The Company's 2001 net loss was $6,206,000 compared to net income of $238,000 and $6,439,000 in 2000 and 1999, respectively. In addition, the comprehensive loss (including net unrealized losses) for 2001 was $2,875,000 compared to a comprehensive loss of $4,658,000 in 2000 and a comprehensive gain of $6,682,000 in 1999. The majority of the 2001 and 2000 declines in net income and the comprehensive losses in 2001 and 2000 are attributable adverse securities markets during those years, including the effects of declines in the telecommunications and technology sectors, a general economic recession and terrorist events.
The Company repurchased 41,400 and 9,000 shares of its common stock during 2001 and 2000 respectively, at average prices of $9.58 and $11.58 per share, respectively.
The Company's discussion and analysis of its financial condition and results of operations are based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to investments, agent receivables, intangible assets, policy liabilities, income taxes, regulatory requirements, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following accounting policies, judgments and estimates critically impact preparation of its consolidated financial statements.
Investment in Debt and Equity Securities. The Company holds debt and equity interests in a variety of companies, many of which are seeking to exploit recent technology advancements. The majority of these are publicly traded and many have experienced volatile market prices. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.
Goodwill and Intangible Impairment. Assessing recoverability of the Company's goodwill and other intangibles (including deferred policy acquisition costs and value of insurance acquired) requires assumptions regarding estimated future cash flows and other factors (see Policy Liabilities below) to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record
impairment charges for these assets not previously recorded. On January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and will be required to expand its analysis of goodwill for impairment issues during the first six months of 2002, and then on a periodic basis thereafter. The Company has not yet determined what the effect of the new standard will be on its earnings and financial position. During the year ended December 31, 2001, the Company did not record any impairment losses related to goodwill and other intangible assets.
Policy Liabilities. Establishing liabilities (and related intangible assets) for the Company's long-duration insurance contracts requires making many assumptions, including policyholder persistency, mortality rates, investment yields, discretionary benefit increases, new business pricing, and operating expense levels. The Company evaluates historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial estimates and judgment are required. Accordingly, if actual experience emerges differently from that assumed, material financial statement adjustments could be required. 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 the deferred tax asset 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 asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
On October 14, 1999, the Company acquired 100% of the stock of Citizens Insurance (formerly Kentucky Insurance Company) from an unaffiliated insurance holding company (the "Citizens Insurance Acquisition"). Citizens Insurance is licensed as a property and casualty insurance company in four states and has approximately $3.6 million of statutory capital and surplus; however, it currently has no insurance operations. The aggregate purchase price for the Citizens Insurance Acquisition was approximately $3,550,000 (including net costs associated with the transaction of approximately $50,000). The acquisition was financed with available internal funds and $2,500,000 of additional bank borrowings.
Standard & Poor's Corporation Rating Amortized Cost1 Fair Value 2 - -------------------------------------- ----------------------- --------------- Investment grade: AAA to A- $58,409,236 $60,088,109 BBB+ to BBB- 12,368,821 12,455,710 - -------------------------------------- ------------------------ --------------- Total investment grade 70,778,057 72,543,819 Non-investment grade: BB+ to BB- 1,599,610 1,580,809 B+ to B- 2,726,890 2,641,241 CCC+ to C 767,720 768,647 - -------------------------------------- ------------------------ --------------- Total non-investment grade 5,094,220 4,990,697 - -------------------------------------- ------------------------ --------------- Total fixed maturities $75,872,277 $77,534,516 - -------------------------------------- ------------------------ ---------------
The Company believes it has a well diversified portfolio and has no plans to decrease its non-investment grade portfolio significantly below its current level, unless necessary to satisfy requirements of state regulators or rating agencies. The Company purchases non-investment grade bonds to obtain higher yields or convertible features and attempts to reduce credit risk by portfolio diversification. Non-investment grade securities comprised 6.7% and 8.3% of the fixed maturities portfolio, on an amortized cost basis at December 31, 2001 and 2000, respectively.
Non-Investment Grade December 31, 2001 Amortized Cost Fair Value ------------------------------- ------------------- ------------------ Largest $904,604 $902,371 Second largest 573,477 374,000 Third largest 535,029 398,750 Fourth largest 500,000 507,500 ------------------------------- ------------------- ------------------ Total $2,513,110 $2,182,621 ------------------------------- ------------------- ------------------
The Company's investment in equity securities decreased $6,622,000 and $4,460,916 during 2001 on a cost (net of write-downs) and fair value basis, respectively, after decreasing $4,551,000 and $10,363,000 on the same basis in 2000. As of December 31, 2001 there were $1,062,000 of unrealized gains on equity securities, as compared with $1,099,000 of unrealized losses at December 31, 2000 and $4,713,000 of unrealized gains at December 31, 1999, respectively.
Citizens Security owns the building in which the Company and its subsidiaries maintain their home offices. The Company occupies approximately 29% of the building with the balance leased to third-party tenants. Market conditions for this property are generally favorable. An updated appraisal obtained during 2001 indicates the market value of the property is approximately $2,500,000 higher than its carrying value.
At December 31, 2001, the Company holds a $156,000 mortgage loan from a real estate limited partnership. The mortgage loan, maturing March 31, 2002, permits revolving credit advances, not to exceed at any time, the lesser of $750,000 or 80% of the collateral fair value. A stockholder of the partnership's general partner personally guarantees 80% of the loan.
Liabilities. A comparison of total policy liabilities as of December 31, 2001, 2000 and 1999 is shown below. Approximately 83% of the 2001 total consists of future policy benefit reserves while policyholder deposit liabilities represent 15% of the total.
Home Service Life sales have been favorable in recent years, with net growth in policy liabilities of 3.4% and 4.1% in 2001 and 2000, respectively. During recent years, this segment has experienced moderate growth through a combination of attracting new producers and continuing to focus on meeting the needs of existing customers and agents. The Broker Life segment's 2001 policy liability net decline of $217,000 includes $464,000 of declines in policyholder deposits as detailed below, partially offset by normal aging of remaining reserves. Approximately half of the net policyholder deposit decline relates to expiration of a withdrawal waiting period for the NAIL business acquired during 2000. Most of the 2000 Broker Life net growth was attributable to the NAIL acquisition. During 2001, the Company increased Preneed Life production through arrangements with several third party marketing groups. Although the Company terminated some of its more competitive arrangements during the year, it has attracted additional marketing groups that have continued to grow net production throughout the year. The 2000 growth was achieved in the Company's second full
year in the Preneed market, after completing the United Acquisition in 1998. However, United Liberty began offering Preneed Life insurance in 1991. The Company's Dental products are annual term coverages; accordingly, policy liabilities for this segment are not significant. The Other Health segment business in not a significant marketing focus. The 2000 policy liability decrease for this segment relates primarily to the settlement of a reinsurance obligation with no impact on overall retention.
As indicated above, total policyholder deposits decreased $464,000 during 2001, with approximately $250,000 of the decrease attributable to withdrawals of NAIL business acquired during 2000. The terms of the NAIL Acquisition precluded policyholder withdrawals and surrenders for the initial six months after the acquisition. This limitation expired during early 2001. The Company is not devoting significant marketing effort towards Annuity, Universal Life and other deposit products and has elected not to aggressively compete in crediting excess interest on such products.
Home Service Life premium increased 3.6% during 2001 as the Company achieved its most favorable sales results since the late 1995 acquisition of this product line. The Company has continued to attract a number of successful, experienced Home Service agents without subsidizing inexperienced agents. In addition, the Company's program to automate and streamline agent field accounting continues to expand with favorable reaction among the agency force. During 2001 the Company also began a Home Service marketing joint venture in two southern states with a much larger property and casualty insurance carrier.
The 2001 increase in Home Service Life profit resulted primarily from continuing sales growth and improved mortality results, while the 2000 decline resulted primarily from the moderate business growth, offset by a slight increase in mortality. The 2001 Broker Life earnings decrease resulted primarily from increased mortality and expenses while the 2000 earnings increase resulted primarily from improved mortality on simplified issue and graded benefit life plans. The 2001 Preneed Life loss improved approximately $563,000 from the prior year while premium increased approximately 111%. This volume growth leverages the Company's fixed costs and has improved per-policy profitability. Additionally, the Company has revised certain product benefits and agent incentives to further improve profitability. The 2000 Preneed Life loss improvement was primarily attributable to improving mortality on business obtained in the 1998 United Acquisition and efficiencies associated with growing levels of new business. As indicated above, the Company has intensified marketing efforts in the Preneed segment and expects continued revenue growth and improving segment results along with increased statutory surplus strain associated with higher new business volumes. However, interest rate declines during 2001 and 2000 have adversely impacted the Company's investment income earnings on recent Preneed Life sales. Although the Company is optimistic about improving growth and profitability in this highly competitive market, if adverse profitability trends develop, several options are available. These options, including lowering discretionary annual benefit increases and adjusting premiums and commissions on new business, would likely adversely impact the Company's ability to compete for new business.
Year Ended December 31 2001 2000 1999 - --------------------------- ----------------- --------------- ----------------- Premium $7,988,620 $7,892,356 $7,105,627
The overall Dental contribution margin declined slightly during 2001 due to increased claim levels. The 2000 contribution margin increase resulted from an 11% increase in premium volume that more than offset the higher claim ratio. During 2001 the Company encountered more competition as additional insurers are expanding in the Dental market and Dental providers are continuing to provide higher levels of care to patients. The Company is continuing its ongoing efforts to maintain profitability in this line by reconfiguring products to provide adequate margins for the various dental procedures, utilizing a third-party company to provide expert assistance with ongoing adjudication of claims, and continuing its program of aggressive renewal underwriting and re-rating. The Company has not been actively marketing its Other Health products in recent years. However, the Company is closely monitoring recent sales activity
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 26% in 2001 and 1999. However, during 2000, the effective rate was substantially increased by state and local income taxes on the parent company's investment gains (which are not eligible for offset by Insurance Subsidiary investment losses), and the effect of an increased valuation allowance on deferred tax assets as discussed below.
Effective January 31, 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 reports its investment 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, from 1998 through 2000, Citizens Security's net income includes the net earnings of United Liberty, $404,553, $234,853, and $289,489, in 1998, 1999, and 2000, respectively. For 2001, Citizens Security reported as income the $292,000 of dividend distributions which it received from United Liberty. At December 31, 2001, Citizens Security reported its investments in United Liberty and Citizens Insurance at their statutory equity value of $2,695,333 and $3,601,560, 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, 2001.
In addition to the statutory totals shown above, Citizens Insurance generated statutory net income of approximately $76,000, $93,000, and $21,000 during, 2001, 2000, and 1999, respectively.
Cash used by investment activities during 2001 of $5,555,000 resulted primarily from investing additional Preneed Life premiums in fixed maturity securities. 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. Cash provided by investment activities during 1999 of $11,200,000 resulted primarily from a decision to limit reinvestment activity near year-end, due to increased market volatility. Cash used by financing activities during 2001 includes net withdrawals of policyholder deposits totaling approximately $1,200,000, debt repayments of $904,000 and common stock repurchases of $396,000. The policyholder withdrawals are principally due to the Company's decision not to aggressively compete in crediting higher interest returns on such funds. However, net policyholder withdrawals decreased in 2001 compared to a total of $1,900,000 in 2000 and $1,400,000 in 1999. Cash from financing activities in 1999 also includes proceeds from a $2,500,000 bank borrowing
associated with the Citizens Insurance Acquisition, net brokerage advance repayments of $1,400,000, and common stock repurchases of approximately $390,000.
Interest expense on the Company's commercial bank debt is also subject to interest rate risk. The rate on this debt is variable and quarterly, the Company elects the lower of the prime lending rate or the one-month LIBOR rate plus 2.75%. At December 31, 2001, the rate on the Company's $7,095,834 of bank borrowings was 4.68%. The Company believes its current liquidity position and profitability levels are adequate to guard against this interest rate risk.
The Life Insurance Subsidiaries' most recent cash flow testing, which was completed in February 2002, involved a review of two basic measures. The first was the value of free market surplus, which is defined as the difference between
|X| the market value of the Company's investments, including stock market performance and prevailing interest rate levels (see the Cash Flow and Liquidity section of Item 7); |X| customer and agent response to new products, distribution channels and marketing initiatives, including exposure to unrecoverable advanced commissions; |X| mortality, morbidity, lapse rates, and other factors which may affect the profitability of the Company's insurance products;
|X| regulatory changes or actions, including those relating to regulation of insurance products and insurance companies (see the State Insurance Regulation section of Item 1); |X| ratings assigned to the Company and its subsidiaries by independent rating organizations which the Company believes are important to the sale of its products; |X| general economic conditions and increasing competition which may affect the Company's ability to sell its products; |X| the Company's ability to achieve anticipated levels of operating efficiencies and meet cash requirements based upon projected liquidity sources; |X| unanticipated adverse litigation outcomes (see Item 3); and |X| changes in the Federal income tax laws and regulations which may affect the relative tax advantages of some of the Company's products.
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999.....................30
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.............................31
Principles of Consolidation and Presentation. The accompanying consolidated financial statements include the accounts of Citizens Financial Corporation and its wholly owned subsidiaries: Citizens Security Life Insurance Company ("Citizens Security"), United Liberty Life Insurance Company ("United Liberty"), Citizens Insurance Company ("Citizens Insurance"), and Corporate Realty Service, Inc. ("Corporate Realty"). These entities are collectively hereinafter referred to as the "Company". United Liberty, and (effective January 31, 2001) Citizens Insurance, are also wholly owned subsidiaries of Citizens Security. All significant intercompany accounts and transactions are eliminated in consolidation. Certain balances in prior years have been reclassified to conform to current year classifications.
deposit and treasury bills, are carried at cost which approximates fair value. Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase and are also carried at cost which approximates fair value.
Deferred Policy Acquisition Costs. Commissions and other policy acquisition costs which vary with, and are primarily related to, the production of new insurance contracts are deferred, to the extent recoverable from future policy revenues and gross profits, and amortized over the life of the related contracts. See Premiums, Benefits and Expenses regarding amortization methods.
Property and Equipment. Property and equipment, including the home office building, are carried at cost less accumulated depreciation, using principally the straight-line method of depreciation. Accumulated depreciation at December 31, 2001 was $2,333,330 ($1,977,438 at December 31, 2000).
Participating insurance business constituted approximately 6% of ordinary life insurance inforce at December 31, 2001, 2000, and 1999, and 4%, 4%, and 5% of annualized ordinary life premium inforce at December 31, 2001, 2000, and 1999, respectively. Participating dividends are determined at the discretion of the Board of Directors.
On October 14, 1999, the Company acquired 100% of the stock of Citizens Insurance (formerly Kentucky Insurance Company) from an unaffiliated insurance holding company (the "Citizens Insurance Acquisition"). Citizens Insurance is licensed as a property and casualty insurance company in four states and has approximately $3.6 million of statutory capital and surplus; however, it currently has no insurance operations. The aggregate purchase price for the Citizens Insurance Acquisition was approximately $3,550,000 (including net costs associated with the acquisition of approximately $50,000). The acquisition was financed with available internal funds and $2,500,000 of additional bank borrowings. The acquisition was accounted for as a purchase and Citizens Insurance results of operations are included in the consolidated statements since its date of acquisition.
value of securities held in the account to be purchased on margin. At December 31, 1999, margin advances of $100,884 were outstanding and included in the financial statements with accrued expenses and other liabilities.
Investment management services are provided by a firm affiliated with certain board members and shareholders of the Company - see Note 16 - Related Party Transactions.
The Company limits credit risk by diversifying its investment portfolio among government and corporate fixed maturities and common and preferred equity securities. It further diversifies these investment portfolios within industry sectors. As a result, management believes that significant concentrations of credit risk do not exist. The following are the only investments (other than the U.S. Governments) comprising more than ten percent of shareholders' equity at December 31, 2001: Clear Channel Communications ($3,153,875), Ford Motor Credit ($2,168,504) and Preferred Term Securities III, Ltd. ($1,988,311). At December 31, 2001, the Company had no investments which had not been income producing for a period of at least twelve months prior to year-end.
As an income generation strategy, the Company takes certain option positions, generally on equity securities or related market indices and on equity options embedded in convertible bonds. Although such positions may be covered by actual securities owned or offsetting options, hedge accounting is not used. Accordingly, all such positions are marked to market and changes in value reported as realized gains or losses. During 2001, option purchases totaled approximately $2,605,000 and related net realized gains totaled approximately $971,410, along with the SFAS No. 133 transition adjustment described in Note 17. At December 31, 2001 net option positions outstanding had a market value of $254,000 with an associated realized loss recorded of $203,000. Approximately $90,000 of these positions contain market risk of loss beyond the recorded value.
The Company leases office space to third-party tenants under noncancellable lease agreements. Future minimum rental income is $622,000, $473,000, $341,000, $202,000 and $43,000 for years 2002 through 2006, respectively.
Amortization of the value of insurance acquired (net of interest accretion) in each of the following five years will be approximately: 2002 - $557,000; 2003 - $480,000; 2004 - $423,000; 2005 - $382,000, and 2006 - $338,000.
Cash paid for interest on debt was $635,594, $771,095 and $595,939 during 2001, 2000 and 1999, respectively; including $21,447 and $84,491 in 2000 and 1999, respectively, related to brokerage account borrowings.
Tax expense includes a current state and local income tax provision (benefit) of $(230,000), $350,000, and $225,000 in 2001, 2000, and 1999, respectively. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined for tax reporting purposes.
Significant components of the Company's deferred tax liabilities and assets as of December 31, 2001 and 2000 are as follows:
The Insurance Subsidiaries are domiciled in Kentucky and prepare their statutory-basis financial statements in accordance with statutory accounting practices ("SAP") prescribed or permitted by the Kentucky Department of Insurance ("KDI"). "Prescribed" statutory accounting practices include state insurance laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ("NAIC"). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. Effective January 1, 2001, the NAIC revised its Accounting Practices and Procedures Manual in a process referred to as Codification. The KDI has adopted the revised manual, which has changed, to some extent, prescribed statutory accounting practices which the Insurance Subsidiaries use to prepare their statutory-basis financial statements. The primary statutory changes affecting the Insurance Subsidiaries are, establishment of deferred income taxes, recognizing as realized losses securities impairments considered other than temporary, recording an allocable share of the Company's accrued employee benefit obligations, and revision of the statutory equity method of accounting which now precludes a parent insurer from recording as income, its share of undistributed subsidiary earnings. Effective January 1, 2001, the Insurance Subsidiaries recorded a net deferred tax benefit from Codification of $1,750,000, partially offset by approximately $228,000 of accrued employee benefit obligations.
Year Ended December 31 2001 2000 1999 - --------------------------- ----------------- ---------------- ----------------- Net Income (Loss) $ (3,762,603) $ 1,961,792 $ 4,966,948 Capital and Surplus $ 9,687,289 $ 11,694,494 $ 16,227,706
NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. Based on RBC computations as of December 31, 2001, the Insurance Subsidiaries each have statutory capital which is well in excess minimum regulatory requirements.
Segment asset totals are determined based on policy liabilities outstanding in each segment.
* Net Loss for the quarters ended March 31, June 30, and September 30, 2001 has been restated from amounts previously reported in the Company's Form 10-Qs. The restated amounts reflect correction of policy benefit reserves and related deferred acquisition costs for the Preneed Life segment. In addition, corresponding income taxes have been revised for the Preneed Life change and to reflect the actual effective tax rate applicable for the year. The effect of the restatement for the first three quarters of 2001 was to increase earnings and per share amounts (e.g. decrease Net Loss) as follows:
The Company currently follows the general practice of reinsuring that portion of risk on the life of any individual which is in excess of $40,000 for individual policies (under yearly renewable term and coinsurance agreements) and $15,000 for group policies (under a group yearly renewable term agreement). Graded death benefit and simplified issue coverages above $4,000 are generally 50% reinsured, with the Life Insurance Subsidiaries maintaining a maximum $10,000 risk on any one policyholder. Individual and group accidental death coverage and major medical accident and health coverages are 100% reinsured. To the extent that reinsuring companies are unable to meet obligations under reinsurance agreements, the Company would remain liable.
United Liberty, which the Company acquired in 1998, is defending an action in an Ohio state court brought by two policyholders. The Complaint refers to a particular class of life insurance policies that United Liberty issued over a period of years ending around 1971. It alleges that United Liberty's dividend payments on these policies from 1993 through 1999 were less than the required amount. It does not specify the amount of the alleged underpayment but implies a maximum of about $850,000. The plaintiffs also allege that United Liberty is liable to pay punitive damages, also in an unspecified amount, for breach of an implied covenant of good faith and fair dealing to the plaintiffs in relation to the dividends. The action has been certified as a class action on behalf of all policyholders whose policies were issued in Ohio and were still in force in 1993. United Liberty has denied the material allegations of the Complaint and is defending the action vigorously. Pre-trial discovery is continuing. United Liberty has filed a motion for summary judgment to which the plaintiffs have not yet responded. Although United Liberty has requested mediation of the action, the plaintiffs would not agree to the request for mediation until United Liberty made an offer to settle the case. Consequently, United Liberty has offered to settle the matter for payments over time, which would include attorneys' fees, and which would be contingent upon an exchange or reformation of the insurance policies currently owned by the members of the class for policies with an increased premium and a set dividend. At this stage of the litigation, the Company is unable to determine whether an unfavorable outcome of the action is likely to occur or, alternatively, whether the chance of such an outcome is remote. Therefore, at this time, management has no basis for estimating potential losses, if any. In addition, the Company is party to other lawsuits in the normal course of business. Management believes recorded claims liabilities are adequate to ensure these other suits will be resolved without material financial impact to the Company.
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, 2001 and 2000, the fair value of available-for-sale fixed maturities was $77,534,516 and $71,403,674, 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, 2001 and 2000, the fair value of equity securities was $8,116,958 and $12,577,874, respectively.
Cash and Cash Equivalents: The carrying amount of cash and cash equivalents approximates their fair value. At December 31, 2001 and 2000, the fair value of cash and cash equivalents was $18,433,626 and $20,093,774 respectively.
Investment Contracts: The carrying amount of investment-type fixed annuity contracts approximates their fair value. At December 31, 2001 and 2000, the fair value of investment-type fixed annuity contracts was $7,468,172 and $7,865,030, respectively.
Notes Payable: The carrying amounts of notes payable approximate their fair values. At December 31, 2001 and 2000, the fair value of notes payable was $7,095,834 and $8,000,000, respectively.
During 1997, the Company adopted a 401(k) savings plan for its full-time employees. The Company contributes matching contributions at the discretion of its Board of Directors. Company expense associated with this plan totaled $57,532, $46,353, and $34,860 in 2001, 2000 and 1999, respectively.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $90,000 ($0.05 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.