The Consolidated Group’s principal offices are located in Spokane, Washington at 601 West 1st Avenue, in an office building owned by Metropolitan where the Consolidated Group leases approximately 9,200 square feet of office space. The Consolidated Group also maintains regional offices in Boise, Idaho and Vancouver, Washington. The Consolidated Group believes that its facilities will be adequate to meet its requirements for the foreseeable future and that suitable additional space will be available if needed.
Earnings were insufficient to meet fixed charges and preferred stock dividends for the fiscal year ended September 30, 1999 by approximately $0.1 million.
The following should be read in conjunction with the attached audited consolidated financial statements and the notes attached thereto for the three years ended September 30, 2002.
The accounting policies described below are those that the Consolidated Group considers critical in preparing its consolidated financial statements. These policies include significant estimates the Consolidated Group makes using information available at the time the estimates are made. However, the estimates could change materially if different information or assumptions are used. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by the Consolidated Group in preparing its consolidated financial statements is included in the Consolidated Group’s audited financial statements for the year ended September 30, 2002.
Deferred policy acquisition costs, consisting of commissions and other insurance underwriting and annuity policy costs, are deferred, and amortized over the lives of the contracts or policies in proportion to the present value of estimated future gross profits. To the extent actual experience differs from assumptions, and to the extent estimates of future gross profits require revision, the unamortized balance of deferred policy acquisition costs is adjusted accordingly; these adjustments would be included in current operations.
Allowance for Losses on Receivables. Commercial Loans are individually monitored for impairment in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure.” SFAS No. 114 addresses the accounting by creditors for impairments of a loan by specifying how allowances for
The remaining real estate contracts and mortgage notes receivable portfolio is made up of a large group of smaller-balance homogenous loans that are collectively evaluated for impairment. The Consolidated Group establishes an allowance for inherent losses on the Receivables based primarily on current delinquencies and historical foreclosure and loss experience. To the extent actual experience differs from assumptions, such adjustments would be included in the statement of operations.
Allowance for Losses on Real Estate Held for Sale and Development. The allowance for losses on real estate held for sale and development includes amounts for estimated losses as a result of impairment in value. The Consolidated Group reviews its real estate properties for impairment in value whenever events or circumstances indicate that the carrying value of the asset may exceed its fair market value. The carrying value of a repossessed property is determined as of the date of repossession of the property and is based on the lower of fair market value less selling costs or carrying value at the time the property was repossessed. For non-commercial properties, an appraisal is obtained on the foreclosed property to determine its fair market value at time of repossession. For commercial properties, an appraisal is obtained on the foreclosed property to determine the fair market value only if the most recent appraisal is more than one year old, otherwise the existing appraisal is used. Periodically, the Consolidated Group may not order an updated appraisal in accordance with its established policies if current negotiations with a potential purchaser can establish an indication of value.
Premiums for annuities and universal life insurance contracts are reported as life insurance and annuity reserves under the deposit method of accounting. Reserves for annuities and universal life insurance are equal to the sum of the account balances, including credited interest and deferred service charges. Based on past experience, consideration is given in actuarial calculations to the number of policyholder and annuitant deaths that might be expected, policy lapses, surrenders and terminations. As a result of changes in the factors considered in the actuarial calculations, it is reasonably possible that the reserves for insurance and annuities could change in the near future.
Insurance policy and annuity benefits primarily consist of interest credited on outstanding policies at the rates of return specified in the policy. When an annuity or an insurance policy is issued, these rates of return are guaranteed for a limited number of years. After that, subject to any guaranteed rate of return specified in the insurance policy or annuity, these rates of return may be adjusted in the Consolidated Group’s discretion. Additionally, insurance and annuity policy benefits also include payments of death claims on mortality contracts. These mortality contracts account for approximately 2% of direct premiums with a portion of the life risk being offset by reinsurance treaties during the last three fiscal years.
Metropolitan and its subsidiary, Metwest, provide servicing for certain invested assets of the Consolidated Group. The cost of these services is included in investment expense. The Consolidated Group’s inter-company agreements are regulated by the OIC. As a result of the OIC’s requirement that services be provided at cost, the inter-company agreements were redrafted and the Consolidated Group received a $2.1 million refund during the year ended September 30, 2000 on charges paid in 1998 and 1999.
The components of gains (losses) on investments for the fiscal years ended September 30, 2002, 2001 and 2000 are as follows:
Western Life is in the real estate market due primarily to its repossession of properties following Receivable defaults. Additionally, Western Life will occasionally acquire property for the purpose of development and sale. The development or improvement of properties is undertaken for the purpose of enhancing values to increase marketability and to maximize profit potential. During the fiscal years ended September 30, 2002, 2001 and 2000, the Consolidated Group realized gains of approximately $11.2 million, $0.2 million, and $2.7 million, respectively, on sales of $32.2 million, $14.5 million and $28.2 million, respectively.
During the fiscal year ended September 30, 2002, approximately $7.0 million of declines in various equity securities were determined to be other than temporary due to the length of time and extent that the investments had traded below cost or carrying value. The decline in value was primarily the result of an overall
decline in the value of stocks traded on the NASDAQ. At September 30, 2002, the Consolidated Group had an equity investment portfolio (including venture capital investments) of approximately $40.0 million.
The increase in securities investment gains was primarily due to sales of fixed income securities that increased in value as a result of a change in the 5-year constant maturity Treasury rate. The 5-year constant maturity Treasury rate, which is similar to the average maturity of the Consolidated Group’s fixed income portfolio, decreased from 5.95% on September 30, 2000 to 2.65% on September 30, 2002. Generally, as the Treasury yields decrease, the value of the Consolidated Group’s fixed income securities portfolio increases.
The Consolidated Group sells pools of Receivables when it considers it profitable to do so. Historically, the majority of the Consolidated Group’s Receivable sales have been through securitizations. In January 2001, the Consolidated Group changed the focus of its investment strategy away from acquiring residential real estate loans for securitization purposes, as it does not intend to participate in any real estate-backed securitizations in the near future. The Consolidated Group has refocused its investment activity on acquiring and holding both residential real estate loans and Commercial Loans.
On March 28, 2002, Western Life agreed to sell to Old Standard and Old West a 69.20% undivided beneficial interest in a certain Lottery Trust owned by Western Life. The purchase price of $11.2 million, which was derived from expected future cash flows discounted at a 6.957% market rate, resulted in a gain of approximately $0.6 million.
On August 15, 2002, Western Life agreed to sell to Old Standard and Old West the remaining interest in a certain Lottery Trust owned by Western Life. The purchase price of $6.2 million, which was derived from expected future cash flows discounted at a 5.527% market rate, resulted in a gain of approximately $0.7 million. Additionally, on August 15, 2002, Western Life agreed to sell to Old Standard and Old West 95.83% undivided beneficial interest in a certain Lottery Trust owned by Western Life. The purchase price of approximately $29.1 million, which was derived from expected future cash flows discounted at a 5.888% market rate, resulted in a gain of approximately $2.0 million.
During the year ended September 30, 2000, the Consolidated Group sold portfolios of real estate Receivables through both direct sales and securitizations for proceeds of approximately $375.8 million and gains of $3.2 million. During that same period, the Consolidated Group sold other Receivables through direct sales for proceeds of approximately $23.8 million and losses of $0.1 million.
The following table presents the components of net non-investment expense during the years ended September 30, 2002, 2001 and 2000:
The stated yields of the mortgages collateralized by commercial property are higher than the yield on Receivables collateralized by single family residential property because the market and credit risks are lower for the mortgages collateralized by single family residential property and there are less competitors with commercial real estate financing capabilities. However, investments in Commercial Loans are less diversified because the principal amount of a Commercial Loan is generally greater than the principal amount of a residential mortgage or other Receivable.
The Consolidated Group’s real estate Receivables at September 30, 2002 were collateralized by properties located throughout the United States as follows:
The principal amounts of real estate Receivables subject to delinquent principal or interest is defined as being in arrears for more than 90 days.
Less than 1% of the real estate Receivables are subject to variable interest rates.
The future maturities of the aggregate amounts of Commercial Loans (face amount) at September 30, 2002 are as follows:
The following table stratifies the unrealized losses as of September 30, 2002 by market sector:
The following table stratifies the unrealized losses as of September 30, 2002 by trading class:
The following table stratifies the unrealized losses as of September 30, 2002 by length of time the securities have continuously been in an unrealized loss position:
The maturities of fixed income investments that are in an unrealized loss position at September 30, 2002 are as follows:
The Consolidated Group is authorized by its investment policies to use financial futures instruments for the purpose of hedging interest rate risk relative to the securities portfolio or potential trading situations. In both cases, the futures transactions are intended to reduce the risk associated with price movements for a balance sheet asset. Securities may be sold “short,” the sale of securities that are not currently in the portfolio and therefore must be purchased to close out the sale agreement, as another means of hedging interest rate risk to benefit from an anticipated movement in the financial markets. At September 30, 2002 and 2001, the Consolidated Group had no open hedging positions relative to hedging its securities portfolio.
The following table outlines the nature and carrying value of other Receivables held by the Consolidated Group at September 30, 2002:
This property is located near the Sullivan Road and Interstate 90 freeway interchange just east of Spokane, Washington and consists of 28.15 acres of land zoned for regional commercial use. Currently, the property has 84,000 square feet of leasable space with 83,015 square feet occupied. Additionally, there is capacity for an additional 59,509 square feet of leasable space available for development.
This property is 19.1 acres of development property on the North Shore of Oahu, Hawaii. During fiscal 2002, the Consolidated Group finalized the necessary entitlements to develop the property into a 29-lot residential subdivision in order to begin to sell the residential lots.
In the course of its real estate Receivable investment activity, the Consolidated Group acquires various parcels of real estate as a result of foreclosures and/or voluntary repossessions. It is the Consolidated Group’s general policy to attempt to resell these properties at the earliest possible time following acquisition. Improvements are made to some properties for the purpose of preservation or restoration to maximize the resale price. A committee that includes sales and management personnel reviews the marketing status of all properties at least monthly. Generally, repossessed properties are resold within one year from the date of repossession. There were no repossessed properties with net realizable values greater than 5% of stockholders’ equity at September 30, 2002.
Prior to April 2001, Metwest performed the servicing and collection functions related to the Consolidated Group’s Receivable portfolio in accordance with an established servicing agreement. In April 2001, as a result of Metropolitan’s decision to stop performing loan servicing operations, the Consolidated Group participated with some of its affiliates in a transaction with a wholly owned subsidiary of Ocwen Financial Corporation
(NYSE: OCN), whereby the servicing rights to Receivables and foreclosed properties held for sale were transferred to Ocwen. In October 2001, the Consolidated Group entered into a sub-servicing agreement, where Ocwen will provide servicing for the majority of the remaining Receivable portfolio in addition to its future acquisitions of new Receivables. As the Consolidated Group’s servicer, Ocwen is responsible for all servicing related functions ranging from payment processing to the liquidation of property acquired as a result of foreclosure. Moody’s Investor Service, Inc. (“Moody’s”) assigned its highest rating, SQ1, to Ocwen as a Primary Servicer of subprime loans and as a Specialty Servicer. Ocwen carries a level 2 Fitch servicer rating. According to Fitch, level 2 servicers have demonstrated high performance in all relevant categories. Ocwen’s primary business is the servicing and special servicing of nonconforming and sub-prime residential and commercial mortgage loans. Ocwen also specializes in the related development of loan servicing technology and software for the mortgage and real estate industries. As of September 30, 2002, Ocwen serviced approximately 64% of the Consolidated Group’s Receivable portfolio. Metwest serviced the remaining 36%.
In addition to the amounts included in the table above at September 30, 2002, there were approximately $23.9 million in additional delinquent loans that the Consolidated Group had serious doubts that the borrowers had the ability to comply with present loan repayment terms, and therefore may become 90 days delinquent. As of September 30, 2002, these loans accounted for 7.0% of the total outstanding commercial Receivables collateralized by real estate, but were not included in the table above because they were less than 90 days delinquent.
When a payment becomes delinquent on a Commercial Loan, either Ocwen’s or Metropolitan’s collection unit will begin making the collection calls immediately. If the defaulted payment is not received by the next payment due date, a notice of default is sent to the borrower and the account is assigned to one of Metropolitan’s workout managers according to the property type, size of loan and complexity of transaction. The workout manager will review the file and related documentation and attempt to contact the borrower to negotiate with the borrower to cure the default. If after the expiration of the notice of default, the default is not cured, counsel begins foreclosure immediately. Concurrent with the notice of default period and the foreclosure process, the assigned workout manager will continue to contact and attempt to negotiate a full reinstatement with the borrower. During this same period, the workout manager will also develop a workout program and make recommendations to Metropolitan’s problem loan review committee for approval. As a part of formulating this workout plan, the workout manager will typically visit the collateral property, talk with local experts and make an assessment of the condition of the collateral and its marketability in the event of a potential foreclosure. The final workout plan is presented to the problem loan review committee with all relevant information regarding contact with the borrower, condition and marketability of collateral and an assessment of the likelihood of default cure or recovery of the loan balance if the default continues through foreclosure. Any actions undertaken by the workout manager with the borrower that would result in other than full reinstatement are subject to prior approval by the problem loan review committee.
The problem loan review committee is composed of representatives from Metropolitan’s underwriting, risk management, operations, commercial lending, legal and property development departments. The committee meets weekly and reviews all newly defaulted loans, continuing defaulted loans, loans in foreclosure, loans in bankruptcy and all repossessed properties for developments and progress on approved workout plans.
The real estate Receivables acquired by the Consolidated Group are generally A-, B and C credit Receivables. Management expects higher delinquency rates than those expected on conventional loans because Receivables purchased or originated by the Consolidated Group are typically not of the same quality as mortgages that are originated for sale to agencies such as Fannie Mae. Management believes that the economic effects of these higher delinquency rates will be generally offset by the higher yields expected to be received on these Receivables than those typically received on the conventional “A” credit lending markets and the value of the underlying collateral.
Changes in the allowance for losses on Receivables were as follows:
Commercial Loans are individually monitored for impairment. When a loan has been identified as impaired, the Consolidated Group determines the allowance for loss based on the estimated fair market value, less estimated liquidation expenses, of the collateral compared to the carrying value of the Receivable, including accrued interest. The estimated fair value is based on the most recent appraisal of the collateral. If the most recent appraisal is more than one year old, a new appraisal is ordered. In the interim, estimated fair value is established through a review of the most recent appraisal in addition to a review of other relevant market information. When reviewing the most recent appraisal, management considers several factors. Some of those factors include the type of property, changes in regional economic factors, the underlying appraisal assumptions, and any recent communication with local real estate brokers. If the estimated fair market value of the collateral is less than the carrying value, including accrued interest, an allowance for loss is recorded. The increase in the allowance for losses on Commercial Loans in fiscal 2002 was due to an increase in the Consolidated Group’s commercial lending activities. Fluctuations in the provision for losses and/or percentage of allowance to outstanding principal result from using the specific impairment methodology.
The Consolidated Group establishes an allowance for losses on residential and other real estate Receivables, including accrued interest, inherent in the portfolio at the balance sheet date based primarily on current delinquencies and historical foreclosure and loss experience. The residential and other Receivable portfolio is comprised of a large group of smaller-balance homogeneous loans that are collectively evaluated
The reduction in the ending reserve balance on residential and other real estate loans during the fiscal year ended September 30, 2002 was primarily due to the overall seasoning of the loan portfolio. As the Consolidated Group has recently focused on Commercial Loan originations, the remaining real estate Receivable portfolio has been decreasing in size due to payoffs and maturities. The remaining portfolio, which is comprised of production from previous years, contains different loss potential characteristics depending upon the year the loans were produced (production pool years). Not all production pool years will experience the same rate of loss over their respective remaining lives. Pools that have seasoned beyond the four-year mark generally experience lower future losses than pools that are less seasoned.
During the fiscal year ended September 30, 2000, the Consolidated Group established an allowance for loss on its investments in annuity and structured settlements as the industry began to focus on state and federal collection laws and their applicability to annuity and structured settlement payments.
The reduction in ending allocated allowance balances for other Receivable investments during the fiscal year ended September 30, 2002 was due to a positive change in the federal tax law effecting structured settlement transfers and the consequential cooperation by certain annuity issuers with respect to the payment of defaulted, and in some cases current, structured settlements.
In estimating the amount of credit losses inherent in the Receivable portfolios, management utilizes various judgments and assumptions. For Receivables that are collateral-dependent, the estimated fair market value of the collateral may deviate significantly from the proceeds received when the collateral is sold. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component reflects management’s judgmental assessment of the impact that various quantitative factors have on the overall measurement of credit losses.
The following table summarizes changes in the Consolidated Group’s allowance for losses on real estate held for sale:
Equity prices. The Consolidated Group’s investments in equity securities expose it to changes in equity prices. The Consolidated Group manages this risk on an integrated basis with other risks through its asset/ liability management strategies. The Consolidated Group also manages equity price risk through industry and issuer diversification and asset allocation techniques.
The following table presents, as of September 30, 2002, the Consolidated Group’s estimated effects of hypothetical increases and decreases in interest rates on assets and liabilities that are subject to interest rate risk. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risks. The hypothetical changes in market interest rates do not reflect what could be deemed best or worst case scenarios. Variations in market interest rates could produce significant changes in the timing of repayments due to prepayment options available. For these reasons, actual results will most likely differ from those reflected in the table that follows.
The gap information is limited by the fact that it is a point-in-time analysis. The data reflects conditions and assumptions as of September 30, 2002. These conditions and assumptions may not be appropriate at another point in time. Consequently, the interpretation of the gap information is subjective.
In the 1-5 years time period, the Consolidated Group’s Gap Analysis indicates a positive gap. However, all items in the Gap Analysis may not be equally sensitive to market rate changes. Specifically, the Consolidated Group’s real estate contracts and mortgage notes receivable are not expected to be as sensitive to market rate changes as the other items on the Gap Analysis. For this reason, the Consolidated Group expects the impact on results of operations to be more in line with that of a negative gap position.
A negative gap means that the net interest income will tend to decrease which will have a negative impact on results of operations in a rising interest rate environment. Conversely, in a falling interest rate environment, the net interest income will tend to increase which will have a positive impact on results of operations.
The objective of liquidity management is to provide funds at an acceptable cost to service liabilities as they become due and to meet demands for additional Commercial Loans and Receivable purchases. Managing liquidity also enables the Consolidated Group to take advantage of opportunities for business expansion. The Consolidated Group finances its business operations and growth with the proceeds from the sale of annuity and life insurance products, the sale of equity securities to affiliates, a secured line of credit agreement, reverse repurchase agreements, Receivable cash flows, the sale of real estate and securities portfolio earnings.
The annuity and life insurance business is highly competitive. The Consolidated Group competes with other financial institutions, including ones with greater resources and greater name recognition than the Consolidated Group. Premium rates, annuity yields and commissions to agents are particularly sensitive to competitive forces. The Consolidated Group believes the primary competitive factors among life insurance companies for investment-oriented insurance products, like annuities, include product flexibility, net return after fees, innovation in product design, the claims-paying ability rating and the name recognition of the issuing company, the availability of distribution channels, service rendered to the customer before and after a policy or contract is issued, and service provided to agents. Other factors affecting the annuity business include the benefits, including before tax and after tax investment returns, and guarantees provided to the customer and the commissions paid to the agent. If the Consolidated Group is unable to effectively price its annuities, offer competitive commissions and effectively compete in general for the sale of its annuity products, its liquidity could be adversely affected.
The Consolidated Group anticipates that the recent changes in Western Life’s A.M. Best assigned rating may result in a slight increase in its cost of funds in addition to a slight increase in surrender rates as current policies enter their surrender periods. Before the initial change in rating, the Consolidated Group changed the focus of its investment strategy away from acquiring residential real estate loans for securitization purposes and refocused its investment activity on acquiring and holding both residential and commercial real estate loans. The change in focus has resulted in higher yields on the Consolidated Group’s investments. Therefore, the Consolidated Group expects the slight increase in its cost of funds will be more than offset by the higher yields expected through its new investment strategy.
To support this change in investment strategy and in response to its rating change, Metropolitan increased its capital contributions to Western Life during the fiscal year ended September 30, 2002 through a $27.6 million purchase of common and preferred stock. Additionally, to further increase the capital of Western Life, Western Holding has registered for sale up to $50.0 million of Series A preferred stock at September 30, 2002. However, Western Holding must sell at least 400,000 shares of the preferred stock to at least 800 qualifying investors before the offering can be completed. The Consolidated Group does not anticipate any further change to its A.M. Best rating in the coming year.
The state of Washington’s Risk-Based Capital Model law requires an insurance company to maintain specified amounts of capital and surplus based on complex calculations of risk factors that encompass the invested assets and business activities of the insurance company. Compliance with the Risk-Based Capital Model Law requirements is tested annually as of a calendar year-end. At the last annual review at its statutory reporting period ended December 31, 2001, Western Life’s capital and surplus levels exceeded the calculated specified requirements. Recently, Western Life has maintained adequate levels of capital through the sale of common stock and preferred stock to Metropolitan. To the extent that Metropolitan does not maintain adequate levels of liquidity permitting it to make further capital investments in Western Life, or to the extent that Western Holding cannot complete its Series A preferred stock offering, Western’s ability to generate capital could be adversely affected, which in turn could negatively affect its ability to increase its investments in higher risk-adjusted assets such as Commercial Loans, real estate and equity investments.
Western Life has a secured line of credit agreement with the Federal Home Loan Bank of Seattle (“FHLB”). When an institution becomes a stockholder in the FHLB, it can borrow from the FHLB at a stock to borrowing ratio of 1 to 20. At September 30, 2002, Western Life had a stock investment in the FHLB of approximately $5.1 million. The collateral used to secure the borrowing is predefined by the FHLB and generally consists of high quality collateralized mortgage obligations. Each type of collateral has a minimum requirement that ranges from 100% to 125% of borrowings. At September 30, 2002, Western Life had $288.3 million in eligible collateral with a market value of $296.9 million resulting in a borrowing potential of $210.1 million, subject to the purchase of additional stock. Approximately $141.4 million in securities having a market value of $145.6 million were pledged to collateralize the outstanding borrowings to FHLB at September 30, 2002. At September 30, 2002, Western Life had approximately $103.0 million in outstanding borrowings leaving an unused borrowing potential of approximately $107.1 million, subject to the purchase of additional stock. In order to increase the unused borrowing potential to match the amount of collateral pledged, Western Life would be required to purchase approximately $2.8 million in additional FHLB stock.
Historically, Western Life has issued preferred stock and surplus notes only to its affiliates. Proceeds of preferred stock issuances less repayment of surplus notes were $10.4 million, $5.0 million and $9.5 during the fiscal years ended September 30, 2002, 2001 and 2000, respectively. The liquidation preference of outstanding preferred stock at September 30, 2002 was $50.0 million. The affiliates that hold the preferred stock are entitled to receive dividends when and as declared by Western Life’s Board of Directors, out of the net earnings available for dividends. The base dividend rate (prime plus 1%) is determined annually by Western Life’s Board of Directors and dividends payable on the preferred stock have priority to the payment of common stock dividends. The preferred stock may be redeemed in whole or in part at Western Life’s option at a redemption price of not less than par value. Western Life paid $2.7 million, $3.9 million and $3.0 million in preferred stock dividends during the fiscal years ended September 30, 2002, 2001 and 2000, respectively. The average monthly dividend rate during the fiscal year ended September 30, 2002 was 6.94%.
Metropolitan owned all of Western Life’s outstanding preferred stock at September 30, 2002. At September 30, 2001, Metropolitan owned 88.6% of Western Life’s preferred stock and Consumers Insurance Company (“Consumers”) owned the remaining 11.4%. The outstanding preferred stock of Western Life is presented as a minority interest on the Consolidated Group’s balance sheet. In addition, both Metropolitan and Consumers previously held Western Life’s surplus notes before they were converted to preferred stock. The following table reflects the payments made to Metropolitan and Consumers for their investments in Western Life’s preferred stock and surplus notes during fiscal years ended September 30, 2002, 2001 and 2000.
Western Life’s payments to Metropolitan accounted for approximately 0.2%, 0.5% and 0.5% of Metropolitan’s total liquidity sources during the fiscal years ended September 30, 2002, 2001 and 2000, respectively.
Another source of liquidity is derived from payments received on Receivables and the sale of real estate. A decrease in the prepayment rate on Receivables or in the ability to sell real estate would reduce future cash flows from Receivables.
Based on September 30, 2002 dividend rate of 5.75% on Western Life’s outstanding preferred stock and does not include dividend payments on Western Holding’s preferred stock it is currently offering.
Additionally, a portion of the Consolidated Group’s annuities may re-price annually, which could cause termination of annuities subject to a surrender charge. In the event of termination, the Consolidated Group’s expected cash outlays will increase.
The Consolidated Group had approximately $88.4 million and $17.0 million of outstanding commitments to extend credit to commercial borrowers at September 30, 2002 and 2001, respectively.
During 2002, $1,070.7 million in funds provided by the Consolidated Group’s various liquidity sources were used to (1) invest $933.2 million primarily in Receivables and investments and (2) fund $147.8 million in debt maturities, annuity product surrenders and the payment of dividends.
During 2000, $781.2 million in funds provided by the Consolidated Group’s various liquidity sources were used to (1) invest $574.9 million primarily in Receivables and investments and (2) fund $214.7 million in debt maturities, annuity product surrenders and the payment of dividends.
In July 2001, the FASB issued SFAS No. 141, “Business Combinations.” The statement discontinues the use of the pooling of interests method of accounting for business combinations and was effective for all business combinations after June 30, 2001. The implementation of this statement did not have a material impact on the Consolidated Group’s financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this statement are effective for financial statements issued on or after May 15, 2002. Implementation of this statement did not have a material impact on the Consolidated Group’s financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit or disposal activities initiated after December 31, 2002. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. The Consolidated Group has completed an evaluation of the effects of this statement and does not believe it will have a material impact on the Consolidated Group’s financial statements.