The most significant liquidity risk faced by the Company would be continued adverse development of the insurance company claims, both reported and unreported. The Company has taken measures to address the underlying causes of the adverse development; however, no assurance can be given that the measures taken will be successful or that the Company's estimate of ultimate losses and loss adjustment expenses will be sufficient. Based on the Company's current loss and loss expense reserves and expected current and future payments, the Company believes that there are no current liquidity issues.
Crusader generates a significant amount of cash as a result of its holdings of unearned premium reserves, its reserves for loss payments, and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash and investments (excluding net unrealized gains or losses) at December 31, 2001, were $94,720,698 compared to $98,234,187 at December 31, 2000, a 4% decrease. Crusader's cash and investments at December 31, 2001, was $92,790,350 or 98% of the total held by the Company, compared to $93,578,918 or 95% of the total held by the Company at December 31, 2000.
Unico has a $2,000,000 line of credit with Union Bank of California. Interest on this line is referenced as Bank's LIBOR rate plus 1.75% per annum and is payable monthly. The agreement contains certain covenants including maintenance of certain financial ratios. As of December 31, 2001, the Company does not meet the covenant requiring a tangible net worth of at least $45,000,000. As of December 31, 2001 and 2000, no amounts were borrowed and the Company does not intend to utilize its credit line during the remainder of its current term. This credit line expires September 3, 2002, at which time it's expected to be renegotiated and renewed.
Crusader's statutory capital and surplus as of December 31, 2000, was $39,626,269, a decrease of $1,326,1877 (3%) from December 31, 1999.
The Company has initiated an upgrade and replacement of its printing and forms generation systems and expects to spend approximately $125,000 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.
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 $1,529,996, 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.
For the year ended December 31, 2000, the Company had income before taxes of $193,613 compared to income before taxes of $7,124,889 in the year ended December 31, 1999, a decrease of $6,931,276. The decrease in pre-tax income was primarily due to a decrease of $6,800,955 in the underwriting profit (net earned premium less
The effect of inflation on the net income of the Company during the years ended December 31, 2001 and 2000 was not significant.
For the year ended December 31, 2001, gross written premium increased by $4,377,448 (13%) compared to the year ended December 31, 2000. Approximately 86% of the Company's premium is written in the state of California, which accounted for 88% of the increase in gross written premium. Although the Company increased its rates on its liquor liability coverages outside of California and Nevada in 2001, it was not a material factor in the growth in gross written premium in 2001. The growth in written premium in 2001 was primarily the result of the subsidence in the intensity of price-based competition in the property and casualty insurance market that has resulted in the Company's products becoming more competitive. The Company's policy count has increased approximately 4% while gross written premium has increased 13%.
Although the Company attempts to be competitive on price, it believes that maintaining adequate rates on the insurance policies it sells is a better business strategy than increasing total written premium by selling more policies at inadequate rates.
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 gone out of business, others have recently raised rates or adopted more restrictive rules. Those changes have not yet been large enough to significantly 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 writes annual policies and, therefore, earns written premium daily over the one-year policy term. Premium earned before reinsurance increased $2,666,009 (8%) in the year ended December 31, 2001, compared to the year ended December 31, 2000, and decreased $1,949,948 (6%) in the year ended December 31, 2000, compared to the year ended December 31, 1999. The increase in earned premium before reinsurance in 2001 was directly related to the increase in written premium in the current year. The decrease in earned premium in the years 2000 and 1999 was directly related to the decrease in written premium in the years 1999 and 1998.
Earned premium ceded decreased $1,328,601 (19%) to $5,515,330 or 16% of earned premium before reinsurance in the year ended December 31, 2001, compared to $6,843,931 or 21% of earned premium before reinsurance for the year ended December 31, 2000. Earned premium ceded increased $260,179 (4%) to $6,843,931 or 21% of earned premium before reinsurance for 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. Ceded premiums decreased in the year ended December 31, 2001, primarily as a result of a decrease in ceded premium ceded under the Company's provisionally rated reinsurance contract. Premium ceded under the Company's provisionally rated reinsurance 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. This decrease in ceded premiums was partially offset by an increase in premium ceded to the Company's primary reinsurance contract as a result of the related increase in earned premiums.
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. The decrease in earned ceded premium (excluding provisionally rated ceded premium) in 2000 and 1999 was primarily due to decreased earned premium before reinsurance.
Primarily due to ceded loss experience, Crusader's reinsurance cost is expected to increase in 2002 due to a rate increase of approximately 61% on its excess of loss treaties. In addition, reinsurance costs are expected to increase due to an increase of approximately 11% on its catastrophe treaties. Without taking into account premium growth, this rate increase, net of ceding commission, will cost approximately $1,500,000. In addition, the annual aggregate deductible will increase from $500,000 in 2001 to $750,000 in 2002. In 2002, the Company's reinsurance coverage for terrorism, mold and cyber risk has been significantly reduced. To the extent allowed by regulators, the Company intends to address this change in its reinsurance coverage by modifying the coverage provided to its policyholders.
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 139.4% in 2001 from 83.7% in 2000 and 60.6% in 1999. This increase in the loss ratio was primarily due to an increase in prior years' incurred losses.
Loss ratio 139.4% 83.7% 60.6% Expense ratio 29.1% 32.1% 29.8% ----- ----- ---- Combined ratio 168.5% 115.8% 90.4% ===== ===== ====
The adverse development of prior years losses was primarily the result of an increase in the Company's estimate of ultimate reported and unreported claims for construction defects, non-California liquor liability and apartment house habitability as described below.
In the years ended December 31, 2001 and 2000, the Company increased its estimates of ultimate losses for both reported and unreported claims primarily occurring from 1998 through 2000 and from 1993 through 1995 (the years most impacted by construction defect claims). Adverse development of prior years' losses of $19,326,349 as of December 31, 2001 and $4,270,631 as of December 31, 2000, was primarily the result of an increase in the Company's estimate of ultimate reported and unreported claims for construction defect claims, non-California liquor liability claims and apartment house habitability claims. Construction defect claims arise from the liability of contractors for their defective work in the construction of habitation structures (such as apartments, condominiums and single-family dwellings) or commercial type structures. Liquor liability claims arise from the liability of tavern owners related to the sale of alcoholic beverages. Apartment house habitability claims arise from uninhabitable conditions related to dilapidated structures and insect and vermin infestation.
Pardee Construction Company v. Insurance Company of the West et al., (2000) ------------------------------------------------------------------- This case states that an additional insured endorsement includes completed operations property damage coverage even for projects that were completed before the inception date of the endorsement.
3. In 2000 and 2001, the Company began experiencing adverse development on its apartment house business due to the effect of settlements on habitability claims. Those settlements were substantially influenced by a statute that provides for the payment of plaintiff attorney fees without regard to policy limits and the Montrose Chemical Corp. v. Admiral Insurance Company decision of 1995. In 2000, the Company modified its underwriting criteria to address this adverse development and intends to modify its policy form to limit the statutory attorney fee exposure.
Since approximately 94% 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 $1,726,811 $1,654,735 $1,677,223 Policies written 18,114 17,351 17,225
Daily auto rental program commission and claim administration fee $657,273 $741,662 $731,884 Contingent commission 10,145 69,979 28,735 -------- ------ ------- Total commission and fee income $667,418 $811,641 $760,619 ======= ======= =======
Membership and fee income for the years ended December 31, 2001, 2000 and 1999 were relatively unchanged, as the membership base remained constant.
Other Commission and Fee Income ------------------------------- Other commission and fee income are as follows: Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ----
Unifax began producing commercial earthquake insurance policies in California for non-affiliated insurance companies in 1999. Unifax receives a commission from the insurance company based on premium written. Commission income on the earthquake program for the year ended December 31, 2001, increased $35,036 (219%) compared to the prior year as a result of the commencement of writing policies with a new non-affiliated insurance company in April of 2001. In October of 2000, the non-affiliated company Unifax had been producing earthquake policies for discontinued writing business in California. This resulted in a decrease of commission income in the year ended December 31, 2000, of $6,428 (29%) compared to the prior year.
Investment Income and Net Realized Gains (Losses) - ------------------------------------------------ Investment income and net realized gains (losses) are as follows:
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 2001, the Company realized a loss of $25,704 on one equity security where a decline in market value was considered other than temporary. The Company had recognized a loss on this equity security in 2000 of $138,250 due to a decline in market value at December 31, 2000.
Investment interest and dividends earned (excluding net realized gains) decreased $296,665 (5%) in the year ended December 31, 2001, compared to the year ended December 31, 2000, primarily as a result of a decrease in the average invested assets in the Company's investment portfolio. In the year ended December 31, 2001, the Company's average invested assets (at amortized value) decreased $5,299,460 (5%) compared to the year ended December 31, 2000. The decrease in average invested assets primarily resulted from the cash used from operations and from the sale of U.S. treasury securities and other short-term investments to fund the repurchase of the Company's common stock. There were no losses on the sale of these securities. As of December 31, 2001 the cost of the stock repurchase plan has been $5,517,465 (See Note 17). The Investment income return based on average invested assets was 6.02% for the year ended December 31, 2001, compared to 6.00% for the year ended December 31, 2000. The mix of taxable and tax-exempt securities in the portfolio affect the investment income return percentage. Tax-exempt securities generally carry a lower yield than taxable securities. These securities (at amortized value) decreased to $8,213,141 (9% of total investments) at December 31, 2001, compared to $19,789,675 (20% of total investments) December 31, 2000.
than in 2000. The Income tax benefit for 2001 arises primarily from the Company's ability to recover prior income taxes paid due to the carryback of current period net operating losses. (See Note 16 - Taxes on Income)
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142") "Goodwill and Other Intangible Assets" is effective for fiscal years beginning after December 15, 2001, and establishes how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Generally, it also requires that those assets meeting criteria for classification as intangible with estimable useful lives will be amortized, while intangible assets with indefinite useful lives and goodwill will not be amortized. Previously, all goodwill was required to be amortized over the estimable useful life, not to exceed 40 years. The Company does not have any intangible assets recorded in its financial statements and thus is not currently impacted by the adoption of SFAS 142.
Significant Accounting Policies - ------------------------------- 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.
the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonable predictable than long-tail liability claims. The liability for unpaid losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period plus estimates based on experience and industry data for development of case estimates and for unreported losses and loss adjustment expenses. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Management believes that the aggregate reserves for losses and loss adjustment expenses are reasonable and adequate to cover the cost of claims, both reported and unreported.
Investments ----------- In accordance with Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company is required to classify its investments in debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading securities. Although all of the Company's investments are classified as available-for-sale, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates market value. Investments in equity securities are carried at market value. The unrealized gains or losses from fixed maturities and equity securities are reported as accumulated other comprehensive income (loss) which is a separate component of stockholders' equity, net of any deferred tax effect. When a decline in value of a fixed maturity or equity security is considered other than temporary, a loss is recognized in the consolidated statements of operations. Realized gains and losses are included in the consolidated statements of operations based on the specific identification method.
Consolidated Statements of Cash Flows for the years ended December 31, 2001, December 31, 2000, and December 31, 1999 35
We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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.
Investments - ----------- All of the Company's fixed maturity investments are classified as available-for-sale and are stated at market value. Although classified as available-for-sale, the Company's investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates market value. Investments in equity securities are carried at market value. The unrealized gains or losses from fixed maturities and equity securities are reported as accumulated other comprehensive income (loss) which is a separate component of stockholders' equity, net of any deferred tax effect. When a decline in value of a fixed maturity or equity security is considered other than temporary, a loss is recognized in the consolidated statements of operations. Realized gains and losses are included in the consolidated statements of operations based on the specific identification method.
c. Insurance Premium Financing Operations ------------------------------------------ Premium finance interest is charged to policyholders who choose to finance insurance premiums. Interest is charged at rates that vary with the amount of premium financed. Premium finance interest is recognized using a method which approximates the interest (actuarial) method.
Restricted Funds: - ---------------- Restricted Funds Restricted funds are as follows: Year ended December 31 ---------------------- 2001 2000 ---- ---- Restricted Funds: Premium trust funds (1) $1,529,996 $2,755,572 Assigned to state agencies (2) 2,725,000 2,725,000 --------- --------- Total restricted funds $4,254,996 $5,480,572 ========= =========
The insurance company operation is conducted through Crusader, which as of December 31, 2001, 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
Concentration of Risks - ---------------------- In 2001 approximately 86% of Crusader's gross premium written was derived from California. In 2001, approximately 94% of the $2,582,290 commission income from the Company's health and life insurance program was from CIGNA HealthCare medical and dental plan programs. At December 31, 2001, the Company's reinsurance recoverable on paid and unpaid losses and loss adjustment expenses of $11,480,134 were from Partners Reinsurance of the U.S. and General Reinsurance Corporation, both California admitted companies rated A+ and A++ respectively by A.M. Best Company.
Stock-Based Compensation - ------------------------ In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation" 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 Note 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. 143 ("SFAS No. 143") "Asset Retirement Obligations" is effective for fiscal years beginning after December 15, 2002, and establishes financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. The Company does not expect the adoption of SFAS No. 143 to have a material impact on our financial statements.
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144") "Accounting for Impairment or Disposal of Long-Lived Assets" is effective for fiscal years beginning after December 15, 2001, and establishes financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121) "Accounting for 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. 3, "Reporting the Results of Operations - Reporting the effects of Disposal of a Segment of a Business, and Extraordinary, Unusual or Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale. The Company does not expect the adoption of SFAS No. 144 to have a material impact on our financial statements.
Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Gross unrealized appreciation: Fixed maturities $3,030,903 $936,589 $363,627 Gross unrealized (depreciation): Fixed maturities (214,480) (752,036) (1,911,768) Equity securities - - (98,170) --------- ------- --------- Net unrealized appreciation (depreciation) on investments 2,816,423 184,553 (1,646,311) Deferred federal income tax benefit (expense) (957,584) (62,748) 559,746 --------- ------ --------- Net unrealized appreciation (depreciation), net of deferred income taxes $1,858,839 $121,805 $(1,086,565) ========= ======= ==========
Amortized Estimated Cost Market Value ---- ------------ Due in one year or less $ 12,217,799 $ 12,414,410 Due after one year through five years 70,173,988 72,694,632 Due after five years through ten years 9,420,072 9,519,240 ---------- ---------- Total fixed maturities $91,811,859 $94,628,282 ========== ==========
NOTE 4 - PROPERTY AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION) - ---------------------------------------------------------------- Property and equipment consist of the following: Year ended December 31 ---------------------- 2001 2000 ---- ----
NOTE 5 - PREMIUMS AND NOTES RECEIVABLE, NET - ------------------------------------------- Premiums and notes receivable are substantially secured by unearned premiums and funds held as security for performance.
NOTE 8 - DEFERRED POLICY ACQUISITION COSTS - ------------------------------------------ Deferred policy acquisition costs consist of commissions (net of ceding commission), premium taxes, inspection fees, and certain other underwriting costs which are related to and vary with the production of Crusader Insurance Company policies. Policy acquisition costs are deferred and amortized as the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, including investment income.
Year ending December 31, 2002 $1,025,952 December 31, 2003 $1,025,952 December 31, 2004 $1,025,952 December 31, 2005 $1,025,952 December 31, 2006 (through March 31, 2007) $1,282,440 --------- Total minimum payments $5,386,248 =========
Premium payable $5,487,753 $6,192,201 Unearned claim administration income 300,000 300,000 Profit sharing contributions 292,900 395,305 Accrued salaries 469,690 475,740 Security purchases payable (settlement date in 2001) - 140,625 Other 706,114 395,308 --------- --------- Total accrued expenses and other liabilities $7,256,457 $7,899,179 ========= =========
On September 13, 2000, the City of Los Angeles audited Unico (parent company only) for the years 1997, 1998 and 1999 with respect to its Los Angeles business license gross receipts tax. The audit resulted in an assessment of $97,681 in gross receipts tax, interest of $24,196, and penalties of $39,072, resulting in a total amount claimed due of $160,949. The assessment was based on the city's position that expenses of Unico's subsidiaries that are paid by Unico (parent company) are subject to the gross receipts business tax when those expenses are reimbursed by the subsidiaries to Unico. The Company disagreed with the audit findings and appealed the matter. A formal hearing was held on January 3, 2001. The Company received the decision of the board of review that resulted in a revised gross receipts tax of $46,589 and a reduction in the interest assessment of $13,500. The Company is awaiting its request that all penalties be waived. As of December 31, 2001, the Company has expensed the revised tax due and recorded the interest expense adjustment.
Since 2000, Crusader had its primary reinsurance agreements with Partner Reinsurance Company of the U.S., a California admitted reinsurer rated A+ by A.M. Best Company. In 1999, Crusader had its primary reinsurance agreements with General Reinsurance Corporation, a California admitted reinsurers rated A++ by A.M. Best Company. These reinsurance agreements help protect Crusader against liabilities in excess of certain retentions, including major or catastrophic losses that may occur from any one or more of the property and/or casualty risks which Crusader insures. Crusader also has additional catastrophe reinsurance from various other reinsurance companies of which 90% of the premium is ceded to participating catastrophe reinsurers that are admitted in California. Any catastrophe loss ceded to the reinsurer not admitted in California requires the reinsurer to immediately obtain a non-cancelable (Evergreen) letter of credit covering their ceded outstanding loss including any IBNR. On July 1, 1997, Crusader increased its retention from $150,000 to $250,000 per risk. Concurrently, Crusader maintained catastrophe and clash covers (subject to a maximum occurrence and annual aggregate) to help protect the Company from one loss occurrence affecting multiple policies. Beginning January 1, 1998, an annual aggregate deductible of $750,000 commenced on losses ceded to its reinsurance treaty covering losses between $250,000 and $500,000. Beginning January 1, 2000, an annual aggregate deductible of $500,000 commenced on losses ceded to its reinsurance treaty covering losses between $250,000 and $500,000. Prior to January 1, 1998, National Reinsurance Corporation charged a provisional rate on exposures up to $500,000 that
Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Premiums written: Direct business $37,637,396 $33,259,948 $33,139,361 Reinsurance assumed - - - Reinsurance ceded (5,531,221) (6,853,383) (6,595,440) ---------- ---------- ---------- Net premiums written $32,106,175 $26,406,565 $26,543,921 ========== ========== ==========
Year ended December 31, 2001 $(12,110,967) Year ended December 31, 2000 $214,787 Year ended December 31, 1999 $5,404,526
In December 1993, the National Association of Insurance Commissioners ("NAIC") adopted a Risk-Based Capital ("RBC") Model Law for property and casualty companies. The RBC Model Law is intended to provide standards for calculating a variable regulatory capital requirement related to a company's current operations and its risk exposures (asset risk, underwriting risk, credit risk and off-balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for regulators that establishes uniform capital levels and specific authority levels for regulatory intervention when an insurer falls below minimum capital levels. The RBC Model Law specifies four distinct action levels at which a regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company's RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. Taking into consideration the Job Creation and Workers Assistance Act of 2002 discussed below, Crusader adjusted capital at December 31, 2001 was 458% of authorized control level risk-based capital.
Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. IRIS helps those companies that merit highest priority in the allocation of the regulators' resources on the basis of 12 financial ratios that are calculated annually. The analytical phase is a review of annual statements and the financial ratios. The ratios and trends are valuable in pointing to companies likely to experience financial difficulties, but are not themselves indicative of adverse financial condition. The ratio and benchmark comparisons are mechanically produced and are not intended to replace the state insurance departments' own in-depth financial analysis or on-site examinations.
In 2001, the Company was outside the usual values of 5 of the 12 IRIS ratio tests, primarily as a result of adverse losses and loss adjustment expenses development. The IRIS ratio test outside the usual values were the Two Year Overall Operating Ratio, Change in Surplus, One Year Reserve Development to Surplus, Two Year Reserve Development to Surplus, and Estimated Current Reserve Deficiency to Surplus.
Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Current provision: Federal $(5,375,381) $(253,899) $1,668,332 State 24,935 37,409 21,577 --------- ------- --------- Total federal and state (5,350,446) (216,490) 1,689,909 Deferred (502,645) (29,694) 303,614 --------- ------- --------- Provision for taxes $(5,853,091) $(246,184) $1,993,523 ========= ======= =========
On March 9, 2002, the Job Creation and Workers Assistance Act of 2002 was signed into law. This act was effective for tax years ending in 2001 and provided that a net operating loss for tax years ending in 2001 or 2002 is carried back five years, rather than the previously allowed two years. This act allowed the Company to carryback its entire net operating loss. The carryback of our current Federal tax benefit was allocated as follows:
Tax year ended Amount Applied - -------------- -------------- December 31, 1996 $(2,145,554) December 31, 1997 (2,900,437) December 31, 1998 (352,948) --------- Total Federal income tax carryback (5,398,939) Adjustment to prior year tax provision 23,558 --------- Current Federal income tax provision $(5,375,381) =========
Year ended December 31 ---------------------- 2001 2000 ---- ---- Deferred tax assets: Discount on loss reserves $1,950,452 $1,385,505 Unearned premiums 1,310,128 1,159,690 Other 169,793 189,883 --------- --------- Total deferred tax assets $3,430,373 $2,735,078 --------- ---------
*In loss periods options are excluded from the calculation of diluted EPS, as the inclusion of such options would have an antidilutive effect.