 2000. Approximately $7.8 million of the increase was attributable to the investment of the proceeds of our initial public offering received in December 2000. In addition, in 2000 we liquidated approximately $35.0 million in equity securities, invested the proceeds in interest income producing government and corporate bonds, and shifted some of our portfolio from tax-exempt securities to higher yielding taxable corporate securities. Net realized (losses) and gains were ($5.6) million and $1.2 million during the years ended December 31, 2001 and 2000, respectively. Approximately $6.0 million of the 2001 loss was attributable to a security whose decline in market value in 2001 we considered to be other than temporary. Reductions in short-term interest rates in 2001 reduced the yields generated by this portfolio.
Our general and administrative expenses increased $1.4 million, to $2.2 million, during the year ended December 31, 2001, compared to the prior year. The increase was primarily due to new costs incurred by the holding company, which became publicly traded in December 2000. These costs included stock market listing fees, investor relations fees, shareholder meeting costs and securities reporting expenses.
We incurred a restructuring charge of $2.5 million in 2001, compared to $919,000 in 2000. See Note 13 to the Consolidated Financial Statements, included elsewhere in this report, for further discussion regarding our restructuring initiatives.
The primary sources of our liquidity, on both a short- and long-term basis, are funds provided by insurance premiums collected, net investment income, recoveries from reinsurers and proceeds from the maturity or sale of invested assets. The primary uses of cash, on both a short and long-term basis, are losses, loss adjustment expenses, operating expenses, reinsurance premiums and taxes.
The Company’s net cash flow generated by operations was approximately $52.2 million for the year ended December 31, 2002, compared to $13.0 million provided by operations for 2001. The improvement in cash flows generated from operations was primarily the result of premium rate increases.
Total assets increased $20.0 million to $1.059 billion at December 31, 2002, compared to $1.039 billion at December 31, 2001. The increase was primarily attributable to cash flow generated from operations and the increase in the market value of our fixed income securities.
In March, July and November 2001, May 2002 and twice in August 2002, APCapital’s Board of Directors authorized six separate programs to purchase 5% of its outstanding common stock, representing a total of approximately 3,115,000 shares. The Company’s purchase of any of its shares is subject to limitations that may be imposed by applicable securities laws and regulations and the rules of the Nasdaq Stock Market. The timing of the purchases and the number of shares to be bought at any one time depend on market conditions and the Company’s capital requirements. During the year ended December 31, 2002, the Company purchased 1,555,100 shares pursuant to these authorizations, bringing the total number of shares purchased pursuant to these authorizations to 2,924,270, at a total cost of $52,707,000. As of December 31, 2002, the Company has approximately 191,000 shares of its August 28, 2002 stock repurchase program remaining to be purchased. There can be no assurance that the Company will repurchase the remaining shares authorized to be purchased, or that any additional repurchases will be authorized by the Company’s Board of Directors.
The Company is exploring various options with respect to financing to meet its long-term liquidity needs. While we believe that our exiting sources of funds will be sufficient to meet our long-term liquidity needs, planned premium rate increases may require that we obtain additional funds to bolster surplus so that we maintain an acceptable ratio of net premiums written to surplus.
The Company is exploring various options with respect to financing to meet its long-term liquidity needs. While we believe, that our exiting sources of funds will be sufficient to meet our long-term liquidity needs, planned premium rate increases may require that we obtain additional funds to bolster surplus so that we maintain an acceptable ratio of net premiums written to surplus.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective for fiscal years beginning after December 15, 2001. This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (APB No. 30). SFAS No. 144 generally retains the basic accounting model for the identification and measurement of impairments to long-lived assets to be held, and long-lived assets to be disposed. SFAS No. 144 broadens the definition of “discontinued operations,” as previously defined by APB No. 30, but does not allow for the accrual of future operating losses, as was previously permitted under that standard. SFAS No. 144 also addresses several implementation and financial statement presentation issues not previously addressed under GAAP. SFAS No. 144 excludes from its scope financial accounting and reporting for the impairment of goodwill and other intangible assets. The implementation of SFAS No. 144 did not have an effect on the Company’s consolidated financial position or results of operations for the year ended December 31, 2002.
In connection with the conversion, 331,638 shares of common stock of APCapital were sold at $13.50 per share under a subscription rights and best efforts offering to APAssurance policyholders, officers, directors, employees, and others. APCapital then sold 9,668,362 shares of its common stock in an underwritten public offering (“the Offering”) that closed December 13, 2000. On December 13, 2000, an additional 1,450,254 shares were sold to underwriters of the Offering pursuant to an over-allotment option contained in the underwriting agreement. The net proceeds of the Offering were approximately $142.6 million, consisting of gross proceeds of $154.6 million less conversion and offering expenses of $12.0 million.
In March, July and November 2001, May, 2002 and twice in August, 2002, APCapital’s board of directors authorized six separate programs to purchase 5% of its outstanding common stock, representing approximately 3,115,000 shares. The Company’s purchase of any of its shares is subject to limitations that may be imposed by applicable securities laws and regulations and the rules of the Nasdaq Stock Market. The timing of the purchases and the number of shares to be bought at any one time depend on market conditions and the Company’s capital requirements. APCapital repurchased 1,555,100 and 1,369,170 shares, at a cost of $27.5 million and $25.2 million, during 2002 and 2001, respectively. As of December 31, 2002, the Company has approximately 191,000 shares of its August 28, 2002 stock repurchase program remaining to be purchased.
Equity securities are carried at quoted market values. Fair values of fixed maturities and equity securities are determined on the basis of dealer or market quotations or comparable securities on which quotations are available. At December 31, 2001, mortgage loans are carried at the unpaid principal balance, which approximates the fair market value as they bore current market interest rates at that date. There were no mortgage loans at December 31, 2002. Real estate is carried at historical cost, less accumulated depreciation. Real estate of $27,380,000 and $33,411,000 in 2002 and 2001, respectively, and mortgage loans of $4,474,000 in 2001 are included in other investments on the balance sheet.
Investments are evaluated for other than temporary impairment (“OTTI”) using both quantitative and qualitative methods. At December 31, 2002, a reserve of $1.0 million was established on investment real estate. Additionally, the Company has written down its investment in Frontier bonds by $520,000 during 2002 and by $5.9 million in 2001. No other investments were noted that would require a write down for OTTI. Changes for OTTI are recorded as realized losses in the period the security is considered impaired. Subsequent declines in market value of an impaired security are recorded as realized losses in the period of decline. The Company does not record gains for subsequent recoveries in the market value of an impaired security until the security is sold or otherwise disposed of.
Premiums written are earned primarily using pro rata methods over the period of risk. Premiums receivable include $57,013,000 at December 31, 2002 and $56,679,000 at December 31, 2001 of premium installments. Receivable balances consist principally of written premiums from physicians and employers in the states of Michigan, Ohio, Illinois, Florida, Minnesota and New Mexico. The Company’s exposure to credit risk associated with receivables is generally offset by the liability for unearned premiums.
Property and equipment are recorded at cost. Depreciation is computed for assets using straight-line and accelerated methods over the following periods: building - 40 years, furniture - 10 years, and computer equipment and software - 5 years. Upon the sale or retirement of property and equipment, balances are removed from the respective accounts and any gain or loss is included in income.
The reserves for unpaid losses and loss adjustment expenses are actuarially estimated using the Company’s claim experience. These estimates are subject to the effects of trends in loss severity and frequency. When a claim is reported to the Company, a “case reserve” is established for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon insurance reserving practices appropriate for the relevant type of insurance, and based on the experience and knowledge of the estimator regarding the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. Case reserves are periodically reviewed and adjusted as necessary as more information becomes available. Reserves for claims “incurred but not reported” provide for the future reporting of claims already incurred, and development on claims already reported. The reserve for claims incurred but not reported is determined based on historical loss trends. The Company does not discount reserves to recognize the time value of money.
The Company’s internal actuaries develop projections of ultimate losses that are used to establish recorded reserves. Management utilizes these actuarial projections, as well as qualitative considerations, to establish a “best estimate” recorded reserve amount. Although considerable variability is inherent in such estimates, management believes that the reserve for unpaid losses and loss adjustment expenses is adequate.
The reserve for extended reporting period claims coverage is recorded during the term of the original claims-made policy, utilizing the pure-premium approach, in amounts believed to be adequate to pay for estimated future claims reported subsequent to a current policyholder’s death, disability or retirement. The amount of this reserve is $14,000,000 and $15,000,000 at December 31, 2002 and 2001, respectively, and is included in unpaid losses on the balance sheet. Changes in this reserve are charged or credited to income.
Insurance premium income is recognized on a daily pro rata basis over the respective terms of the policies in-force, generally one month for health insurance policies and one year for all other policies, and unearned premiums represent the portion of premiums written which are applicable to the unexpired terms of policies in-force.
Net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock and common stock equivalents (stock options and stock grants) outstanding during each year (See Note 17).
The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of 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. Actual results could differ from those estimates.
The FASB issued SFAS No. 144 “Accounting for Impairment or Disposal of Long-lived Assets.” This Standard was effective for the Company on a prospective basis, beginning January 1, 2002. SFAS No. 144 clarifies and revises existing guidance on accounting for impairment of property, plant, and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. The adoption of this Standard did not have any impact on the Company’s 2002 financial results.
SFAS No. 130, “Reporting Comprehensive Income”, requires unrealized gains or losses on the Company’s available-for-sale securities to be included in other comprehensive income, net of tax. Realized investment gains (losses) on securities held as of the beginning of the year totaling $459,000 in 2002, $(4,103,000) in 2001, and $3,686,000 in 2000 had unrealized appreciation of $620,000 at the beginning of 2002, $100,000 at the beginning of 2001, and $4,139,000 at the beginning of 2000.
The changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2001, were as follows:
Changes in unrealized gains (losses) on fixed maturities and equity securities were:
Bonds with amortized costs of $8,541,000 and $8,297,000 were on deposit with various states as of December 31, 2002 and 2001, respectively.
Changes in deferred policy acquisition costs for the years ended December 31, 2002, 2001, and 2000 are summarized as follows:
The positive development recognized in 2000 was the result of continued favorable claims settlement experience in the Michigan market. In the second half of 2001, we encountered a large increase in reported losses, primarily in our Florida, Ohio, and Kentucky professional liability markets. This increase in reported
Management believes the estimate of the ultimate liability for losses and loss adjustment expenses at December 31, 2002 is reasonable and reflective of anticipated ultimate experience. However, it is possible that the Company’s actual incurred loss and loss adjustment expenses will not conform to the assumptions inherent in the determination of the liability. Accordingly, it is reasonably possible that the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimated amounts included in the accompanying financial statements.
Losses and loss adjustment expenses incurred are net of ceded losses of $31,725,000 for 2002, $46,721,000 for 2001, and $30,417,000 for 2000.
The Company had reinsurance recoverables from the following reinsurers at December 31, 2002 and 2001:
The provision for income taxes for the years ended December 31, 2002, 2001 and 2000 consists of:
Income taxes incurred do not bear the usual relationship to income before income taxes for the years ended December 31, 2002, 2001, and 2000 due to the following:
At December 31, 2002, the Company had approximately $9.5 million of net operating loss carryforwards which expire in 2012 and are limited to approximately $910,000 annually, and approximately $9.1 million of minimum tax credits which can be carried forward indefinitely.
In November, 2001, the Company reduced personnel in its Information Systems department and its management team. A total of eleven people were terminated resulting in $1,891,000 of severance costs and $26,000 of other costs. In December 2001, the Company completed its phase out of the personal and commercial lines and all policies have been non-renewed. A total of nine people were terminated resulting in a charge of $567,000.
In 1999, the Company asked SCW to help the Company enter the Nevada medical professional liability market. To help alleviate the cost of penetrating a new market, the Company agreed to reimburse a portion of SCW’s costs from when it began its operations in Nevada in October 1997 through October 1999. The amounts paid by the Company would then be repaid through a reduced commission on premium written by SCW in the state of Nevada over a period of time not to exceed ten years. Any unpaid amounts at the end of ten years will be forgiven by the Company. The Company’s non-interest bearing receivable balance related to
the SCW Nevada start up costs was $310,000 and $334,000 at December 31, 2002 and 2001, respectively. In 2002, the Company established an allowance in the amount of $300,000 in the event that the receivable balance owed by SCW is not repaid as a result of a reduction or elimination of premiums written in Nevada. Accordingly, the net receivable at December 31, 2002 was $10,000.
In 2001, a representative from a law firm providing legal services to the Company was appointed an officer of the Company. Legal services provided by this firm to the Company during 2002 and 2001 were $410,000 and $370,000, respectively.
The Company offers benefits under certain defined contribution plans. In 2002 and 2001, the defined contribution plans provide for Company contributions of 5% of employee compensation, as defined in the plan and a 100% match of employee contributions on the first 3% of contributions and 50% match on the next 2% of contributions (10% of employee compensation and a 25% match of employee contributions on the first 4% of contributions for the year 2000). Employer contributions to the plans were approximately $575,000, $1,654,000, and $1,401,000 for 2002, 2001, and 2000, respectively.
The Company accounts for its stock-based compensation in accordance with Accounting Principles Bond Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. The Company’s policy regarding stock options is to issue options with an exercise price equal to the market price on the date of grant. Accordingly, no compensation expense has been recognized for options granted in 2002, 2001, and 2000. Had compensation expense for the options been recognized based on the fair value at the grant date consistent with SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s net (loss) income and net (loss) income per common share-assuming dilution would have been reduced to the pro forma amounts below:
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2002 and 2001 and the period ended December 31, 2000:
during the previous calendar years. The Company accrues for its portion of assessments in accordance with American Institute of Certified Public Accountants’ Statement of Position 97-3, “Accounting by Insurance and Other Enterprises for Insurance-Related Assessments.” Assessments to date are not significant; however, the ultimate liability for future assessments is not known. Accordingly, the Company is unable to predict whether such future assessments will materially affect the financial condition or results of operations of the Company.
Deferred federal income taxes and were not recorded for statutory purposes prior to 2001.
Expense allocations are based primarily on loss and loss adjustment expenses by line of business and certain other estimates for underwriting expenses. Investment income, investment expense, amortization expense and interest expense are allocated to the segments based on that segment’s “ownership” percentage of the assets or liabilities underlying the income or expense. General and administrative expenses, restructuring expense and demutualization expense are all attributed to the holding company and are included in corporate and other, as is other income, which the Company does not allocate to the insurance operating segments.
The unaudited operating results by quarter for 2002, 2001, and 2000 are summarized below:
For periods subsequent to conversion; (for periods where the Company incurred a loss, no effect of awards or options were calculated as the impact would be anti-dilutive).
In accordance with the transition guidance given in SFAS No. 142, the goodwill impairment charge, net of tax, that was determined in the fourth quarter of 2002 has been recorded in the first quarter of 2002 as SFAS No. 142 was adopted effective January 1, 2002 (Notes 2 and 4).
APCapital owns all of the issued and outstanding common stock of the following entities: