The Company currently leases the following office space, representing primarily the operating offices of American Progressive, American Pioneer, Pennsylvania Life, CHCS Services, Inc., PennCorp Life (Canada) and CHCS:
(1) This lease includes one renewal, at our option, for an additional five years.
- -------------------------------------------- (1) After provision for Series C Preferred Stock dividends of $180, $434 and $289 for the years ended December 31, 1999, 1998 and 1997, respectively.
(3) Includes the results of American Exchange since its acquisition on December 1, 1997.
(5) Represents net income applicable to common shareholders, excluding realized gains, net of tax.
Certain statements in this report or incorporated by reference into this report and oral statements made from time to time by our representatives constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements not based on historical information. They relate to future operations, strategies, financial results or other developments. In particular, statements using verbs such as "expect," "anticipate," "believe" or similar words generally involve forward-looking statements. Forward-looking statements include statements about development and distribution of our products, investment spreads or yields, the impact of proposed or completed acquisitions, the adequacy of reserves or the earnings or profitability of our activities. Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control and are subject to change. These uncertainties can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable risks and uncertainties, some of which relate particularly to our business, such as our ability to set adequate premium rates and maintain adequate reserves, our ability to compete effectively and our ability to grow our business through internal growth as well as through acquisitions. Other risks and uncertainties may be related to the insurance industry generally or the overall economy, such as regulatory developments, industry consolidation and general economic conditions and interest rates. We disclaim any obligation to update forward-looking statements.
CORPORATE -- This segment reflects the activities of our holding company, including the payment of interest on our debt and our public company administrative expenses.
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of assets and liabilities reported by us at the date of the financial statements and the revenues and expenses reported during the reporting period. As additional information becomes available or actual amounts become determinable, the recorded estimates may be revised and reflected in operating results. Actual results could differ from those estimates. Accounts that, in our judgment, are most critical to the preparation of our financial statements include policy liabilities and accruals, deferred policy acquisition costs, valuation of certain investments and deferred taxes.
We calculate and maintain reserves for the estimated future payment of claims to our policyholders using the same actuarial assumptions that we use in the pricing of our products. For our accident and health insurance business, we establish an active life reserve plus a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims, as well as a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extracontractual damage awards. Therefore, the reserves and liabilities we establish are based on extensive estimates, assumptions and prior years' statistics. When we acquire other insurance companies or blocks of insurance, our assessment of the adequacy of transferred policy liabilities is subject to similar estimates and assumptions. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our net income depends significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in setting our reserves and pricing our policies. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities resulting in reduced net income and shareholders' equity.
In November 2001, we acquired the assets of Living Strategies, Inc., a privately held company based in Bala Cynwyd, Pennsylvania, including certain contracts, trademarks and proprietary web-based technology. Living Strategies is a recognized provider of employer-sponsored elder care programs, providing assistance and support to those dealing with the aging of their parents and family members. As a result of the acquisition of the Living Strategies assets, we have enhanced our technology infrastructure and expanded the audience for our elder care management services.
In August 2000, we acquired CHCS a privately held administrator of long term care products located in Weston, Florida. CHCS administers long term care and home health care insurance and non-insurance products. This acquisition enhanced our expertise in the long term care business.
(1) We evaluate the results of operations of our segments based on operating income by segment. Operating income excludes realized gains. This differs from generally accepted accounting principles, which includes the effect of realized gains in the determination of net income. The schedule above reconciles our operating income to net income in accordance with generally accepted accounting principles.
The operating income for our special markets segment for 2001 improved by $0.6 million compared to 2000. In the fourth quarter of 2000, we wrote off $1.4 million of deferred acquisition costs related to our decision to exit the major medical line of business. Adjusted for this item, operating income for the segment decreased by $0.8 million. This decrease is due primarily to a reduction in the overall business of the segment, resulting primarily from our decision to exit the major medical line of business.
The decrease in the operating loss from our corporate segment is due primarily to the reduction in interest cost. This reduction was due to a combination of a declining balance of debt outstanding as a result of principal repayments and reductions in the weighted average interest rates for the year, compared to 2000.
Our effective tax rate was 33.2% for 2001 as compared to 30.8% in 2000. As a result of the increased profitability of the administrative services segment, valuation allowances on certain of the tax loss carryforwards were no longer considered necessary during both 2001 and 2000. The amount of the valuation allowance released through deferred income tax expense during 2001 was $0.7 million compared to $1.3 million during 2000.
Consolidated net income after realized gains and Federal income taxes increased by $13.3 million to $22.9 million ($0.49 per share) in 2000, compared to $9.6 million ($0.34 per share) in 1999. Net operating income increased by $13.0 million to $22.8 million in 2000 compared to $9.8 million in 1999.
Operating income from our career agency segment increased by $17.1 million, reflecting the inclusion of a full year of operating results in 2000 compared to the inclusion of five months of operating results in 1999. The results for 2000 were consistent with 1999 on an annualized basis.
Our senior market brokerage segment improved results by more than 40%, increasing operating income by $1.6 million. This improvement is the result of continued internally generated growth of business in this segment, primarily in the Medicare supplement and long term care lines, offset in part by a deterioration in overall loss ratios for the segment from 73% to 78%.
The increase in the operating loss from our corporate segment reflected the inclusion in 2000 of a full year of interest expense and other costs related to the debt incurred in connection with the business we acquired in 1999 compared to the inclusion of only five months of interest expense and other costs for 1999.
Other income increased by approximately $0.7 million in 2001 compared to 2000. This increase is due primarily to fees associated with the sale by Career Agents of a recently introduced product designed to provide access to nursing home and home healthcare services. This increase in other income is largely offset by an increase in commissions related to this non-insurance product.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including a change in reserves, increased by approximately 3% compared to 2000 on an annualized basis. This was due to higher overall loss ratios, primarily in the accident & health lines of business, for the segment in 2001 compared to 2000 on lower premium, as noted above.
The increase in deferred acquisition costs was approximately $0.3 million less in 2001, compared to the increase in 2000. This reflects a decrease in the underwriting and issue costs and a higher level of amortization as the post acquisition block of business increases.
Commissions and general expenses decreased by approximately $4.2 million, or 7%, in 2001 compared to 2000 on an annualized basis. The decrease is primarily due to the consolidation of the operations from the Raleigh location into the existing operations in Toronto, Canada and Pensacola, Florida.
Operating income from our Career Agency segment increased by $17.1 million, reflecting the inclusion of a full year net of operating results for this segment in 2000 compared to the inclusion of five months of operating results in five months in 1999.
REVENUES. Net premiums for the year fell by approximately 3% for the segment compared to 1999 on an annualized basis. Canadian operations accounted for approximately 37% of the net premiums for both 2000 and 1999. During 2000, we began to develop new products for the Career Agency sales force which are based on the Senior Market Brokerage products. Additionally, we were focused on the recruiting and training of new agents during the year.
Net investment income increased by approximately 9% over 1999 on an annualized basis. The increase resulted from the increase in the average invested assets for the comparable periods. Average invested assets increased as a result of earnings for the year, as well as the movement of the proceeds from certain acquisition related transactions from short-term investments in 1999 to long-term investments in 2000.
The increase in deferred acquisition costs was approximately $5.5 million more in 2000, compared to the increase in 1999 on an annualized basis and is directly related to the new business sold in 2000. The deferred acquisition costs in this segment relates solely to business sold subsequent to our acquisition of PennCorp Life (Canada) and Pennsylvania Life.
Commissions and general expenses decreased by approximately $5.5 million or 8% in 2000 compared to 1999 on an annualized basis. Approximately $2.8 million of the decrease related to a reduction in the overall commission rate for our Career Agents, as well as a reduction in stock-based compensation related to agent production. The remaining decrease related to the decrease in production as compared to 1999 on an annualized basis.
The table below details the gross premiums and policyholder fees before reinsurance for the major product lines in the Senior Market Brokerage segment and the corresponding average amount of premium retained. We reinsure a substantial portion of all of our senior market brokerage products with unaffiliated third party reinsurers under various quota share agreements. Medicare supplement written premium is reinsured under quota share reinsurance agreements ranging between 50% and 75% based upon the geographic distribution. We also acquired various blocks of Medicare supplement premium, which we reinsure under quota share reinsurance agreements ranging from 50% to 100%. Under our reinsurance agreements, we reinsure the claims incurred and commissions on a pro rata basis and receive additional expense allowances for policy issue, administration and premium taxes.
The increase of $1.9 million in other supplemental senior health gross premiums was the result of new sales of long term care products offset by the run off of premium associated with the acquired block of long term care products.
Net investment income increased by 3% compared to 2000, as a result of the increasing asset base, offset by a decrease in the overall yield.
Interest credited to policyholders decreased by approximately $0.5 million as a result of the decrease in the effective interest rate credited to the policies in 2001 compared to 2000 and the expected lapses of policies in force.
The increase in deferred acquisition costs was approximately $2.7 million more in 2001, compared to the increase in 2000. The increase in deferred acquisition costs related to the increase in premiums issued during 2001, primarily Medicare supplement, compared to 2000.
REVENUES. Total gross premium written increased $109.1 million, or 75%, over 1999. This increase consisted of an increase of $47.2 million, or 136%, on Medicare supplement business written by our insurance companies, an increase of $50.9 million in Medicare supplement premium acquired through acquisition, an increase of $7.9 million in other senior supplemental health premium and an increase of $3.1 million in senior life insurance premium.
This increase in gross premium written by our insurance company subsidiaries was the result of an increase in sales of $48.5 million, or 133%, of the senior market products from $36.6 million in 1999 to $85.1 million in 2000. Medicare supplement written premium grew as a result of the increase in the number of general agents under contract and by the disenrollment of policyholders by HMO's. In addition, premiums increased as a result of rate increases that we implemented in 2000. This increase was partially offset by lapses attributable to the rate increases.
Commissions and general expenses increased by approximately $4.6 million or 37% in 2000 compared to 1999. The following table details the components of commission and other general expenses:
REVENUES. Net premiums for 2001 decreased by $13.1 million or 34% compared to 2000. Major medical premiums decreased by approximately $10.7 million compared to 2000, directly related to our decision, in the fourth quarter of 2000, to exit the major medical line of business. Life premiums decreased by $1.5 million.
Net investment income decreased by $1.3 million compared to 2000. This decrease is due to a combination of a lower invested asset base, combined with a decrease in the overall yield.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits decreased by $12.4 million in 2001 compared to 2000. This decrease is related to the decline in premium for the segment, offset by an increase in the overall loss ratios for the segment, compared to 2000.
The net amortization of deferred acquisition costs decreased by $0.9 million in 2001, compared to 2000. In the fourth quarter of 2000, we wrote off approximately $1.4 million of deferred acquisition costs related to our decision to exit the major medical line of business. Adjusting for this item, net amortization of deferred acquisition costs increased by $0.5 million, reflecting lower levels of production as the remaining lines of business run off.
Operating results from our Special Markets segment for 2000 improved approximately 4% compared to 1999.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits increased by $12.6 million in 2000 compared to 1999. Approximately $9.8 million of the increase related to the inclusion in 2000 of a full year of operating results the business acquired in 1999 compared to the inclusion of only five months of operating results in 1999. Approximately $2.0 million resulted from deterioration in the loss ratios from the major medical business of the segment. The remaining increase related to adverse mortality for the life business in 2000 compared to 1999.
The increase in interest credited of $0.8 million was due primarily to the inclusion of a full year of operating results for the business acquired in 1999.
The increase in the net amortization of deferred acquisition costs related primarily to our decision to exit the major medical line of business. As a result of this decision, we wrote off approximately $1.4 million of deferred acquisition costs in 2000.
Commissions and general expenses, net of allowances, increased by $2.5 million, or 28%, during 2000. An increase of approximately $3.3 million was due to the inclusion of a full year of operating results of the business acquired in 2000 compared to the inclusion of only five months of operating results in 1999. Offsetting this increase was a decrease in operating expenses relating to existing blocks of business.
(1) For our Administrative Services segment, we evaluate its results based on earnings before interest, taxes, depreciation and amortization, which is not in accordance with generally accepted accounting principles.
Operating income for the Administrative Services segment for 2001 improved by more than 72% over the amount in 2000, primarily as the result of the increase in Medicare premiums being serviced by our administrative services company. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased by approximately 35% to $9.7 million in 2001.
Service fee income increased by $8.7 million, or 36%, in 2001 as compared to 2000. Fees for our administration of Medicare supplemental business increased by $4.6 million, or 46%, in 2001 compared to 2000, primarily as a result of the increase in Medicare business issued by our Senior Market Brokerage segment. Fees for our administration of long term care business increased $4.3 million in 2001 compared to 2000. This increase is due primarily to the inclusion of a full year of operations of CHCS in 2001 compared to only five months in 2000. Currently our Administrative Services segment generates 48% of its revenues from the administration of business on behalf of affiliates, 27% from unaffiliated third party clients and 25% from the reinsurer of 100% of a certain block of business of one of our insurance subsidiaries. Fees for the affiliated business are priced using terms similar to those charged for our unaffiliated business.
The amortization of present value of future profits and goodwill in 2001 related primarily to the acquisition of American Insurance Administration Group. Approximately $7.7 million of present value of future profits ("PVFP") was established when we acquired that company. The PVFP is amortized in proportion to the expected profits from the contracts in force on the date of acquisition. A large portion of the contracts had a remaining term of three years and, accordingly, the amortization is heavily weighted to that period. Approximately $2.1 million of the PVFP was amortized during 2001 and $2.8 million of the PVFP was amortized during 2000. Cumulatively, 64% of the PVFP has been amortized, with 36% of the original balance remaining as of December 31, 2001. We expect to amortize approximately $1.7 million of PVFP in 2002. The remaining amortization related to the goodwill established in connection with the acquisition of CHCS, which we expect will have no amortization expense in 2002 as a result of the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Operating income for the Administrative Services segment nearly doubled in 2000 compared to 1999, primarily as a result of the acquisition of American Insurance Administration Group in January 2000 and the acquisition of CHCS in August 2000.
Service fee income from the Administrative Services segment increased by $14.9 million, or 161%, in 2000 as compared to 1999. Fees from American Insurance Administration Group added $10.3 million in revenues and CHCS, acquired in August 2000, added $2.2 million in revenues to the segment in 2000. Affiliated revenues at WorldNet Services Corp. increased by $2.7 million as a result of the increase in premiums serviced by WorldNet on behalf of affiliated insurance subsidiaries.
The amortization of present value of future profits and goodwill in 2000 related primarily to the acquisition of American Insurance Administration Group. During 2000, approximately $2.8 million, or 37% of the original balance, was amortized. The remaining amortization related to the goodwill established in connection with the acquisition of CHCS.
General expenses for the segment increased by $10.2 million in 2000 compared to 1999. Approximately $8.1 million of the increase related to the two acquisitions. The remaining increase related to the costs associated with the increase in business administered for our affiliated insurance subsidiaries.
In January 2000, the Company announced that it had approved a plan to consolidate the Raleigh location acquired in the 1999 Acquisition into its locations in Toronto (Canada), Pensacola (Florida) and Orlando (Florida) in order to improve operating efficiencies and capabilities. The plan to consolidate this location was being formed at the date of the acquisition and was approved by the Board of Directors. Accordingly, the Company recorded an $11.1 million restructuring liability in its accounting for the 1999 Acquisition. These restructuring costs were accounted for under EITF No 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination" ("EITF 95-3"). During 2001, we paid $2.8 million of restructuring costs. As of December 31, 2001, the remaining liability consisted of employee relocation costs of $0.2 million.
We use capital primarily to maintain or increase the surplus of our insurance company subsidiaries and to support our holding company as an insurance holding company. In addition, we require capital to fund our anticipated growth through acquisitions of other companies or blocks of insurance business.
We require cash to meet our obligations under our credit facility and our outstanding debentures held by our subsidiary, American Progressive. We also require cash to pay the operating expenses necessary to function as an insurance holding company (applicable insurance department regulations require us to bear our own expenses), and to meet the costs involved in being a public company.
We are obligated under certain lease arrangements for its executive and administrative offices in New York, Florida, Texas, and Ontario, Canada. Rent expenses for the three years ended December 2001, 2000 and 1999 was $1.8 million, $2.9 million, and $1.5 million, respectively. The minimum rental commitments, subject to escalation clauses, at December 31, 2001 under non-cancelable operating leases are as follows:
Our insurance subsidiaries are required to maintain minimum amounts of capital and surplus as determined by statutory accounting practices. As of December 31, 2001, each insurance company subsidiary's statutory capital and surplus exceeded its respective minimum requirement. However, substantially more than these minimum amounts are needed to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries' operations. As of December 31, 2001 the statutory capital and surplus, including asset valuation reserves, of our U.S. domiciled insurance subsidiaries totaled $107.0 million.
The National Association of Insurance Commissioners has developed, and state insurance regulators have adopted, risk-based capital requirements on life insurance enterprises. As of December 31, 2001 all of our insurance company subsidiaries maintained ratios of total adjusted capital to risk-based capital in excess of the minimum trigger point for regulatory action.
PennCorp Life (Canada) and Pennsylvania Life's Canadian branch are subject to Canadian capital requirements and report results to Canadian regulatory authorities based upon Canadian statutory accounting principles that vary in some respects from U.S. statutory accounting principles. Canadian net assets based upon Canadian statutory accounting principles were $58.6 million as of December 31, 2001. PennCorp Life (Canada) maintained a minimum continuing capital and surplus requirement ratio in excess of the minimum requirement and Pennsylvania Life's Canadian branch maintained a test of adequacy of assets in Canada and margin ratio in excess of the minimum requirement as of December 31, 2001.
Dividend payments by our insurance companies to our parent holding company or to intermediate subsidiaries are limited by, or subject to the approval of the insurance regulatory authorities of each insurance company's state of domicile. Such dividend requirements and approval processes vary significantly from state to state. The maximum amount of dividends which can be paid to American Exchange from Pennsylvania Life (to assist in the service of the surplus note held by American Exchange) without the prior approval of the Pennsylvania Department of Insurance is restricted to the greater of 10% of the Pennsylvania Life's surplus as regards policyholders as of the preceding December 31 or the net gain from operations during the preceding year, but such dividends can be paid only out of unassigned surplus. Thus, future earnings of Pennsylvania Life would be available for dividends without prior approval, subject to the restrictions noted above. Based upon the current dividend regulations of the respective states, Pennsylvania Life would be able to pay ordinary dividends of up to $8.4 million and Constitution Life would be able to pay ordinary dividends of approximately $1.7 million to American Exchange (their direct parent) without the prior approval from their respective insurance departments in 2002. Additionally, in 2002, Peninsular Life would be able to pay ordinary dividends of up to $0.7 million to American Pioneer without approval from the Florida Department. We do not expect that our remaining subsidiaries will be able to pay ordinary dividends in 2002.
Liquidity is also affected by unscheduled benefit payments including death benefits, benefits under accident and health insurance policies and interest-sensitive policy surrenders and withdrawals. The amount of surrenders and withdrawals is affected by a variety of factors such as credited interest rates for similar products, general economic conditions and events in the industry that affect policyholders' confidence. Although the contractual terms of substantially all of our in force life insurance policies and annuities give the holders the right to surrender the policies and annuities, we impose penalties for early surrenders. As of December 31, 2001 we held reserves that exceeded the underlying cash surrender values of our inforce life insurance and annuities by $17.4 million. Our insurance company subsidiaries, in our view, have not experienced any material changes in surrender and withdrawal activity in recent years.
The net yields on our cash and invested assets decreased slightly from 6.88% in 2000 to 6.76% in 2001. A significant portion of these securities are held to support the liabilities for policyholder account balances, which liabilities are subject to periodic adjustments to their credited interest rates. The credited interest rates of the interest-sensitive policyholder account balances are determined by us based upon factors such as portfolio rates of return and prevailing market rates and typically follow the pattern of yields on the assets supporting these liabilities.
As of December 31, 2001, our insurance company subsidiaries held cash and cash equivalents totaling $49.8 million, as well as fixed maturity securities that could readily be converted to cash with carrying values (and fair values) of $796.2 million. The fair values of these holdings totaled more than $846.0 million as of December 31, 2001.
Our investment policy is to balance the portfolio duration to achieve investment returns consistent with the preservation of capital and maintenance of liquidity adequate to meet payment of policy benefits and claims. We invest in assets permitted under the insurance laws of the various states in which we operate. However, we do not invest in partnerships, special purpose entities, real estate, commodity contracts, or other derivative securities. Such laws generally prescribe the nature, quality of and limitations on various types of investments that may be made. We currently engage the services of two investment advisors under the direction of the management of our insurance company subsidiaries and in accordance with guidelines adopted by the Investment Committees of their respective boards of directors. Conning Asset Management Company manages our fixed maturity portfolio in the United States and Elliot & Page, Limited manages our Canadian fixed maturity portfolio. Our policy is not to invest in derivative programs or other hybrid securities, except for GNMA's, FNMA's and investment grade corporate collateralized mortgage obligations. We invest primarily in fixed maturity securities of the U.S. Government and its agencies and in corporate fixed maturity securities with investment grade ratings of "Baa3" (Moody's Investor Service), "BBB-" (Standard & Poor's Corporation) or higher. As of December 31, 2001, 99.0% of our fixed maturity investments had investment grade ratings from Moody's Investors Service or Standard & Poor's Corporation. However, we do own some investments that are rated "BB+" or below by Standard & Poor's (together 1.0% of total fixed maturities as of December 31, 2001). Fixed maturities with a carrying value of $0.1 million were non-income producing for the year ended December 31, 2001. We wrote down the value of certain fixed maturity securities by $4.2 million during the year ended December 31, 2001, and by $0.5 million during 2000. In each case, these write-downs represent our estimate of other than temporary declines in value and were included in net realized gains (losses) on investments in our consolidated statements of operations.
We file a consolidated return for Federal income tax purposes, in which American Exchange and the companies acquired in 1999 are not currently permitted to be included. As of December 31, 2001, we (exclusive of American Exchange and the companies acquired in 1999) had net operating tax loss carryforwards of approximately $6.3 million that expire in the years 2005 to 2019. As of December 31, 2001, we also had an Alternative Minimum Tax ("AMT") credit carryforward for Federal income tax purposes of approximately $0.3 million that can be carried forward indefinitely. As a result of the change in our ownership in July 1999, use of most of our loss carryforwards is subject to annual limitations.
American Exchange and the other U. S. companies acquired in 1999 file a separate consolidated Federal income tax return. As of December 31, 2001, these companies had net operating loss carryforwards, most of which were incurred prior to their acquisition by us, of approximately $40.4 million that expire in the years 2007 to 2013. As a result of the change in the ownership of the companies acquired in 1999, use of most of these loss carryforwards is subject to annual limitations.
Our U.S. insurance company subsidiaries are taxed as life insurance companies as provided in the Internal Revenue Code. The Omnibus Budget Reconciliation Act of 1990 amended the Internal Revenue Code to require a portion of the expenses incurred in selling insurance products to be capitalized and amortized over a period of years, as opposed to an immediate deduction in the year incurred. Instead of measuring actual selling expenses, the amount capitalized for tax purposes is based on a percentage of premiums. In general, the capitalized amounts are subject to amortization over a ten-year period. Since this change only affects the timing of the deductions, it does not, assuming stability of rates, affect the provisions for taxes reflected in our financial statements prepared in accordance with GAAP. However, by deferring deductions, the change does have the effect of increasing the current tax expense, thereby reducing statutory surplus. Because of our insurance company subsidiaries' net operating loss carryforwards, there was no material increase in our current income tax provision for any of the three years in the period ended December 31, 2001 due to this provision.
- specifies that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment;
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which addresses the accounting and reporting for business combinations and broadens the criteria for recording intangible assets separate from goodwill. On July 1, 2001, we adopted this Statement, which requires us to use the purchase method of accounting for all business combinations initiated after June 30, 2001.
- the definition of an employee for purposes of applying APB Opinion No. 25;
- the criteria for determining whether a plan qualifies as a noncompensatory plan;
- the accounting consequences of various modifications to the terms of a previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business combination.