(4) Tax on realized gains and losses is computed based on a 35% effective rate for all periods.
(5) Represents net income applicable to common shareholders, excluding realized gains, net of tax. Management believes that realized gains and losses are not indicative of overall operating trends.
(7) Tangible book value per share represents total stockholders' equity, excluding accumulated other comprehensive income, goodwill and present value of future profits, plus assumed proceeds from the exercise of vested options, divided by the total shares outstanding plus the shares assumed issued from the exercise of vested options.
(8) Operating return on average equity represents net operating income divided by the average of the beginning and the end of year total stockholders' equity, excluding accumulated other comprehensive income.
(9) The ratio of acquired intangible assets to equity represents the sum of goodwill and present value of future profits divided by shareholders' equity.
We own nine insurance companies (collectively, the "Insurance Subsidiaries"): American Progressive Life & Health Insurance Company of New York ("American Progressive"), American Pioneer Life Insurance Company ("American Pioneer"), American Exchange Life Insurance Company ("American Exchange"), Constitution Life Insurance Company ("Constitution"), Marquette National Life Insurance Company ("Marquette"), Peninsular Life Insurance Company ("Peninsular"), Pennsylvania Life Insurance Company ("Pennsylvania Life"), Penncorp Life Insurance Company ("Penncorp Life (Canada)") and Union Bankers Insurance Company ("Union Bankers"). The insurance company subsidiaries are licensed to sell life and accident and health insurance in all fifty states, the District of Columbia and all the provinces of Canada. In addition to the Insurance Subsidiaries, we own a third party administrator, CHCS Services, Inc., that administers senior market business for more than 40 unaffiliated insurance companies, as well as our own companies.
CAREER AGENCY -- The Career Agency segment is comprised of the operations of Pennsylvania Life and Penncorp Life (Canada), both of which we acquired in 1999. Penncorp Life (Canada) operates exclusively in Canada, while Pennsylvania Life operates in the United States. The Career Agency segment includes the operations of a career agency field force, which distributes fixed benefit accident and sickness disability insurance, life insurance, supplemental senior health insurance and annuities in the United States and Canada. The career agents are under exclusive contract with either Pennsylvania Life or Penncorp Life (Canada).
SENIOR MARKET BROKERAGE -- This segment includes the operations of our other insurance subsidiaries, primarily American Pioneer, American Progressive and Constitution, that distribute senior market products through general agency and brokerage distribution systems. The products include Medicare supplement/select, long term care, senior life insurance and annuities. In 2002, we combined our Special Markets segment with our Senior Market Brokerage segment.
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.
The cost of acquiring new business, principally commissions and certain expenses of the agency, policy issuance, underwriting and related departments, all of which vary with, and are primarily related to the production of new and renewal business, have been deferred. These costs are being amortized in relation to the present value of expected gross profits on the policies arising principally from investment, mortality and expense margins in accordance with SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments", for interest sensitive life and annuity products and in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in accordance with SFAS No. 60, "Accounting and Reporting by Insurance Enterprises", for non-interest sensitive life and all accident & health products.
In December 2002, Pennsylvania Life entered into a definitive contract to acquire Pyramid Life Insurance Company ("Pyramid Life") from Ceres Group, Inc. for $56 million in cash. This transaction is subject to regulatory approvals and other customary conditions and is scheduled to close by the end of the first quarter of 2003.
Pyramid Life specializes in providing health and life insurance products to the senior market. These products include Medicare supplement, long term care, life insurance, and annuities. Pyramid Life markets its products in 26 states through a career agency sales force of over 1,100 career agents operating out of 29 Senior Solutions Sales Centers. As of the end of 2002, Pyramid Life had approximately $110 million of premium in force and in excess of $114 million of assets.
In December 2002, the Company issued $15.0 million of floating rate trust preferred securities through a subsidiary trust. These securities are due in 2032 and are not callable for the first five years. The floating rate is equal to the three-month LIBOR plus 4.0%, currently 5.4%. Approximately $6.0 million of the proceeds were used to augment the capital of our insurance subsidiaries and the balance of approximately $9.0 million was retained at the parent company in anticipation of funding the acquisition of Pyramid Life. In March 2003, a second subsidiary trust of the Company issued $10.0 million of floating rate trust preferred securities under terms similar to the above securities at a rate of 5.29%. The proceeds will be used to pay down a portion of the term loan and for general corporate purposes.
In November 2002 we entered into an agreement with Nationwide Life Insurance Company ("Nationwide") to acquire, through a 100% quota share reinsurance agreement, Nationwide's individual Medicare supplement policies representing approximately $20.0 million of annualized premium in force. In connection with this transaction, administration of the business was transferred to CHCS Services, Inc.
In the fourth quarter of 2000, we decided to exit our under-performing individual major medical business to the extent possible. Of the $31.3 million of individual major medical premium that was in force on December 31, 2000, approximately $1.6 million remained in force on December 31, 2002, which we are not able to cancel.
(1) We evaluate the results of operations of our segments based on operating income by segment. Operating income excludes realized gains and losses. This differs from generally accepted accounting principles, which includes the effect of realized gains in the determination of net income. Management believes that realized gains and losses are not indicative of overall operating trends. The schedule above reconciles our operating income to net income in accordance with generally accepted accounting principles.
(2) The effective tax rates were 35.2% for the year ended December 31, 2002, 35.0% for 2001 and 34.8% for 2000.
We incurred realized losses, net of tax, of $3.3 million or $.06 per share in 2002, largely as the result of the loss on our WorldCom bonds. This compares to the net realized gain of $2.0 million or $.04 per diluted share in 2001.
Net operating income for 2002, excluding realized gains (losses) and excluding the benefit of the release of a portion of the reserve held against the Company's deferred tax asset, was $31.8 million or $0.59 per share. This is comparable to $26.2 million or $0.52 per share in 2001, representing increases of 21.4% and 13.5%, respectively.
Pre-tax operating income from our Career Agency segment increased by $5.0 million or 18%, compared to 2001. This reflects an increase in new sales and improved loss ratios for our disability business.
Net income increased by $6.0 million to $28.9 million ($0.57 per share) in 2001, compared to $22.9 million ($0.49 per share) in 2000.
Our overall effective tax rate was 33.2% in 2001 as compared to 30.8% in 2000. As a result of the increased profitability of our operating segments, 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, or $0.01 per share, compared to $1.3 million, or $0.03, per share during 2000. Excluding the release of the tax valuation allowance, the effective tax rate on operating income was 35.0% in 2001, compared to 34.8% in 2000.
The decrease in the pre-tax 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.
REVENUES. Net premiums for 2002 fell by approximately 0.6% compared to 2001. Canadian operations accounted for approximately 39% of the net premiums for the segment in 2002, compared to 37% in 2001. New sales during 2002 increased by 10% over 2001. This increase was driven by a 9% increase in sales in the U.S. and a 12% increase in sales in Canada. The increase in production in the U.S. came from sales of our senior market products, such as Medicare supplement, long term care and senior life, which accounted for 49% of the new sales in the U.S. The Career agents also sold $33.0 million of fixed annuities during 2002, compared to $8.4 million in 2001, that are not reported as premiums for GAAP.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including the change in reserves, decreased by approximately 10% compared to 2001. Overall loss ratios for the segment improved from 67% in 2001 to 60% in 2002, primarily in our disability line as a result of active rate and claims management. Interest credited increased by $1.0 million, consistent with the increase in fixed annuities.
Commissions and general expenses increased by approximately $4.5 million, or 8%, in 2002 compared to 2001. This relates primarily to the increase in new business, including annuities.
Pre-tax operating income from our Career Agency segment decreased by $0.4 million or 1%, compared to 2000. This decrease was due primarily to a reduction in the underwriting profit of the U.S. operations, offset by a reduction in general expenses.
purposes. The decrease in Canadian net premium is due to the run-off of the older block of Canadian business. Canadian operations accounted for approximately 37% of the net premiums for the segment in both 2001 and 2000.
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 non-insurance 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 the change in reserves, increased by approximately 3% compared to 2000. 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.
Commissions and general expenses decreased by approximately $4.2 million, or 7%, in 2001 compared to 2000. This decrease is primarily due to the consolidation of the operations from the Raleigh location into the existing operations in Toronto, Canada and Pensacola, Florida.
The table below details the gross premiums and policyholder fees collected for the major product lines in the Senior Market brokerage segment and the corresponding average amount of net premium retained after reinsurance. Our insurance subsidiaries reinsure our senior market brokerage products to unaffiliated third party reinsurers under various quota share agreements. Medicare supplement/select written premium in force as of December 31, 2002, is reinsured under quota share reinsurance agreements ranging between 50% and 90% based upon the geographic distribution. During the first quarter of 2002, we increased our retention on certain new business written from 25% to 50%. We are considering a further increase in our retention on new business further by the end 2003. We have also acquired various blocks of Medicare supplement premium, which are reinsured under quota share reinsurance agreements ranging from 75% to 100%.
Gross premium increased $75.2 million, or 20%, over 2001 despite the slow down in new production. The increase in gross premium includes a $87.5 million, or 54%, increase on Medicare supplement/select business written as a result of continued new sales. In addition, premiums increased due to normal rate increases implemented by the Company and better than assumed persistency. Other senior supplemental health premium, which includes long term care, nursing home and home health care increased 11%, or $2.4 million. These increases were partially offset by a decrease of $16.4 million, or 56%, in other health premium, primarily as a result of our decision to exit the major medical line of business.
In November 2002, we entered into an agreement with Nationwide Life Insurance Company to reinsure a block of its Medicare supplement business with annualized premium in force of approximately $20.0 million. This added approximately $3.5 million of premium to the Medicare supplement acquired line.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including the change in reserves, increased by approximately $24.8 million, or 31%, compared to 2001. The increase is due primarily to higher annualized premium in force in our Medicare supplement lines, even though our loss ratio for this line improved. Additionally, we experienced an increase in claims in a block of home health
care business that we stopped selling in 2000. We believe that we are taking the necessary steps, particularly as to rate management, so that we can eliminate the negative drag of this block as soon as possible. We implemented a 30% rate increase on this block during 2002 and we will file for additional rate increases in 2003 so that we can continue to mitigate the effect of this block on the earnings of the segment. We have not experienced a similar increase in claims in any of the long term care blocks that we are currently marketing.
The increase in deferred acquisition costs was approximately $5.5 million more in 2002, than in 2001. The increase in deferred acquisition costs relates primarily to our higher retention on new business.
REVENUES. New production of our Senior Market products amounted to $109.5 million in 2001. This represents a 29% increase over the $84.9 million in 2000 and reflects a benefit from new sales of our Medicare products as a result of the dis-enrollment of members from HMO's. We have continued to expand geographically and have increased our recruiting efforts to further augment our production. Additionally, $7.1 million of fixed annuities were sold during 2001, compared to $5.2 million in 2000.
Gross premium increased $65.6 million, or 21%, over 2000. The increase in gross premium includes a $79.1 million, or 96%, increase on Medicare supplement/select business written by the Insurance Subsidiaries as a result of continued new sales. In addition, premiums increased due to normal rate increases implemented by the Company and better than assumed persistency. Medicare supplement acquired increased by $3.3 million, or 2%. Other senior supplemental health premium, which includes long term care, nursing home and home health care increased 9%, or $1.9 million. These increases were partially offset by a decrease of $17.4 million, or 37%, in other health premium, primarily as a result of our decision to exit the major medical line of business.
Net premiums for 2001 increased by $12.7 million, or 14%, compared to 2000. On a percentage basis, net premiums grew less than gross premium as a result of our decision to exit the major medical business, which is 100% retained. The decrease in the retained percentage from 29% to 27% was due primarily to the reduction in major medical premium.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including the change in reserves, increased by approximately $8.6 million, or 12%, compared to 2000. The increase is due primarily to higher annualized premium in force in our Medicare supplement lines, even though our loss ratio for this line improved.
The increase in deferred acquisition costs was approximately $3.6 million more in 2001, than in 2000. This is net of the amortization of approximately $1.4 million of deferred acquisition costs relating to our decision to exit the major medical line of business. The increase in deferred acquisition costs relates primarily to the increase in new sales.
Commissions and other operating expenses increased by approximately $3.4 million, or 12%, in 2001 compared to 2000. The following table details the components of commission and other operating expenses:
(1) In addition to segment operating income, we also evaluate the results of our Administrative Services segment based on earnings before interest, taxes, depreciation and amortization ("EBITDA"), which is not in accordance with generally accepted accounting principles.
Operating income for the Administrative Services segment for 2002 improved by more than 15% over 2001, primarily as the result of the increase in Medicare premiums being serviced by our administrative services company and the scheduled reduction in the amortization of the present value of future profits ("PVFP"). Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased by approximately 8% to $10.5 million to in 2002.
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. EBITDA increased by approximately 35% to $9.7 million in 2001.
General expenses for the segment increased by $6.9 million in 2001 compared to 2000. Expenses relating to the administration of long term care business increased by approximately $4.3 million. This increase is due primarily to the inclusion of a full year of operations of CHCS operations in 2001 compared to only five months in 2000. The remaining increase related to the costs associated with the increase in Medicare business administered, primarily for our affiliated insurance subsidiaries.
The decrease in the operating loss from our corporate segment in 2001 was due primarily to the reduction in interest cost. This reduction was due to a combination of the 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. During 2001, the weighted average balance outstanding decreased by $4.6 million from $70.1 million for 2000. The weighted average interest rate on our debt decreased to 7.8% in 2001 from 10.1% in 2000.
The Corporate segment reflects the elimination of revenues and expenses associated with services performed by our Administrative Services segment for our insurance company subsidiaries. These eliminations amounted to $31.2 million for 2002, $23.6 million for 2001 and $18.1 million for 2000. The Corporate segment also reflects the elimination of interest income and expense on debentures issued by our parent holding company to our subsidiaries subsidiary of $1.6 million for 2002, $0.5 million for 2001, $0.7 million for 2000. (See "Affiliated Obligations of the Parent Company" below).
We require cash at our parent company to meet our obligations under our credit facility and our outstanding debentures held by our subsidiaries, American Progressive and Pennsylvania Life. In January 2002, our parent company issued a debenture to Pennsylvania Life in conjunction with the transfer of the business of Pennsylvania Life's Canadian Branch to Penncorp Life (Canada). Repayment of the debenture is anticipated to be funded from dividends from Penncorp Life (Canada). We also require cash to pay the operating expenses necessary to function as a holding company (applicable insurance department regulations require us to bear our own expenses), and to meet the costs of being a public company.
We believe that our current cash position, the availability of the revolving credit facility, the expected cash flows of our administrative service company and the surplus note interest payments from American Exchange (as explained below) can support our parent company obligations for the foreseeable future. However, there can be no assurance as to our actual future cash flows or to the continued availability of dividends from our insurance company subsidiaries.
$8.2 million in principal on the term loan. For 2000, we paid $7.1 million in interest and repaid $3.4 million in principal on the term loan.
In connection with the pending acquisition of Pyramid Life, we intend to refinance the above term loan. We anticipate that our new credit facility will total $85 million, consisting of a $70 million five year term loan with a $15 million revolver. We intend to use the proceeds from the term loan along with existing cash to repay the existing term loan and finance the acquisition of Pyramid Life. The refinancing, if consummated, would trigger the immediate amortization of the capitalized loan origination fees from the existing term loan resulting in an pre-tax expense of approximately $1.9 million.
future senior debt of the Company and are effectively subordinated to all existing and future obligations of the Company's subsidiaries. The Company has the right to redeem the Junior Subordinated Debt on or after December 4, 2007.
The Company has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debt for a period not exceeding 20 consecutive quarters up to the debentures' maturity date. During any such period, interest will continue to accrue and the Company may not declare or pay any cash dividends or distributions on, or purchase, the Company's capital stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank equally with or junior to the Junior Subordinated Debt. The Company will have the right at any time to dissolve the Trust and cause the Junior Subordinated Debt to be distributed to the holders of the Capital Securities. The Company has guaranteed, on a subordinated basis, all of the Trust's obligations under the Capital Securities including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation but only to the extent the Trust has funds available to make such payments.
In January 2002, our parent company issued a debenture in the amount of $18.5 million to Pennsylvania Life in connection with the transfer of the business of Pennsylvania Life's Canadian Branch to Penncorp Life (Canada). Our parent company paid $4.4 million in principal during 2002, reducing the outstanding balance to $14.1 million at December 31, 2002. Principal and interest payments are made quarterly. The debenture is scheduled to be repaid in full by the third quarter of 2005. During 2002, our parent holding company paid $1.5 million in interest on these debentures. The interest on these debentures is eliminated in consolidation. Dividends from Penncorp Life (Canada) funded the interest and principal paid on the debenture in 2002 and it is anticipated that they will fund all future payments made on this debenture.
During 2002, Pennsylvania Life paid cash dividends amounting to $3.0 million to American Exchange. Universal American contributed the 100% of the common stock of American Pioneer and American Progressive to American Exchange during 2002. American Exchange also received capital contributions from its parent totaling $4.2 million during the year. American Exchange made capital contributions of $3.0 million to American Pioneer and $1.2 million to American Progressive during 2002.
During 2001, Union Bankers paid cash dividends amounting to $1.7 million to American Exchange. In addition, the insurance companies included in the tax allocation agreement with American Exchange paid $6.5 million in tax sharing payments to American Exchange. In connection with the equity offering discussed above, American Exchange received $4.3 million in capital contributions from its parent. During 2001, American Exchange made cash capital contributions of $7.0 million to Pennsylvania Life.
During 2000, Pennsylvania Life paid $2.9 million and Union Bankers paid $2.0 million in dividends to American Exchange. In addition, the insurance companies included in the tax allocation agreement with American Exchange paid $4.8 million in tax sharing payments to American Exchange.
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, 2002 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) is 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 $38.1 million as of December 31, 2002. Penncorp Life (Canada) maintained a minimum continuing capital and surplus requirement ratio in excess of the minimum requirement as of December 31, 2002.
Liquidity for our insurance company subsidiaries is measured by their ability to pay scheduled contractual benefits, pay operating expenses, and fund investment commitments. Sources of liquidity include scheduled and unscheduled principal and interest payments on investments, premium payments and deposits and the sale of liquid investments. We believe that these sources of cash for our insurance company subsidiaries exceed scheduled uses of cash.
The net yields on our cash and invested assets decreased from 6.78% in 2001 to 6.12% in 2002. 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.
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. Such laws generally prescribe the nature, quality of and limitations on various types of investments that may be made. However, we do not invest in partnerships, special purpose entities, real estate, commodity contracts, or other derivative securities. We currently engage the services of independent professional insurance 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 MFC Global Investment Management 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, 2002, 99.4% 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 0.6% of total fixed maturities as of December 31, 2002). There were no non-income producing fixed maturities for the year ended December 31, 2002. During the year ended December 31, 2002, we recognized other than temporary declines in the value of certain fixed maturity securities of $10.6 million, primarily as a result of the impairment of our WorldCom bonds, which were disposed of in the third quarter of 2002 at a price approximating their carrying value after recognition of the other than temporary decline. We recognized other than temporary declines in the value of fixed maturity securities of $4.2 million and during 2001 and $0.5 million during 2000. In each case these represent our estimate of the 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, 2002 we (exclusive of American Exchange and the companies acquired in 1999) had net operating tax loss carryforwards of approximately $2.7 million that expire in the years 2015 to 2016. As of December 31, 2002, we also had an Alternative Minimum Tax ("AMT") credit carryforward for Federal income tax purposes of approximately $0.1 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, 2002, these companies had net operating loss carryforwards, most of which were incurred prior to their acquisition by us, of approximately $27.4 million that expire in the years 2008 to 2017. 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.
As of December 31, 2002 and 2001, we carried valuation allowances of $5.1 million and $6.8 million, respectively, with respect to our tax loss carryforwards (deferred tax assets). We determine a valuation allowance based upon an analysis of projected taxable income and our ability to implement prudent and feasible tax planning strategies. The tax planning strategies include the expense reductions anticipated from our recent reorganization and from the income generated by our administrative services companies. As a result of the increased profitability of the insurance subsidiaries acquired in 1999, valuation allowances on certain of the life tax loss carryforwards were considered not necessary at December 31, 2002. The amount of the valuation allowance released during 2002 was $2.1 million and was recorded as a benefit in the deferred income tax expense. As a result of the increased profitability of the Administrative Services segment, valuation allowances on certain of the non-life tax loss carryforwards were considered not necessary as of December 31, 2002. The amount of the valuation allowance released during 2002 was $0.1 million and was recorded as a benefit in the deferred income tax expense. These decreases were partially offset by the establishment of a valuation allowance of $0.5 million for certain capital losses incurred in 2002 by the Company that are subject to limitation on their use. We believe it is more likely than not that we will realize the recorded net deferred tax assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes an accounting model for long-lived assets to be disposed of by sale that applies to all long-lived assets, including discontinued operations. SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. Adoption of SFAS 144 did not have a material impact on the Company's consolidated financial condition or results of operations.
reporting unit's fair value exceeded its carrying amount, including goodwill. As a result, goodwill for each reporting unit was not considered impaired. SFAS 142 also requires that useful lives for intangibles other than goodwill be reassessed and remaining amortization periods be adjusted accordingly. Adoption of SFAS 142 did not have a material impact on the Company's consolidated financial condition or results of operations. The Company updated its review of its good will assets during the fourth quarter of 2002 and determined that the goodwill asset remained unimpaired.
Effective April 1, 2001, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"). Under the consensus, investors in certain securities with contractual cash flows, primarily asset-backed securities, are required to periodically update their best estimate of cash flows over the life of the security. If the fair value of the securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, an other than temporary impairment charge is recognized. The estimated cash flows are also used to evaluate whether there have been any changes in the securitized asset's estimated yield. All yield adjustments are accounted for on a prospective basis. Adoption of EITF 99-20 did not have a material impact on the Company's consolidated financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires costs associated with exit or disposal activities (including restructurings) to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. This standard nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS 146, a liability related to an exit or disposal activity is not recognized until such liability has actually been incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of a commitment to an exit or disposal plan. The provisions of this standard are effective for exit or disposal activities initiated after December 31, 2002. The Company will adopt this standard on January 1, 2003, as required.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"). This standard amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This standard also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 123, the Company measured its stock-based compensation using