The Company utilizes for its own operations 100% of the space it leases.
Liquidity and Capital Resources: ------------------------------- Due to the nature of the Company's business (insurance and insurance services) and whereas Company growth does not normally require material reinvestments of profits into property or equipment, the cash flow generated from operations usually results in improved liquidity for the Company. Because the Company is a holding company and operates through its subsidiaries, its cash flow is dependent upon the earnings of its subsidiaries and the distributions of those earnings to the Company.
The tax-exempt interest income earned (net of bond premium and discount amortization) during the year ended December 31, 2001, was $752,189 compared to $1,191,794 in the year ended December 31, 2000. In the year ended December 31, 1999, tax-exempt interest income earned totaled $1,473,922.
There were no dividends paid by Crusader to Unico in 2001. Crusader paid dividends of $1,500,000 in 2000 and $2,000,000 in 1999. The dividends paid in 2000 and 1999 were invested in short-term instruments and were ultimately used to help fund the repurchase of shares of the Company's common stock discussed below. As of December 31, 2001, the maximum dividend that could have been made by Crusader to Unico without the prior approval of the California Department of Insurance was $2,751,954.
The Company has previously announced that its Board of Directors had authorized the repurchase in the open market from time to time of up to an aggregate of 945,000 shares of the common stock of the Company (See Note 17). During the year ended December 31, 2001, the Company retired an aggregate of 240,358 shares of its common stock at a cost of $1,387,397. Of this amount, $432,046 came from cash on hand and the proceeds from the maturities of short-term investments and $955,351 from the proceeds of the sale of U.S. treasury notes. As of
December 31, 2001, the Company has purchased and retired under the Board of Directors authorization an aggregate of 868,958 shares of its common stock at a cost of $5,517,465.
Crusader's statutory capital and surplus as of December 31, 2001, was $27,519,538, a decrease of $12,106,731 (31%) from December 31, 2000. On March 9, 2002, subsequent to Crusader's statutory filing, 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 year ending in 2001 or 2002 is carried back five years, rather than the previously allowed two years. The income tax credit resulting from net operating loss carrybacks are treated as current receivables while income tax credit resulting from the net operating loss carryforwards, subject to limitations, are treated as deferred tax assets and are limited to an aggregate amount no greater than 10% of beginning surplus. As of December 31, 2001, Crusader reported to the California Department of Insurance in its annual statutory filing, total deferred tax assets of $7,243,071 of which $3,962,627 was admitted and included in surplus and $3,280,444 was non-admitted and not included in surplus. This act allowed Crusader to carryback its entire net operating loss and thus converted its net operating loss carryforward of $3,934,772 to a current receivable. This reduced the total deferred tax assets to $3,308,299 of which $2,087,678 were admitted and $1,220,621 were non-admitted. Taking into consideration the Job Creation and Workers Assistance Act of 2002, the primary effect of the Act was to increase Crusader's surplus by $2,059,823.
Cash flow used by operations for the year ended December 31, 2001, was $1,288,941, a slight decrease of $85,833 in cash used compared to the year ended December 31, 2000. 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 decline in cash flows from operations in 2000 was primarily due an increase in loss and loss adjustment payments of $4,985,797.
Results of Operations: --------------------- General - ------- The Company had a net loss of $10,870,018 for the year ended December 31, 2001, compared to net income of $439,797 for the year ended December 31, 2000, and $5,131,366 for the year ended December 31, 1999. Total revenue for the year ended December 31, 2001, was $42,116,906 compared to $38,367,949 for the year ended December 31, 2000, and $40,734,257 for the year ended December 31, 1999.
losses and loss adjustment expenses and policy acquisition costs) from Crusader. The Company had net income for the year ended December 31, 2000, of $439,797 compared to net income of $5,131,366 for the year ended December 31, 2000, a decrease in net income of $4,691,569.
The progressive decrease in operating results both from year-to-year and successive quarters during the two years ended December 31, 2001, is primarily attributable to the successive increases to loss and loss adjustments expense reserves related to prior periods, as discussed below under Insurance Company Operation. In addition to increasing its estimates of losses and loss adjustment expenses, the Company has taken various underwriting and pricing actions that it believes addresses the underlying causes of the adverse development discussed below and which has given rise to the successive periods of decline in operating results. No assurance can be given that the actions taken will be successful or that the Company's estimates of ultimate losses and loss adjustment expenses will be sufficient. Changes in such estimates, if any, will be recorded in the period they occur.
Crusader's primary line of business is commercial multiple peril business package policies. This line of business represented approximately 96% of Crusader's total written premium for the year ended December 31, 2001, and 97% of Crusaders total premium in the years ended December 31, 2000 and 1999.
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, 2001, 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.
For the year ended December 31, 2000, gross written premium increased by $120,587 compared to the year ended December 31, 1999. This slight increase was primarily due to the subsidence in the intensity of price-based competition that began in 2000.
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 its marketing channels. However, the Company does plan to adopt "fine-tuning" changes to its existing rates, rules and forms.
Centex Golden Construction Co. v. Dale Tile Co. (2000) ----------------------------------------------------- This case states that indemnity agreements in construction contracts requires the subcontractor to defend the general contractor even though the subcontractor's liability has not been established.
1. The Company had written liquor liability outside of California since 1992. The time allowed by statute to report a claim in these states ranges from 2 years to 3 years. Prior to 1998, the frequency and severity of the claims seemed reasonably predictable. Before the statute of limitations expired, claims occurring in 1998 that were reported to the Company in 2000 were significantly higher than anticipated based on the Company's loss experience for all prior years in which these coverages were offered. The Company could not identify any reason for this change and was unable to tell whether it was an aberration or a new trend. Although the Company increased its reserves, they were not enough to cover the claims reported in 2001 for losses occurring in 1999. Prior to 2001, the Company's loss development studies included this line of business with its commercial multiple peril package business. To better isolate the change in development of its non-California liquor liability business, the Company developed separate actuarial studies during 2001. Based on these studies, the Company substantially increased its reserves for both its reported and unreported claims on its non-California liquor liability business. In 2001, the Company responded to the change in development in 2001 and 2000 by either substantial increased rates or reducing coverages offered on this business.
2. Prior to 1995, the Company was writing a wide variety of general contractors and subcontractors in California. In 1995, California law relating to contractors changed significantly as a consequence of various California legal decisions. The effect of these changes was to expand coverages and increase loss exposure. Although the Company modified its policy forms and underwriting standards relating to its contractor business in 1995, it could not change the exposure on the policies already written. The assumptions made and the trends used by the Company in estimating its reserves for losses and loss adjustment expenses in 2001 and 2000 have been relatively untested by time and actual development of its reserves. Although the Company increased its reserves in 2000, construction defect claims on its contractor business for 1995 and prior continued to be reported in 2001 in amounts greater than the Company anticipated. Prior to 2001, the Company included this line of business in its commercial multiple peril business package development studies. To better isolate the effect of the above changes, the Company developed separate actuarial studies on its contractor line of business during 2001. Based on these studies, the Company substantially increased its reserves for both its reported and unreported claims on its contractor business.
Other Insurance Operations - -------------------------- Health and Life Insurance Program --------------------------------- Commission income from the health and life insurance sales of NIB and AIB is as follows:
Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Commission income $2,582,290 $2,625,193 $2,668,582
NIB and AIB market health and life insurance through non-affiliated insurance companies for individuals and groups. Approximately 94% of the health and life commission income for the year ended December 31, 2001, and approximately 93% of the health and life commission income for the year ended December 31, 2000, was from the CIGNA HealthCare medical and dental plan programs. Revenues for the year ended December 31, 2001, decreased $42,903 (2%) compared to the year ended December 31, 2000. The decrease in commission income in the health and life insurance programs is primarily a due to a decrease in premiums written in the CIGNA HealthCare programs as a result of increased competition in the individual and group healthcare market.
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 due to a one-time bonus commission of $143,191 that the Company received from CIGNA in 1999. Excluding the effect of the 1999 bonus commission, commission income for the year ended December 31, 2000, increased $99,802 (4%) when compared to the prior year.
Service Fee Income ------------------ Unifax sells and services insurance policies for Crusader. The service fee charged to the policyholder by Unifax is recognized as income in the consolidated financial statements. Service fee income of Unifax is as follows:
Service fee income is primarily related to the number of policies written by Unifax. Service fee income increased $72,076 (4%) and policies issued increased by 763 (4%) in the year ended December 31, 2001, compared to the year ended December 31, 2000. Service fee income decreased $22,488 (1%) in the year ended December 31, 2000, compared to the year ended December 31,1999. Although the number of policies issued in 2000 increased by 126 over those written in 1999 service fee income decreased. In 1999, Unifax voluntarily discontinued charging service fees in several states outside of California which contributed to the decline in revenue in 2000.
The Company is in the process of applying for a rate increase with the California Department of Insurance to increase its California service fee from $100 per policy to $165 per policy. There is no assurance that this rate increase will be approved.
Revenues during the year ended December 31, 2001, were $667,418, a decrease of $144,223 (18%) compared to the same period of the prior year. Revenue for the year ended December 31, 2000, increased by $51,022 (7%) compared to the year ended December 31, 1999.
The daily automobile rental insurance program commission and fee income (excluding contingent commission) decreased $84,389 (11%) in 2001 compared to the year 2000. The decrease in commission income is primarily due to a 10% decrease in written premium as a result of continued intense price competition in the daily automobile rental insurance program. 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.
Unifax produces workers' compensation policies primarily in California for non-affiliated insurers and receives a commission from them based on premium written. Unifax intends to discontinue its sales of workers' compensation insurance policies for non-affiliated insurers in 2002. The Company's decision to discontinued selling this business was due to underwriting constraints of the non-affiliated insurance companies that limited the types and classes of business that they would accept. These constraints resulted in the decrease in commission income in the year ended December 31, 2001 and 2000.
Premium Finance Program ----------------------- Premium finance charges and late fees earned from financing policies are as follows: Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Premium finance charges and late fees earned $868,496 $837,902 $915,940 New loans 7,148 7,166 7,597
AAC provides premium financing primarily to Crusader policies produced by Unifax in California. The growth of this program is dependent and directly related to the growth of Crusader's written premium and AAC's ability to market its competitive rates and service to finance those policies. Revenue increased $30,594 (4%) in the year ended December 31, 2001, compared to the prior year although there were slightly fewer loans financed in the current year. The increase in revenue in 2001 is primarily due to the fact that the average policy loan in 2001 was approximately 6% greater than the prior year. Although AAC finances approximately 80% of all Unifax policies
financed, the percentage of all Unifax policies that are financed decreased from approximately 50% in 2000 to approximately 49% in 2001. Although Unifax increased the number of policies issued in 2001 by approximately 4% compared to the prior year, AAC's new loans remained approximately the same.
Revenue for the year ended December 31, 2000, decreased $78,038 (9%) compared to the year ended December 31, 1999. The decrease in revenues and loans in 2000 is primarily due to the fact that fewer policies are being financed. Although AAC finances approximately 80% of all Unifax policies which are financed, the percentage of all Unifax policies which are financed decreased from approximately 54% in 1999 to approximately 50% in 2000.
Operating Expenses - ------------------ Policy Acquisition Costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly 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 slight changes in the ratio of policy acquisition cost to net earned premium in 2001, 2000, and 1999 are primarily due to due to changes in provisionally rated ceded premium which affects net earned 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: Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Policy acquisition costs $8,695,037 $8,303,917 $8,362,814 Ratio to net earned premium (GAAP ratio) 29% 32% 30%
Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Salaries and employee benefits $4,321,637 $4,241,117 $4,351,550
Commissions to Agents/Brokers (not including commissions on Crusader policies that are reflected in policy acquisition costs) are generally related to gross commission income from the health and life insurance program, the daily automobile rental insurance program, the earthquake program and the commercial liability program. Commissions to agents and brokers decreased $49,431 (4%) for the year ended December 31, 2001, compared to the year ended December 31, 2000. Commissions to agents and brokers increased $3,971 (0%) for the year ended December 31, 2000, compared to the year ended December 31, 1999.
Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ---- Commission to agents/brokers $1,260,059 $1,309,490 $1,305,519
Income Taxes - ------------ The income tax benefit for 2001 was $5,853,091 compared to an income tax benefit of $246,184 for 2000. The effective combined income tax rates for 2001 and 2000 were (35%) and (127.2%), respectively. The pre-tax loss was significantly higher in 2001 compared to 2000 which resulted in the difference in the effective tax rates between 2001 and 2000. The Company's combined effective tax rate for 1999 was 28.0% due to the pre-tax net income for the year and to significantly larger portion of tax-exempt interest in the income before taxes in 1999
New Accounting Standards - ------------------------ Statement of Financial Accounting Standards No. 141 ("SFAS No. 141") "Business Combinations" became effective January 1, 2002. SFAS No. 141 requires companies to apply the purchase method of accounting for all business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interest method.
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.
Losses and Loss Adjustment Expenses ----------------------------------- The preparation of the Company's financial statements requires judgments and estimates. The most significant is the estimate of loss reserves as required by Statement of Financial Accounting Standards No 60 ("SFAS No. 60"), "Accounting and Reporting by Insurance enterprises" and Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies". Estimating loss reserves is a difficult process as there are many factors that can ultimately affect the final settlement of a claim and, therefore, the reserve that is needed. Changes in the regulatory and legal environment, results of litigation, medical costs, the cost of repair materials and labor rates can all impact ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer
Related Party Transaction - ------------------------- The Company presently occupies a 46,000 square foot building located at 23251 Mulholland Drive, Woodland Hills, California, under a master lease expiring March 31, 2007. The lease provides for an annual gross rent of $1,025,952. Erwin Cheldin, the Company's president, chairman and principal stockholder, is the owner of the building. On February 22, 1995, the Company signed an extension to the lease with no increase in rent to March 31, 2007. The Company believes that the terms of the lease at inception and at the time the lease extension was signed were at least as favorable to the Company as could have been obtained from non-affiliated third parties. The Company utilizes for its own operations 100% of the space it leases.
Certain statements contained herein, including the Sections entitled "Business," "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," that are not historical facts are forward looking. These statements, which may be identified by forward looking words or phrases such as "anticipate," "appears," "believe," "estimates," "expect," "intend," "may," "should," and "would," involve risks and uncertainties, many of which are beyond the control of the Company. Such risks and uncertainties could cause actual results to differ materially from these forward looking statements. Factors which could cause actual results to differ materially include those described under Item 1 - Business - "Competition"; premium rate adequacy relating to competition or regulation; actual versus estimated claim experience; success of the Company's underwriting and pricing actions that it believes addresses the adverse development on its construction defect, apartment house habitability and non-California liquor liability claims; possible reductions in Crusader's A.M. Best rating; regulatory changes or developments; unforeseen calamities; general market conditions; the Company's ability to introduce new profitable products; and the Company's ability to expand geographically.
Consolidated Statements of Operations for the years ended December 31, 2001, December 31, 2000, and December 31, 1999 32
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, December 31, 2000, and December 31, 1999 34
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unico American Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
The Company had net unrealized investment gains of $1,858,839 as of December 31, 2001, and net unrealized investment gains of $121,805 as of December 31, 2000. These amounts are net of deferred taxes.
Income Taxes - ------------ The provision for federal income taxes is computed on the basis of income as reported for financial reporting purposes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and are measured using the enacted tax rates and laws expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense provisions increase or decrease in the same period in which a change in tax rates is enacted.
d. Insurance Claim Administration Operation -------------------------------------------- Claim administration income is based on premium written by Bedford for non-affiliated insurers. Income is recognized on the effective date of the insurance policies and a liability is recognized for the estimated cost of completing the administration of all current and future claims that are covered by these policies.
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.
transacting business on January 1, 1985. As of December 31, 2001, 96% 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 or operation of the insured premises. 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.
NOTE 2 - ADVANCE PREMIUM AND PREMIUM DEPOSITS - --------------------------------------------- Some of the Company's health and life programs require payments of premium prior to the effective date of coverage; and, accordingly, invoices are sent out as early as two months prior to the coverage effective date. Insurance premiums received for coverage months effective after the balance sheet date are recorded as advance premiums. Deposit premiums represent funds received from the Company's daily automobile rental program which guarantee the payment of premiums for past coverage months. These deposits are required when information such as gross receipts or number of rental cars is required to compute the actual premium due, but is not available until after the coverage month.
NOTE 3 - INVESTMENTS - -------------------- The Company manages its own investment portfolio. A summary of net investments and related income is as follows:
Fixed maturities $5,628,698 $5,848,248 $5,752,154 Equity securities - - 1,380 Short-term investments 174,720 251,930 238,017 --------- --------- --------- Total investment income 5,803,418 6,100,178 5,991,551 Less investment expenses 5 100 664 --------- --------- --------- Net investment income $5,803,413 $6,100,078 $5,990,887 ========= ========= =========
Year ended December 31 ---------------------- 2001 2000 1999 ---- ---- ----
Gross realized gains: Fixed maturities $35,276 $ 2,861 $ - Equity securities - - 190,169 Gross realized (losses): Equity securities (25,704) (138,250) (125,376) ------ ------- ------- Net realized investment gains (losses) $ 9,572 $(135,389) $64,793 ===== ======= ======
The amortized cost and estimated market value of fixed maturity investments at December 31, 2001, 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.
Certificates of deposit $ 225,000 $ 225,000 Commercial paper - 2,000,000 Commercial bank money market accounts 2,050,006 417,280 U.S. government obligation money market fund 585,699 28,778 Short-term U.S. treasury note - 681,414 Savings account 2,917 2,882 --------- --------- Total short-term investments $2,863,622 $3,355,354 ========= =========
Premiums receivable $2,268,702 $1,931,311 Premium finance notes receivable 4,002,347 3,896,959 --------- --------- Total premiums and notes receivable 6,271,049 5,828,270 Less allowance for doubtful accounts 22,722 20,539 --------- --------- Net premiums and notes receivable $6,248,327 $5,807,731 ========= =========
Bad debt expense for the fiscal year ended December 31, 2001, and the fiscal year ended December 31, 2000, was $27,759 and $19,878, 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 6 - NOTE PAYABLE - BANK - ---------------------------- 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.
(*) 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.
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) ---------------------------------------------------------- and James Pepperell, et al., v. Scottsdale Insurance Company (1998). -------------------------------------------------------------- These four cases state that all insurance companies with completed operations property damage coverage in force during a period of continuing damage or property deterioration must provide coverage for construction defect losses regardless as to whether or not the damage first manifested during their policy period.
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. The Company has no reinsurance recoverable balances in dispute.
was subject to adjustment and was based on the amount of losses ceded, limited by a maximum percentage that could be charged. That provisional rated treaty was cancelled on a runoff basis and replaced by a flat rated treaty on January 1, 1998.
Premiums earned: Direct business $35,409,174 $32,743,165 $34,693,113 Reinsurance assumed - - - Reinsurance ceded (5,515,330) (6,843,931) (6,583,752) ---------- ---------- ---------- Net premiums earned $29,893,844 $25,899,234 $28,109,361 ========== ========== ==========
Incurred losses and loss adjustment expenses: Direct $52,939,238 $34,225,322 $23,189,173 Assumed - - - Ceded (11,262,222) (12,548,407) (6,161,983) ---------- ---------- ---------- Net incurred losses and loss adjustment expenses $41,677,016 $21,676,915 $17,027,190 ========== ========== ==========
Employer contributions to the plan were as follows: Year ended December 31, 2001 $554,111 Year ended December 31, 2000 $624,388 Year ended December 31, 1999 $653,389
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 and deferred taxes, subject to limitations, are recognized but only to the extent that they do not exceed 10% of statutory surplus. 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. The NAIC's project to codify accounting practices was approved by the NAIC in March 1998. The approval included a provision for commissioners' discretion in determining appropriate statutory accounting for insurers in their states. Consequently, prescribed and permitted accounting practices may continue to differ from state to state. Codification became effective on January 1, 2001. The primary effect of Codification on Crusader was the recognition, subject to limitations, of deferred tax assets previously not allowed. As of December 31, 2001, Crusader reported to the California Department Insurance in its annual statutory filing, total deferred tax assets of $7,243,071 of which $3,962,627 was admitted and included in surplus and $3,280,444 non-admitted and not included in surplus. The admitted deferred tax assets of $3,962,627 would not have been allowed prior to codification. On March 9, 2002, subsequent to Crusader's statutory filing, 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 year ending in 2001 or 2002 is carried back five years, rather than the previously allowed two years. The income tax credit resulting from net operating loss carrybacks are treated as current receivables while income tax credit resulting from net operating loss carryforwards, subject to limitations, are treated as deferred tax assets and are limited to an aggregate amount no greater than 10% of beginning surplus. This act allowed Crusader to carryback its entire net operating loss and thus converted its net operating loss carryforward of $3,934,772 to a current receivable. Taking into consideration the Job Creation and Workers Assistance Act of 2002, Crusader's admitted deferred tax assets were $2,087,678 and its non-admitted deferred tax assets were $1,220,621. Taking into consideration the Job Creation and Workers Assistance Act of 2002, the primary effect of Codification on Crusader was to increase its surplus by recognizing admitted deferred tax assets of $2,087,678.
The Company is unable to predict how insurance rating agencies will interpret or react to any such changes resulting from Codification. No assurance can be given that future legislative or regulatory changes resulting from such activities will not adversely affect the Company and its subsidiaries.
As of December 31, 2001 $27,519,538 As of December 31, 2000 $39,626,269
Crusader is restricted in the amount of dividends it may pay to its parent in any twelve (12) month period without prior approval of the California Department of Insurance. Presently, without prior approval, Crusader may pay a dividend in any twelve (12) month period to its parent equal to the greater of (a) 10% of Crusader's statutory policyholders' surplus or (b) Crusader's statutory net income for the preceding calendar year. The maximum dividend that may be made without prior approval as of December 31, 2001, is $2,751,954. There were no
dividends paid by Crusader to Unico in 2001. Crusader paid dividends of $1,500,000 in 2000 and $2,000,000 in 1999.
NOTE 15 - STOCK PLANS - --------------------- The Company's 1985 stock option plan provided for the grant of incentive stock options to officers and key employees. The plan covered an aggregate of 1,500,000 shares of the Company's common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.). As of December 31, 2001, there were 11,415 options outstanding, and all are currently exercisable. Options granted under this plan had a life of either 5 or 10 years and had a vesting period from immediate to 9 years. All options were granted at fair market value. There are no additional options available for future grant under the 1985 plan.
The Company's 1999 Omnibus Stock Plan that covers 500,000 shares of the Company's common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) was approved by shareholders June 4, 1999. On August 26, 1999, the Company granted 135,000 incentive stock options of which 30,000 were terminated and 105,000 were outstanding as of December 31, 2001. These options expire 10 years from the date of the grant and were not exercisable prior to September 1, 2000. Options covering 10,000 or less shares become exercisable at the rate of 2,500 shares per year commencing September 1, 2000; and options covering more than
10,000 shares become exercisable at the rate of 5,000 shares per year commencing September 1, 2000. At December 31, 2001, there were 70,000 options under the 1999 stock option plan were exercisable.
The Company applies APB Opinion No. 25 in accounting for its incentive stock option plans. Accordingly, no compensation cost has been recognized in the accompanying statements of operations. Had compensation cost for the Company plans been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the Company's 2001 net income would have been reduced by $27,174; 2000 net income would have been reduced by $74,654 and 1999 net income would have been reduced $210,107. In addition, 2001 earnings per share (basic and diluted) would have been reduced by $0.00, 2000 earnings per share (basic and diluted) would have been reduced by $0.01 and 1999 earnings per share (basic and diluted) would have been reduced by $0.03. Calculations of the fair value under the method prescribed by SFAS No. 123 were made using the Black-Scholes Option-Price Model with the following weighted average assumptions used for the 1999 grant: dividend yield 2.46%, expected volatility of 43%, expected lives of 10 years, and risk-free interest rates of 6.09%. No options were granted during 2001.
The changes in the number of common shares under option are summarized as follows: Weighted Average Options Exercise Price ------- -------------- 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 Options granted - - Options exercised (59,860) $3.500 Options terminated (27,500) $9.250 ------- Outstanding at December 31, 2001 116,415 $8.686 =======
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 ---------------------- 2001 2000 1999 ---- ---- ---- Computed tax expense (benefit) $(5,685,857) $65,828 $2,422,462 Tax effect of: Tax exempt income (217,383) (344,428) (425,963) Dividend exclusion - - (279) Other 19,220 (5,910) (23,334) State income tax expense 30,929 38,326 20,637 -------- ------- --------- Tax per financial statements $(5,853,091) $(246,184) $1,993,523 ========= ======= =========
Deferred tax liabilities: Deferred acquisition costs $1,727,043 $1,530,051 Discount on salvage and subrogation 8,400 8,027 Unrealized gain on investments 957,584 62,748 Other 181,095 185,810 --------- --------- Total deferred tax liabilities $2,874,122 $1,786,636 --------- ---------
NOTE 17 - REPURCHASE OF COMMON STOCK - EFFECT ON STOCKHOLDERS' EQUITY - --------------------------------------------------------------------- The Company has previously announced that its Board of Directors had authorized the repurchase in the open market from time to time of up to an aggregate of 945,000 shares of the common stock of the Company. During the year ended December 31, 2001, the Company retired an aggregate of 240,358 shares of its common stock at a cost of $1,387,397 of which $118,116 was allocated to capital and $1,269,281 was allocated to retained earnings. As of December 31, 2001, the Company had purchased and retired under the Board of Directors authorization an aggregate of 868,958 shares of its common stock at a cost of $5,517,465.
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------ Summarized unaudited quarterly financial data for each of the calendar years 2001 and 2000 is set forth below: