The following selected financial data are taken from the Company's consolidated financial statements. The data should be read in conjunction with the accompanying consolidated financial statements and the related notes, Management's Discussion and Analysis and other financial information included in this Form 10-K.
The Company believes the following accounting policies are the most critical since these policies require significant judgment or involve complex estimations that are important to the portrayal of the Company's financial condition and operating results:
The Company records valuation allowances to reduce the deferred tax assets to the amount that is more likely than not to be realized. While the Company considers taxable income in assessing the need for a valuation allowance, in the event the Company determines it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, an adjustment would be made and income increased in the period of such determination. Likewise, in the event the Company determines it would not be able to realize all or part of its deferred tax assets in the future, an adjustment would be made and charged against income in the period of such determination.
The liability for loss and loss adjustment expenses including incurred but not reported losses is based on the estimated ultimate cost of settling the claim using traditional paid and incurred loss development methods. These estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the liabilities for loss and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments are included in current operations. A liability for all costs expected to be incurred in connection with the settlement of unpaid loss and loss adjustment expenses is accrued when the related liability for unpaid losses is accrued. Loss adjustment expenses include costs associated directly with specific claims paid or in the process of settlement, such as legal and adjusters' fees. Loss adjustment expenses also include other costs that cannot be associated with specific claims but are related to losses paid or in the process of settlement, such as internal costs of the claims function. The Company does not discount its reserves for losses and loss adjustment expenses. The Company writes primarily surety contracts which are of short duration. The Company does not consider investment income in determining if a premium deficiency relating to short duration contracts exists.
Written Premiums (000's) Earned Premiums (000's) --------------------------------------------------------------- 2001 2000 % Change 2001 2000 %Change --------------------------------------------------------------- Direct ........ $ 13,867 $ 13,775 .7% $14,465 $ 12,756 13.4% Assumed ....... 4,194 2,393 75.3% 3,788 2,481 52.7% Ceded ......... (4,654) (3,510) 32.6% (4,612) (3,109) 48.3% -------- -------- ------- ------ Total ..... $ 13,407 $ 12,658 5.9% $13,641 $ 12,128 12.5% ======== ======== ======= =========
Other revenue consists primarily of commissions earned by subsidiary agencies and fee revenue earned by a subsidiary claim-consulting group. For the year ended December 31, 2001, other revenues increased by $227,283 or 13.5%, which is primarily attributable to increased business by the Company's claim consulting subsidiary.
During the year ended December 31, 2001 the net amortization of deferred policy acquisition costs were to $4,362,721 as compared to $3,767,107 for the year ended December 31, 2000. The acquisition costs represent 23.9% and 24.7% of the direct and assumed earned premiums for the years ended December 31, 2001 and 2000, respectively.
During the year ended December 31, 2001, operating expenses and taxes, licenses and fees (excluding income taxes) increased to $6,563,919 from $5,288,520 in 2000. The increase of $1,275,399 or 24.1% is a result of increased salary and related expenses, actuarial and consulting fees associated with the derivative valuation, legal fees, travel and related expenses and other miscellaneous expenses. The Company began direct marketing in the surety bond market in 1997. Through 2001, the Company has produced approximately $67 million in gross written premiums and $52 million in premiums net of reinsurance. The increase in expenses is associated with the Company's continued expansion and administration costs.
In accordance with Statement of Financial Accounting Standard 121 ("SFAS 121"), goodwill and other long-lived assets that were capitalized in conjunction with the purchase of Associates Acquisition Corp., d/b/a Surety Associates, were deemed impaired as of December 31, 2001, and an asset impairment charge of $437,418 was recorded.
Losses and loss adjustment expenses increased to $3,360,258 from $2,394,532 for the year ended December 31, 2000 and 1999, respectively. The increase of $965,726 or 40.3% is attributed to claims arising from increased direct writings. Losses as a percentage of earned premiums were 27.7% and 24.9% for the years ended December 31, 2000 and 1999, respectively. Direct incurred losses increased $1,498,196 or 89.0% while losses under the assumed agreements decreased $475,117 or 72.7% when comparing current year to prior year. The following tables reflects the 2000 activity as it pertains to earned premiums and incurred claims:
The Company incurred income tax expenses during 2000 of $764,390 as compared to $36,686 during 1999. The income tax expense for the year ended December 31, 1999 includes the reversal of a valuation allowance of $466,799.
At December 31, 2001, the Company's $26,104,019 of total assets were distributed primarily as follows: 52.2 percent in cash and investments (including accrued investment income), 32.7 percent in receivables and reinsurance recoverables, 9.3 percent in intangibles and deferred policy acquisition costs, 1.9 percent in deferred income tax asset and 3.9 percent in other assets.
The Company follows investment guidelines that are intended to provide an acceptable return on investment while maintaining sufficient liquidity to meet its obligations.
Net cash used in financing activities was $(220,570), $(204,262) and $(33,308) for the years ended December 31, 2001, 2000 and 1999, respectively. Financing activities consist primarily of repayments on borrowings and advances to (from) affiliates during 2001, 2000 and 1999.
The differences between the December 31, 2001 liability for losses and LAE reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") and that reported in the annual statement filed with the state insurance departments in accordance with statutory accounting practices ("SAP") are as follows: