Effective December 31, 2000, CSC executed a Subordinated Surplus Note with Star in the principal sum of $3.8 million. Interest earns at 9% per annum, payable quarterly beginning April 1, 2001. These loan proceeds were deposited by CSC into a trust account established for the benefit of Star in order to collateralize CSC’s reinsurance obligations under the reinsurance agreements described above. This Subordinated Surplus Note, along with the other notes described above, were intended to be converted into Voting Convertible Preferred Stock of CSC, or its parent, as part of recapitalization of CSC, pursuant to a Letter of Intent dated December 31, 2000 between CSC, Star, and other investors. However, Star and the other investors decided not to exercise their conversion rights. As such, Star remains a surplus note holder of CSC in the amounts and terms described above. The Company has recorded an impairment of $870,000, which accounts for any uncollateralized portion of these notes.
Revenues from program business increased $25.6 million, or 16.1%, to $184.7 million in 2000 from $159.1 million in 1999. The increase reflects 16.9% growth in net earned premiums to $146.0 million in 2000 from $124.9 million in 1999. This increase reflects growth in new and existing programs, partially offset by a reduction in premiums from programs discontinued in 1999 and 2000. In addition, the purchase of a large quota share reinsurance treaty for several workers’ compensation programs resulted in a $9.5 million reduction in net earned premiums. Management fees grew $1.6 million, or 7.2%, to $24.5 million from $22.9 million. This increase reflects the addition of two new managed programs and the full year impact of the 1999 acquisition of TPA. The remaining increase reflects a $2.1 million, or 18.3%, increase in investment income to $13.7 million in 2000 from $11.6 million in 1999. This increase reflects both a 9.2% increase in average invested assets, from operating cash flows, and an increase in pre-tax yields to 6.23% in 2000 from 5.33% in 1999.
Revenue from agency operations, which consists primarily of agency commission revenue, decreased $1.5 million, or 8.9%, to $15.7 million for the year ended December 31, 2001 from $17.2 million for the comparable period in 2000. This decrease reflects the sale of the Meadowbrook-Villari Agency. Excluding the Meadowbrook-Villari Agency revenues from both periods, agency revenue would have decreased 2.2%. This decrease in agency commissions primarily relates to the sale of business to a former employee, for which there was a corresponding reduction in salary and administrative costs. Agency operations generated pre-tax income of $5.3 million for the year ended December 31, 2001 compared to $4.1 million for the comparable period in 2000. The improvement in agency operations reflects improved margins as a result of expense management initiatives. Effective July 1, 2001, the Company sold the business of Meadowbrook-Villari Agency. It is anticipated that this sale will result in a reduction of annualized agency revenue of approximately $3.2 million, but should not have a material impact on the Company’s overall results of operations.
The insurance subsidiaries are required to maintain certain deposits with regulatory authorities, which totaled $71.9 million at December 31, 2001, and $55.0 million at December 31, 2000.