During 2002, the Company achieved a 34% or $9,735,000 increase in premiums. A 114% increase in the Preneed Life segment accounts for essentially all of the net increase, along with approximate 2.5% increases in the Home Service Life and Dental segments, partially offset by moderate reductions in Broker Life and Other Accident and Health. Pretax segment profit (loss), excluding realized investment gains and losses and interest expense, was ($554,000), $460,000 and $36,000 for 2002, 2001, and 2000 respectively. The decline in 2002 was primarily attributable to lower interest yields and adverse mortality, while the 2001 improvement was primarily attributable to increased Preneed Life production.
Deferred Taxes. The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. In assessing the need for the valuation allowance, the Company has considered ongoing prudent and feasible tax planning strategies but has not assumed future taxable income. In the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to deferred tax assets would be charged to income in the period such determination was made.
Income Taxes. Historically, the Company has experienced a relatively low effective income tax rate, due primarily to the small life insurance company deduction. The effective rate was approximately 23% and 26% in 2002 and 2001, respectively. The effective rate was much higher in 2000, due to state and local income taxes on the parent company's investment gains along with an increased valuation allowance on deferred tax assets.
During December 2002, Citizens Financial strengthened the statutory capital position of Citizens Security by acquiring $2,000,000 of Citizens Security redeemable preferred stock. During January 2001, Citizens Financial contributed 100% of the capital stock of Citizens Insurance to Citizens Security. The statutory value of this contribution was $3,540,555. Citizens Security has reported its investments in United Liberty and Citizens Insurance on the equity method of accounting, since their acquisition in 1998 and 2001, respectively. However, beginning in 2001, Codification changed the statutory equity method of accounting to preclude a parent insurer from recording as income, its share of undistributed subsidiary earnings. Accordingly, Citizens Security's net income includes United Liberty's net earnings of $404,553, $234,853, and $289,489, in 1998, 1999, and 2000, respectively. For 2001 and 2002, Citizens Security reported as income the $292,000 and $214,000 respectively, of dividend distributions which it received from United Liberty. At December 31, 2002, Citizens Security reported its investments in United Liberty and Citizens Insurance at their statutory equity values of $2,159,092 and $3,783,528, respectively. To provide a more detailed understanding of Citizens Security's operations, shown below are SAP basis net income, net operating income, statutory capital and surplus, asset reserves, and capital ratios for Citizens Security for the five years ended December 31, 2002.
The Company is completing a strategic review of its products and operations. A key element of this initiative is mitigating the significant losses incurred on the Preneed Life business segment and strengthening profitability in the Broker Life and Home Service Life segments.
Cash used by investment activities of $27,877,000 and $5,555,000 during 2002 and 2001 respectively, relates primarily to investing additional Preneed Life premiums in fixed maturity securities, although the 2002 total also includes investing $11,734,000 of cash and short term balances outstanding at December 31, 2001. Cash provided by investment activities during 2000 of $4,488,000 resulted primarily from a reduction in equity portfolio positions and net cash received from acquisition of the NAIL business, partially offset by additional property and equipment expenditures, including a fractional aircraft ownership share. The $412,000 of cash used by financing activities during 2002 includes $1,317,000 of debt repayments and $956,000 of net withdrawals of policyholder deposits, partially offset by additional borrowings of $2,000,000. Cash used by financing activities during 2001 includes net withdrawals of policyholder deposits of approximately $1,200,000, debt repayments of $904,000 and common stock repurchases of $396,000. Cash used by financing activities during 2000 includes net withdrawals of policyholder deposits of approximately $1,920,000 and debt repayments of $500,000. The policyholder deposit withdrawals are principally due to the Company's decision not to aggressively compete in crediting higher interest returns on such funds.
Income taxes paid (refunded) in 2002, 2001, and 2000 were $(3,065,000), $(1,293,000), and $3,100,000, respectively. The Company has $328,000 of net operating loss carryforwards and $1,752,000 of capital loss carryforwards which expire in years 2016 and 2017. The change in the valuation allowance is due principally to the limitation in the recovery of prior year taxes at the full statutory rate.
Statutory-basis net income and capital and surplus for the Company's combined insurance operations, for the three years ended December 31, 2002 are shown below. These amounts are combined totals for Citizens Security, United Liberty, and Citizens Insurance, with adjustments to eliminate intercompany holdings and activity.
December 31 2002 2001 2000 - ----------------------------------------- ------------ ------------ ------------ Revenue: Home Service Life $ 9,260,097 $ 9,290,120 $ 9,036,005 Broker Life 5,964,089 6,497,286 6,328,884 Preneed Life 19,706,136 9,974,405 5,345,930 Dental 8,209,257 8,025,375 7,933,598 Other Health 1,432,607 1,487,562 1,469,316 - ----------------------------------------- ------------ ------------ ------------ Segment Totals 44,572,186 35,274,748 30,113,733 Net realized investment gains (losses) (2,469,768) (7,911,829) 1,180,879 - ----------------------------------------- ------------ ------------ ------------ Total Revenue $42,102,418 $27,362,919 $31,294,612 - ----------------------------------------- ------------ ------------ ------------
Fixed Maturities: The fair values for fixed maturities are based on quoted market prices, where available. For those fixed maturities which are not actively traded, fair values are estimated using values obtained from independent pricing services. Available-for-sale fixed maturities are carried at fair value in the accompanying statements of financial condition. At December 31, 2002 and 2001, the fair value of available-for-sale fixed maturities was $103,953,815 and $77,534,516, respectively.
Equity Securities: The fair values for equity securities are based on quoted market prices. Equity securities are carried at fair value in the accompanying statements of financial condition. At December 31, 2002 and 2001, the fair value of equity securities was $7,761,892 and $8,116,958, respectively.