One of AFS' product offerings is a "life of loan" flood zone determination whereby AFS agrees to update the zoning status of the subject property throughout the life of the original underlying loan. Therefore, AFS defers a portion of the revenues associated with this product and amortizes it into income over the estimated life of the original underlying loan. Significant estimates AFS must make in determining the estimated annual amortization of this deferred revenue include rates of loan amortization and loan prepayment. Loan prepayment rates are materially impacted by the general level of mortgage interest rates. For example, higher loan prepayment rates will be experienced during periods of falling mortgage interest rates and lower prepayment rates will be experienced during periods of rising mortgage interest rates. The higher the loan prepayment rate, the faster AFS' deferred revenues will amortize into income.
The Adjusting Services segment contains all of the fee-based operations of INS. INS provides a variety of claims-related management and adjudication services to the insurance industry, including claims handling, networked glass claims handling and automobile appraisals. The Company's premium concentration in the catastrophe-heavy Southeast led to the creation of this subsidiary to manage the Company's internal claims activity. Currently, INS is a full service claims organization offering an array of capabilities to the insurance industry, including all-lines claim handling, automobile appraisals, catastrophe claim adjusting and glass claim services. INS is an important part of the Company's corporate structure and can accommodate claims services requests from anywhere in the United States.
Effective January 21, 2000, three of the Company's insurance subsidiaries made a combined investment in the common stock of QualSure Holding, representing a combined ownership interest of 30.625%. QualSure Holding owns 100% of the issued and outstanding stock of QualSure, a homeowners take out insurance company domiciled in the state of Florida, and QualSure Underwriting Agencies, Inc., an MGA for QualSure. In connection with this investment, INS entered into a Claims Administration Services Agreement with QualSure to adjudicate all of its claims for a fee based upon subject earned premium. Effective October 3, 2002, the combined ownership interest in QualSure Holding was redeemed by QualSure Holding. Under the terms of the underlying redemption agreement, INS continues to provide claim administration services to QualSure under an amended contract at a reduced rate for terms that expire from October 4, 2005 through January 21, 2010. The most significant component of INS' revenues is the fees earned under its Claims Administration Services Agreement with QualSure, accounting for over 56%, 38% and 30% of its total revenues for the years ended December 31, 2002, 2001 and 2000, respectively.
Though the Company believes it can successfully implement each of the above initiatives and develop a presence in the South Carolina nonstandard automobile and homeowners markets, as well as recover its market share in the North Carolina commercial lines market, no guaranty can be provided as to their success. Therefore, the Company also believes it is very important to place heavy emphasis on maintaining or growing its continuing operations from 2002: the risk-bearing nonstandard automobile and nonowners operations of UIC (North Carolina) and Catawba (South Carolina), respectively; the risk-bearing commercial lines operations of UIC (North Carolina) and Catawba (South Carolina, Georgia, and Tennessee); UIC's fee-based NC Facility operations (North Carolina); and the multi state fee-based operations of INS and AFS.
Commission and service income for the flood segment was $17,152 for the year ended December 31, 2002, versus $16,984 for the same period of 2001, an increase of $168. The NFIP operations component of the flood segment accounted for $542 of the overall increase, reporting commission and service income of $15,035 for the year ended December 31, 2002 and $14,493 for the same period of 2001. Throughout 2001 and continuing through the nine months ended September 30, 2002, the Company's NFIP written premium demonstrated significant growth, due primarily to obtaining several large books of flood business from independent insurance agents across the United
The remaining decrease in other income of $176 came from all other operations.
Finally, as a result of PBP's runoff, which was substantially complete at December 31, 2002, the Company has experienced a reduction in its other operating costs and expenses incurred (excluding recovery of bad debts and management fee expenses incurred discussed above) of approximately $2,586 for the year ended December 31, 2002 as compared to the same period of 2001.
- As compensation for personal services rendered in connection with the settlement of certain then-outstanding litigation, the Company incurred $433 in consulting expenses to a member of its Board of Directors during the year ended December 31, 2001. Consulting services to this Board member amounted to $150 for the corresponding period of 2002.
The remaining $73 increase in commission and service income came from all other operations.
A part of the Company's reserve for losses and LAE is for environmental, pollution, and toxic tort claims. These claims relate to business written by the Company's previously owned West Coast operation prior to 1986. On June 7, 1994, the Company settled a dispute related to approximately 400 of these claims. Any future liability on these claims is limited to 50% of the direct loss and LAE paid. The Company's obligation does not begin until the other company involved in the settled dispute pays, subsequent to the settlement date, a total of $20 million in losses and LAE. Current third party actuarial estimates indicate that the other company involved in the settled dispute will not reach the threshold at which the Company must begin sharing the liability.
In connection with the large deductible workers' compensation program written through the HDC Group, SCIC and CAIC collected cash from HDC amounting to $1,386 for the year ended December 31, 2002 for reinsurance premiums for the retained-risk layers of $4,000 in excess of $1,000 and fees.
At December 31, 2001, the Company owned 32,676 shares of common stock of ISO which it had received in 1997 as a result of ISO converting from a mutual organization to a stock company. Since the equity security received in connection with the conversion was not marketable, the Company has historically valued the investment at cost ($0). In February 2002, ISO offered, and the Company accepted, to repurchase the Company's shares for a price of $64.80 per share, resulting in a realized investment gain of $2,117.
The Company is the beneficiary of several key man life insurance policies maintained on certain former directors or officers of the Company. In June 2002, the Company recorded a gain on the settlement of one of these policies of $294. As of December 31, 2002 and 2001, the net cash value of the policies was $311 and $851, respectively, and is included in other assets.
NOTE 11 DIVIDEND RESTRICTIONS AND STATUTORY REPORTING (CONTINUED) A reconciliation between the GAAP net income (loss) and the statutory net income (loss) of the insurance subsidiaries is as follows for the year ended December 31:
NOTE 12 BENEFIT AND STOCK OPTION PLANS (CONTINUED) The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
NOTE 14 COMMITMENTS AND CONTINGENCIES (CONTINUED) (g) The Company and its subsidiaries are parties to various other lawsuits generally arising in the normal course of their insurance and ancillary businesses. The Company does not believe that the eventual outcome of such suits will have a material effect on the financial condition or results of operations of the Company.
During the years ended December 31, 2002, 2001 and 2000, the Company paid a total of $12, $61 and $110 to FHI, Inc. ("FHI"), respectively, for services related to the settlement of certain outstanding litigation and other consulting services. A member of the Company's Board of Directors is the owner of FHI. For this Director's personal services, the Company paid FHI an additional $150 and $373 in 2002 and 2001, respectively.