The cash flow provided by operations in the year ended December 31, 2002, was $8,013,224, an increase in cash flow of $9,302,165 compared to the cash flow for the year ending December 31, 2001. The increase in cash flow from operations in 2002 was primarily the result Crusader's 2002 growth in written premiums (unearned premium reserves increased $5,053,433) and from the recovery of federal income taxes of $5,449,872 from the Company's 2001 federal income tax loss carryback. 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.
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, 2002, 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, 2002, gross written premium increased by $7,984,884 (21%) compared to the year ended December 31, 2001. Approximately 93% of the Company's premium is written in the state of California. The increase in written premium in the state of California in 2002 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. In addition, the Company has increased rates on some of its California products, is in the process of filing for rate increases on some of its California products, and is waiting for regulatory approval of rate increases on some of its products that have already been filed with California regulatory authorities. The Company believes that a "hard market" cycle has begun in California. Industry-wide underwriting losses, decreases in investment yield, and increases in reinsurance cost have all contributed to the change from the "soft market" to the "hard market." The Company is also benefiting from the fact that some of its competitors have gone out of business and others have recently raised rates or adopted more restrictive rules. The Company cannot determine how long the existing market conditions will continue, nor in which direction they might change. The number policies issued by the Company in 2002 increased approximately 3% from the prior year while gross written premium increased 21%.
As discussed in the following paragraphs, the Company believed that it had adequately addressed its estimate of ultimate losses as of December 31, 2001, and anticipated that underwriting changes in problematic business such as reducing coverages, modifying policy forms, more restrictive underwriting, reductions in non-California business, and increasing rates would be reflected in the 2002 development. However, continued adverse development in 2002 indicated that the underwriting changes implemented through December 31, 2001, were not sufficient to fully address the losses primarily occurring on accident years 1999 through 2001 on the Company's business outside of California (primarily liquor and premises liability), and on the Company's special risk class of business. Liquor liability claims arise from the liability of tavern owners related to the sale of alcoholic beverages. The Company's special risk class of business represents risks written within current underwriting programs that have a higher degree of exposure and require special pricing and underwriting. Based on the development in 2002 primarily on the business discussed above, the Company increased its estimate of ultimate losses for accident years 1999 and subsequent. The adverse development in 2002 for accident years 1998 and prior was primarily due to higher than anticipated cost of construction defect 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
MONTANA: The Company discontinued offering limits over $300,000 for Liquor Liability in June 2001, and discontinued offering Liquor Liability to new applicants on August 1, 2002. In October 2002, the Company stopped offering any new business coverage in Montana, and in January 2003 the Company started to non-renew its entire book of Montana policies. Total premium written in Montana in 2001 was $513,735, compared to $393,966 in 2002.
c. On September 7, 2002, the Company changed its coverage forms to limit the "costs taxed against the insured" clause of the "Supplementary Provisions" coverage grant, from unlimited to $100,000.
Year ended December 31 ---------------------- 2002 2001 2000 ---- ---- ---- Service fee income $2,241,883 $1,726,811 $1,654,735 Policies written 18,603 18,114 17,351
The daily automobile rental insurance program commission and fee income (excluding contingent commission) increased $65,263 (10%) in 2002 compared to the year 2001. 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 increase in commission income in the year ended December 31, 2002, is primarily due to a 7% increase in written premium in 2002 which reversed the 10% decline in written premium in the year ended December 31, 2001. There is continued intense price competition in the daily automobile rental insurance
Unifax began producing commercial earthquake insurance policies in California for non-affiliated insurance companies in 1999. Unifax receives a commission from these insurance companies based on premium written. Commission income on the earthquake program for the year ended December 31, 2002, increased $547 (1%) compared to the prior year. Commission income on earthquake policies increased in the year ended December 31, 2001, as a result of the commencement of writing policies with a new non-affiliated insurance Company in April of 2001.
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 ratio of policy acquisition cost to net earned premium in 2000 was greater than the ratio in 2002 and 2001 primarily 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 ---------------------- 2002 2001 2000 ---- ---- ---- Policy acquisition costs $9,274,263 $8,695,037 $8,303,917 Ratio to net earned premium (GAAP ratio) 28% 29% 32%
In November 2002 the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. This interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee. The provisions related to the disclosure requirements to be made by a guarantor are effective for financial statements
We have audited the accompanying consolidated balance sheets of Unico American Corporation and subsidiaries as of December 31, 2002 and 2001, 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, 2002. 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.
Fair Value of Financial Instruments - ----------------------------------- The Company has used the following methods and assumptions in estimating its fair value disclosures:
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, 2002, is $2,625,845. There were no dividends paid by Crusader to Unico in 2002 or in 2001. Crusader paid dividends of $1,500,000 to Unico in 2000.