The Company has experienced significant organizational changes during the time periods covered by the financial data presented below, which may affect the comparability of this data. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Bankruptcy Proceedings and Recapitalization" and "General."
The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes included in Item 8 of this Annual Report on Form 10-K.
On January 10, 2000 PennCorp announced that it had agreed to sell Southwestern Life and Security Life to Reassure America for $260 million subject to certain adjustments, and would accomplish such transaction through the filing of a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
Southwestern Life and PLAIC underwrite a variety of insurance products with the primary emphasis on modest premium policies in the life, annuity and accident and health product sectors. Life products include term products and traditional whole life or universal life products which build cash values that are available to the policyholder. Annuity products include various forms of annuity products which are utilized by policyholders primarily as a means of tax deferred savings. Accident and health products include long-term care, cancer and accident only.
On June 30, 1999, PennCorp completed the sale of KIVEX to Allegiance for $34.5 million in cash. The net proceeds to the parent company from the sale were $22.2 million after payment of costs and fees associated with the transaction and after repayment of $10.2 million of intercompany borrowings to insurance company affiliates of PennCorp. PennCorp recorded a gain of $30.9 million from the sale.
On March 31, 1999, PennCorp consummated the sale of Professional to GE Financial for cash proceeds of $47.5 million. PennCorp realized net cash proceeds of $40.2 million. Professional, which previously was included in the Payroll Sales Division, provided individual fixed benefit accident and health and life products utilizing a network of independent agents primarily in the southeastern United States through employer-sponsored payroll deduction programs. On September 15, 1999, as a result of certain settlement and consideration adjustment provisions included in the purchase and sale agreement PennCorp reduced the consideration received by $1.2 million. PennCorp realized a gain from the sale totaling $1.1 million. As a result of the sale, unrealized gains on securities available for sale decreased by $488,000.
The following reflects the impact of activity for the year ended December 31, 2000 on the restructuring provision and accrual balance under the 2000 Plan (in thousands):
The 1999 Plan provided for the termination of 50 employees consisting of divisional management and staff in Dallas over a nine-month period. The staff reduction was completed in 2000. The 1999 Plan also provided for vacating certain floors of the Company's Dallas leased offices. The restructuring provision of $2.1 million represented the estimated net present value of the rent on the office space to be vacated net of the estimated sublease rental income to be received by the Company. During the quarter ended June 30, 2000, the Company agreed to assign its lease on certain vacated office space to a third party and was released from obligations related to the vacated office space beginning January 1, 2001. As a part of this agreement, the new lessee has the use of furniture located in the vacated space but the Company retains the furniture lease obligation which totals approximately $184,000 per year through 2004. The Company adjusted the remaining accruals pursuant to these agreements. The Company anticipates realizing operating expense reductions of $3.9 million and cash savings of approximately $3.4 million per year from implementing the 1999 Plan.
In the fourth quarter of 1998, PennCorp recorded restructuring costs aggregating approximately $9.3 million as a result of the decision to consolidate or merge substantially all of PennCorp's corporate functions into the Dallas infrastructure.
Approximately 120 and 39 people, respectively, were terminated as a result of the decision to transfer all operations of Union Bankers to Raleigh and transfer operations of United Life from Baton Rouge to Dallas. In addition, PennCorp restructured certain of the operations in Raleigh. Certain employees in the areas of customer services, information technology, actuarial, legal, human resources and other policyholder service areas, totaling 54 people, were terminated under the Raleigh portion of the restructuring plan. PennCorp recognized severance costs totaling $3.8 million. PennCorp charged $297,000 and $4.4 million against the severance accrual during 1999 and 1998, respectively, as the result of termination payments. In addition, during 1999 and 1998 PennCorp adjusted the severance accrual in the amount of $322,000 and $405,000, respectively, due to PennCorp paying less severance costs as a result of natural attrition and other factors such as inter-company transfers of employees. During 1998, PennCorp also increased the severance accrual by $1.6 million as a result of the decision to terminate all 54 of Security Life's Raleigh employees.
As part of the first quarter 1998 Plan, PennCorp terminated an information technology outsourcing agreement. The original contract termination fee was $4.6 million. As a result of an amendment to the termination agreement, PennCorp exited the agreement for a payment of $3.2 million and the remaining accrual was adjusted during 1998.
For the years ended December 31, 1999 and 1998, PennCorp recorded impairment provisions aggregating $58.5 million and $343.0 million, respectively. PennCorp recorded the impairment provisions in order to reflect the difference in PennCorp's accounting basis in the Businesses Held for Sale and the fair value of the consideration that PennCorp would likely receive for such businesses. The fair value of the consideration likely to be received was primarily based upon the terms of definitive sales agreements. The impairment provision of $58.5 million in 1999 was related to the disposition of the Career Sales Division. The impairment provision recorded during 1998 aggregating $343.0 million reduced the value of the Career Sales Division, Professional and the United Life Assets in the amounts of $328.6 million, $3.3 million and $11.1 million, respectively.
PennCorp evaluated the recoverability of all intangible assets of the Payroll Sales Division based upon the sales proceeds received from the disposition of the remaining Payroll Sales Division companies on February 4, 2000. As a result, an impairment provision for certain intangible assets aggregating $95.5 million was reflected in the Statement of Operations for the year ended December 31, 1999. All remaining costs in excess of net assets acquired in the Payroll Sales Division, totaling $19.3 million, were impaired. In addition, PennCorp impaired all remaining present value of insurance in force and a portion of deferred policy acquisition costs totaling $67.5 million and $49.7 million, respectively, net of deferred taxes of $41.0 million.
Between February 7, 2000 and June 13, 2000, PennCorp was managing its assets as a "debtor-in-possession" as a result of the bankruptcy petition filing (see Note 3 of Notes to Consolidated Financial Statements).
On June 13, 2000, the Company established a $95.0 million credit facility. The Company used $81.0 million of the new credit facility along with proceeds from the issuance of SWL Holdings common stock pursuant to the rights offering and Rapoport and Sharpe investments and $55.0 million in extraordinary dividends to repay the entire principal balance of PennCorp's senior and subordinated debt and related interest (see Note 8 of Notes to Consolidated Financial Statements).
Cash from Subsidiaries. Cash generated by the Company's insurance subsidiaries is made available to SWL Holdings principally through periodic payments of principal and interest on surplus debentures issued by PLAIC, Constitution (sold July 30, 1999) and Pioneer Security (sold February 4, 2000) (collectively, the "Surplus Note Companies"). The surplus debentures issued by PLAIC and Constitution were repaid in full in connection with the
During the period June 13, 2000 to December 31, 2000, the Company received capital contributions of $46.0 million (net of related expenses) through the issuance of 3,800,000 shares of common stock pursuant to the Recapitalization Plan. In addition, the Company borrowed $89.0 million under the new credit facility. The Company also received $58.2 million from PLAIC as principal and interest payments on the existing surplus debenture and $5.9 million as dividends. These payments were funded in part by $55.0 million that was made available to PLAIC from Southwestern Life and Security Life as an extraordinary dividend. Additionally, the Company received a dividend of $350,000 from a non-insurance subsidiary. The Company used these proceeds to repay the principal balances of PennCorp's senior and subordinated debt aggregating $174.6 million and related interest and premiums on redemption aggregating $6.4 million. During the period from June 13 to December 31, 2000, the Company made interest payments on the new credit facility totaling $5.0 million and incurred cash operating expenses of $7.5 million including a $6.0 million fee paid for the termination of the contract to sell Southwestern Life and Security Life. The Company paid costs associated with the Recapitalization Plan of $11.3 million. In addition, the Company established an escrow account in the amount of $1.4 million in connection with posting bond for appeal of an adverse judgment rendered in the Schnoebelen lawsuit (see Item 3. Legal Proceedings). The Company also paid $27,000 for the interest rate cap agreement (see Note 8 of Notes to Consolidated Financial Statements).
As part of a series of restructuring transactions approved by the Texas Department of Insurance, Security Life became a wholly-owned subsidiary of PLAIC. In addition, PLAIC was permitted to prepay $20.4 million of principal and interest on its surplus debenture to SW Financial, which then paid these funds as a dividend to PennCorp. On February 4, 2000, AA Holdings sold the companies in the Payroll Sales Division for $103.3 million. The net proceeds to PennCorp after repayment of intercompany borrowings to insurance company affiliates of PennCorp was $97.0 million. In addition, PennCorp received a $12.7 million dividend from AA Holdings. Of the proceeds, $100.0 million were used to repay a portion of PennCorp's bank credit facility.
Interest Paid on Indebtedness. During the two year period, PennCorp utilized varying amounts of leverage in its capital structure. For the years ended December 31, 1999 and 1998, the average indebtedness outstanding aggregated $366.9 million and $452.6 million, respectively. PennCorp's weighted average costs of borrowings increased significantly during 1999 and 1998 as a result of PennCorp's increased leverage ratio and projected weakness in future liquidity. For additional information regarding indebtedness, see Note 8 of Notes to Consolidated Financial Statements and Parent Company--General above.
Operating Expenses Including Restructuring Charges. During 1999 and 1998, PennCorp directly and indirectly, through charges from its subsidiaries, incurred significant operating and restructuring charges. Total restructuring charges paid by PennCorp during 1999 and 1998 aggregated $1.8 million and $9.1 million, respectively. During 1999 and 1998, PennCorp also incurred legal, accounting and investment banking fees associated with asset dispositions aggregating $2.4 million and $1.5 million, respectively. Operating expenses incurred during 1999 and 1998 also include costs aggregating $1.6 million for each of the two years, associated with shareholder litigation and the SEC's investigation into PennCorp's historical accounting practices.
In conjunction with PennCorp's 1998 acquisition of the SW Financial Controlling Interest, PennCorp borrowed under its existing $450 million bank credit facility to repay indebtedness of SW Financial aggregating $115.0 million upon acquisition. In addition, during 1998 PennCorp used existing liquidity to repay $11.0 million of indebtedness under its bank credit facility.
Purchase of Equity Securities. In conjunction with the acquisition of the Fickes and Stone Knightsbridge Interests, PennCorp acquired Fickes' and Stone's interest in the ACO Brokerage Common Stock for $5.0 million.
The insurance subsidiaries' principal sources of cash are premiums and investment income. The insurance subsidiaries' primary uses of cash are policy claims, commissions, operating expenses, income taxes and payments to
the Company for principal and interest due under surplus debentures, tax sharing payments and dividends. Both sources and uses of cash are reasonably predictable.
The Insurance Operations include the operations of Southwestern Life (including Security Life) and PLAIC. Southwestern Life markets life insurance and, to a lesser extent, annuity and accident and health insurance products, through independent and exclusive agents who sell directly to individuals primarily in the southwestern and southeastern United States. The Company's sales of accident and health insurance products historically have been limited and, in management's view, have not had and do not have a material effect on the Company's results of operations. Accordingly, the Company's accident and health insurance products are not discussed separately but are included in tabular presentations of related financial information where appropriate.
Policy revenues decreased 13.3% during 2000 to $116.2 million compared with 1999. Policy revenues increased 3.5% to $134.1 million in 1999 compared with 1998. Life premiums collected, net of reinsurance, were $124.7 million, $103.8 million and $134.1 million in 2000, 1999 and 1998, respectively. First year universal life premiums decreased 21.4% and 15.0% to $7.4 million and $9.5 million in 2000 and 1999, respectively. The decline in new life sales during 2000 reflects the impact of ratings downgrades and uncertainties surrounding the parent company's bankruptcy and recapitalization. In addition, the decision to cease new life sales at Security Life was announced during the third quarter of 1999 as a result of management's decision to reduce costs and concentrate its marketing efforts at Southwestern Life. The decrease in first year traditional life premiums is also attributable to a decrease in single
In January 1999, Security Life initiated management action in the form of an exchange program for certain policyholders of Security Life. The program was offered to all policyholders who had certain policy forms in force as of January 1, 1998. The program allowed the policyholder the following options in exchange for terminating his or her policy and executing a release: (i) receive a refund of 115% of all premiums paid for the policy prior to January 1, 1999 and 100% of premiums paid thereafter; or (ii) exchange the policy, without proof of insurability, for the same face amount in one of two policies offered by Security Life. The policyholder also had the choice of not accepting the exchange program and keeping the current policy in force. In November 1999, a lawsuit was filed against Security Life regarding the exchange program and subject products (see Item 3. Legal Proceedings).
Long-term care premiums increased $586,000 in 2000 after decreasing $202,000 in 1999. Premiums for 1999 reflected the retroactive effects of an amendment to the reinsurance contract which increased the cession amount to 80% retroactively to 1998.
Net Investment Income. Net investment income decreased 16.9% or $27.8 million in 2000 after declining $17.9 million or 9.8% in 1999. The decrease is primarily due to a decline in invested assets. Average invested assets declined by $379.9 million or 16.1% in 2000 compared with 1999 and $180.9 million or 7.1% in 1999 compared with 1998. The decrease in 2000 resulted from the reinsurance of substantially all of the deferred annuity business and the need to liquidate invested assets to provide cash for the $55.0 million extraordinary dividend. At the consummation of the reinsurance transaction, invested assets aggregating $433.0 million were transferred to the reinsurer. The decrease in 1999 resulted principally from the need to liquidate invested assets to provide cash to fund the surrenders of annuities and universal life products which exceeded deposits by $128.8 million. Weighted average yields on invested assets were 7.0%, 6.9% and 7.1% in 2000, 1999 and 1998, respectively. Weighted average yields were impacted slightly for 2000 as a result of maintaining higher cash balances resulting from sales of securities in order to consummate the annuity reinsurance transaction and pay the special dividends associated with the recapitalization. Impacting investments yields in 1999 were lower new money rates available to the Company for investment as a result of extensive maturities and calls of higher yielding investments.
Other Income. Other income totaled $6.8 million, $11.3 million and $3.7 million in 2000, 1999 and 1998, respectively. Included in other income for 2000 is $1.9 million of ceding allowances associated with the RGA reinsurance transaction and the amortization of deferred gain on the reinsurance of deferred annuities of $810,000. Other income for 1999 included $5.7 million from the distribution of assets of a joint venture investment resulting from the sale of most of the operations and assets of the joint venture. During 1998, the Company received approximately $1.0 million from a settlement associated with securities owned in the past. The most significant remaining item in other income is consideration received on supplemental contracts. Supplemental contract revenue is derived from annuity
Total Policyholder Benefits. The following table shows the components of total policyholder benefits for the years ended December 31, 2000, 1999 and 1998:
The Company is continually evaluating actuarial assumptions associated with interest-sensitive life insurance contracts in which the determination of policy reserves is highly sensitive to assumptions such as lapse rates, investment earnings rates, mortality rates, and premium persistency. Policy reserves and account values associated with such contracts aggregated approximately $555.0 million and $527.1 million as of December 31, 2000 and 1999, respectively. Should withdrawal rates experienced be less than the expected level of lapses associated with such interest-sensitive blocks of business, the Company would be required to record additional reserves or reduce intangible assets, which could have a material impact on the Company's financial position and results of operations. For example, a decrease of 1% in the assumed lapse rate would increase policy reserves associated with such contracts by $13.9 million. Management continues to assess the potential impact of future actions that might mitigate the financial impact of these trends. Examples include, but are not limited to, the redetermination of non-guaranteed charges and/or benefits under the contracts, asset segmentation, and reinsurance. There are risks associated with management action, including potential sales disruption and the threat of litigation.
Insurance Related Expenses. Insurance related expenses (including non-deferrable commissions, amortization of deferred policy acquisition costs and amortization of present value of insurance in force) increased $2.6 million during 2000 compared with 1999. The net increase in 2000 is due to: (i) the increase in amortization of deferred acquisition costs of $8.8 million; (ii) a decrease in the amortization of present value of insurance in force of $8.1 million; and (iii) an increase in non-deferrable commissions of $1.9 million. During the fourth quarter of 2000, the Company undertook an analysis of its reserving and other actuarial practices. As part of this review, the Company discovered that the method utilized to calculate deferred policy acquisition costs and policy liabilities on certain term policies was not correctly reflecting reinsurance ceded. As a result of correcting this methodology, deferred policy acquisition costs decreased approximately $6.5 million. The remaining increase in amortization compared to 1999 results from a decrease in amortization of approximately $2.0 million in 1999 at Southwestern Life as a result of unlocking assumptions during the third quarter of 1999. Amortization of present value of future profits in 2000 decreased $8.1 million compared to 1999. The amortization of present value of insurance in force decreased approximately $1.6 million during the second quarter of 2000 as a result of unlocking assumptions, including future lapsation, for certain interest-sensitive blocks of business at Security Life. In addition, the remaining balances of present value of insurance in force associated with the annuities reinsured to RGA were written off against deferred gain during the second quarter of 2000 and, consequently, required no further amortization. Non-deferrable commissions increased approximately $1.9 million due to the decision by management to accelerate payment of approximately $2.2 million of accumulation bonuses owed to agents. This was partially offset by a decrease to non-deferrable commissions at Security Life resulting from decreases in new and renewal premium and an adjustment of $700,000 based upon a re-evaluation of credit balances with terminated or inactive agents.
Businesses Sold include the operations of the Payroll Sales Division (sold February 4, 2000) the Career Sales Division (sold July 30, 1999), KIVEX (sold June 30, 1999), Professional (sold March 31, 1999), the United Life Assets (sold April 30, 1999) and Marketing One (sold November 30, 2000). The Payroll Sales Division included the operations of AA Life and OLIC. AA Life marketed and underwrote customized life insurance and annuity products to U.S. military personnel and federal employees through a general agency force. OLIC provided accident and health and life products utilizing a network of independent agents primarily in the southeastern United States through employer- sponsored payroll deduction programs. The Career Sales Division, which included the operations of Penn Life, marketed and underwrote accident and health products and, to a lesser extent, life products through a sales force exclusive to PennCorp throughout the United States and Canada. With the January 2, 1998, consummation of the acquisition of the SW Financial Controlling Interest, PennCorp integrated Union Bankers, Marquette and Constitution with the Career Sales Division. KIVEX was an internet service provider. Professional provided individual accident and health and life products utilizing a network of independent agents primarily in the southeastern United States through employer-
The significant decreases in revenues, benefits and expenses in 2000 compared to 1999 and 1998 are primarily attributable to the sale of Professional, the United Life Assets, the Career Sales Division, the Payroll Sales Division and Marketing One on March 31, 1999, April 30, 1999, July 30, 1999, February 4, 2000 and November 30, 2000, respectively.
Income Taxes (Benefits). For the years ended December 31, 2000, 1999 and 1998, the Company recognized income tax expense (benefits) of $924,000, $28.7 million and ($3.4 million), on pretax loss of $65.7 million, $172.0 million and $424.6 million, respectively. The decrease in tax for 2000 results principally from losses incurred by the life companies, which includes interest on PLAIC's surplus debentures. The unusual effective tax rates for these years are substantially due to the non-deductibility of the reduction in carrying value of the assets associated with the sale of Businesses Sold and an increase in the tax valuation allowance. The valuation allowance associated with tax assets is continually monitored by the Company in light of the dramatic changes in the operating structure and financial results of the Company. As a result of analysis the Company increased the valuation allowances by $9.0 million, $38.9 million and $23.5 million during 2000, 1999 and 1998, respectively. In each of the periods, the valuation allowance was incurred as the result of the increased likelihood that certain net operating losses and capital loss carryforwards would not be utilized and the impact or potential impact of a "change in control" as defined by the Internal Revenue Code Section 382, which occurred in 2000. Change of control provisions of Section 382 limit the Company's ability to utilize certain tax benefits including net operating loss carryforwards in future periods.
Extraordinary Items. Extraordinary items for 2000 reflect premiums of $1.1 million paid on the redemption of PennCorp's then-existing senior debt as required by the indenture for early payoff and $1.3 million of unamortized loan costs that were written off as all of PennCorp's senior debt and bank credit facility were repaid. For 1998 PennCorp
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share amounts)
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED) (In thousands)
SOUTHWESTERN LIFE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These principles are established primarily by the Financial Accounting Standards Board ("FASB") and the American Institute of Certified Public Accountants ("AICPA"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as revenues and expenses. Accounts that the Company deems to be acutely sensitive to changes in estimates include deferred policy acquisition costs, policy liabilities and accruals, present value of insurance in force, costs in excess of net assets acquired, the fair value of assets and liabilities classified as held for sale and deferred taxes. In addition, the Company must determine the requirements for disclosure of contingent assets and liabilities as of the date of the financial statements based upon estimates. As additional information becomes available, or actual amounts are determinable, the recorded estimates may be revised and reflected in operating results.
Accounts and notes receivable consist primarily of agents' balances and premiums receivable from agents and policyholders. Agents' balances are partially secured by commissions due to agents in the future and premiums receivable are secured by policy liabilities. An allowance for doubtful accounts is established, based upon specific identification and general provision, for amounts which the Company estimates will not ultimately be collected. During 2000, 1999 and 1998, the Company wrote off receivables totaling $3.3 million, $1.5 million and $2.0 million, respectively.
The Company continually monitors the recoverability of the carrying value of intangible assets using the methodology prescribed in Statement of Financial Accounting Standards ("SFAS") No. 121 and Accounting Principles Board ("APB") No. 17 "Intangible Assets." The Company evaluates long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amounts of these assets may not be recoverable. Recoverability of these assets is determined by comparing a forecast of the undiscounted net cash flows
The Company evaluated the recoverability of all intangible assets of the Payroll Sales Division based upon the sales proceeds received from the sale which was entered into on January 8, 2000 and consummated February 4, 2000 (see Notes 3 and 23). As a result, an impairment provision of $95.5 million was reflected in the Statement of Operations for the year ended December 31, 1999.
The present value of insurance in force represents the anticipated gross profits to be realized from future revenues on insurance in force at the date such insurance was purchased, discounted to provide an appropriate rate of return and amortized, with interest based upon the policy liability or contract rate, over the years that such profits are anticipated to be received in proportion to the estimated gross profits. Accumulated amortization was $97.4 million and $119.3 million as of December 31, 2000 and 1999, respectively.
Costs in excess of the fair value of net assets acquired are primarily amortized on a straight-line basis ranging from 25 to 30 years. Accumulated amortization was $24.0 million and $32.9 million as of December 31, 2000 and 1999, respectively. In 1999, unamortized costs in excess of net assets acquired in the amount of $19.3 million was impaired due to the evaluation of recoverability of intangible assets of the Payroll Sales Division as a result of its sale on February 4, 2000 (see Notes 3 and 23). During 1999, costs in excess of net assets acquired of a non-insurance subsidiary in the amount of $7.6 million was written off as the result of the decision to cease operations. During 1998, unamortized costs in excess of net assets acquired in the amount of $22.8 million were transferred to assets of Businesses Held for Sale and $114.5 million was written off in connection with the impairment provision associated with assets of Businesses Held for Sale.
Policy and contract claims represent estimates of both reported claims and claims incurred but not reported based on experience. Prior to disposition, the Company had been closely monitoring the development of claims reserve experience for Penn Life. The methodology previously utilized had experienced, what appeared to be, a deterioration of the adequacy of claims reserves associated with disability income products sold prior to the Company's ownership. During 1998, the Company changed its methodology in recording these reserves. The effect of the change in methodology is inseparable from the effect of the change in accounting estimate and is accordingly reflected in operations as a change in accounting estimate for 1998.
Revenues for interest-sensitive products such as universal life and annuity contracts represent charges assessed against the policyholders' account balance for the cost of insurance, surrenders and policy administration. Benefits
charged to expenses include benefit claims incurred during the period in excess of policy account balances and interest credited to policy account balances.
Net loss per common share is computed in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings (loss) per share excludes dilution and is computed by dividing income (loss) applicable to common shareholders by weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share represents the potential dilution that could occur if all convertible securities, warrants and stock options were exercised and converted into common stock, if the effect of doing so is dilutive. The diluted earnings per share calculation assumes that the proceeds received upon the conversion of all dilutive options and warrants are used to repurchase the Company's common shares at the average market price of such shares during the period.
Loss per share for each of the three years ended December 31, 2000 is computed based on outstanding common shares of the recapitalized company as if the recapitalization occurred at the beginning of 1998. As a result, the computation of loss per share does not include the preferred stock dividend requirements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 defines derivative instruments and provides comprehensive accounting and reporting standards for the recognition and measurement of derivative and hedging activities (including certain instruments embedded in other contracts). It requires derivatives to be recorded in the Consolidated Balance Sheet at fair value and establishes criteria for hedges of changes in the fair value of assets, liabilities or firm commitments, hedges of variable cash flows of forecasted transactions, and hedges of foreign currency exposures of net investments in foreign operations. Changes in the fair value of derivatives not meeting specific hedge accounting criteria would be recognized in the Consolidated Statement of Operations. In June 2000, SFAS No. 138 was issued amending certain provisions of SFAS No. 133. The Company will adopt SFAS No. 133 and SFAS No. 138 on January 1, 2001. The Company evaluated SFAS No.133 and SFAS No. 138 and does not expect their adoption to have a material effect on the consolidated financial statements.
On January 10, 2000, PennCorp announced that it had agreed to sell Southwestern Life and Security Life to Reassure America Life Insurance Company ("Reassure America") for $260.0 million subject to certain adjustments, and would accomplish such transaction through the filing of a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
On February 7, 2000 (the "Petition Date"), PennCorp filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). From the Petition Date, PennCorp continued to operate and manage its assets and business as a debtor-in-possession as authorized by provisions of the Bankruptcy Code. None of PennCorp's insurance subsidiaries were involved in the bankruptcy filing.
On February 28, 2000, the Bankruptcy Court issued an order scheduling a hearing to consider approval of the sale agreement with Reassuare America, subject to higher or better offers, and establishing the procedures for the submission of competing offers ("Sales Procedure Order").
On June 30, 1999, PennCorp completed the sale of KIVEX to Allegiance Telecom, Inc. The operating results of KIVEX are included in the consolidated operating results through June 30, 1999. PennCorp recorded a gain of $30.9 million on the sale.
During 1999, PennCorp used $267.0 million of the net proceeds from these sales to pay down the outstanding balance under the then-existing bank credit facility. In addition, PennCorp repaid an additional $2.0 million of indebtedness during 1999 as a result of liquidity at the parent company above the amounts prescribed in the then-existing bank credit facility, as amended.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which requires that companies disclose segment data on a basis that is used internally by management for evaluating segment performance and allocating resources to segments. The Company has prepared the following selected financial information for the Company's Insurance Operations (PLAIC and Southwestern Life, including Security Life which was merged into Southwestern Life effective June 30, 2000), Businesses Sold (Payroll Sales Division, Career Sales Division, Professional, the United Life Assets, KIVEX and Marketing One) and corporate activities. As a result of the sale of Payroll Sales Division on February 4, 2000 and Marketing One on November 30, 2000, the operating results of these companies have been included in the Businesses Sold for all the periods presented.
The Company prepared such information as it believes that: (i) the disposition of the Businesses Sold and (ii) the restructuring costs are material enough to make historical comparative results not meaningful.
Reconciliations of segment data to the Company's consolidated data are as follows:
As of December 31, 2000, commercial mortgage loan investments were concentrated in the following states:
Realized and changes in unrealized gains and losses on investments were as follows for the years ended December 31:
The Company had non-income producing investments at December 31, 2000 with an amortized cost, fair value and carrying value as follows:
(6) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
The methods used by the Company to value the life, annuity and accident and health products purchased are consistent with the valuation methods used most commonly to value blocks of insurance business. It is also consistent with the basic methodology generally used to value insurance assets. The method used by the Company includes identifying the future cash flows from the acquired business, the risks inherent in realizing those cash flows and the rate of return the Company believes it must earn in order to accept the risks inherent in realizing the cash flows, and determining the value of the insurance asset by discounting the expected future cash flows by the discount rate the Company requires.
Recoverability of the present value of insurance in force is evaluated annually and appropriate adjustments are then determined and reflected in the financial statements for the applicable period utilizing expected future cash flows. Expected future cash flows used in determining such values are based on actuarial determinations of future premium collection, mortality, morbidity, surrenders, operating expenses and yields on assets held to back policy liabilities as
well as other factors. Variances from original projections, whether positive or negative, are included in income as they occur and will affect the present value of insurance in force amortization rates for insurance products accounted for under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from Sales of Investments." To the extent that these variances indicate that future cash flows will differ from those included in the original scheduled amortization of the present value of insurance in force, future amortization may be adjusted.
The following table presents information on changes in the liability for health claims for the years ended December 31:
The lag factor method (an actuarial method to estimate aggregate claims reserves which utilizes the ratio of actual claims paid to what is ultimately paid as a function of time since the date incurred based upon historical experience) is one method which utilized Penn Life's experience considering its products and market. The Company believes that available industry data for establishing claim reserves was not appropriate for Penn Life's products and market. The utilization of a case reserve method (which estimates aggregate claims reserves based on the total estimates of all cases outstanding) for Penn Life required experience, in addition to that utilized by the lag factor method, to create case reserves based on Penn Life's experience. This experience was not sufficient until 1998. With system upgrades, Penn Life was able to obtain better benefit data distinguishing disability benefits from other benefits which may be payable under the same policy form. With the systems upgrades and more robust experience the Company was able to consider a more refined claims methodology such as seriatim case reserves (which estimates aggregate claims reserves based upon the sum of estimates for each individual unsettled case). During 1998, Penn Life implemented a method which substituted case reserves for most disability claims. The new method utilizes more detailed information by policy and by line of business resulting in a more refined estimate. As a result, the accident and health claim reserve for Penn
On June 13, 2000, the Company established a $95.0 million, senior credit facility (the "New Credit Facility") consisting of a $80.0 million term loan and a $15.0 million revolving commitment. The Company used $81.0 million of the new credit facility along with the proceeds from the issuance of SWL Holdings common stock pursuant to the rights offering, Rapoport and Sharpe investments and the extraordinary dividends from its insurance subsidiaries to repay the principal balances of the PennCorp senior and subordinated debt and related interest.
On September 8, 2000, the Company entered into an interest rate cap agreement with a bank to hedge a notional amount of $40.0 million of its outstanding floating rate notes for a term of 21 months effective December 12, 2000. Pursuant to the agreement, the Company will receive interest differential from the counter-party if the London Inter Bank Offering Rate ("LIBOR") exceeds 8.5%. At December 31, 2000, LIBOR was 6.6%. The Company paid a fixed amount of $27,000 which is being amortized over the term of the agreement.
Extraordinary Charges. For the year ended December 31, 1998, the Company realized an after-tax extraordinary charge of $1.7 million which represents the write-off of the deferred financing costs associated with the
refinance of a SW Financial existing note that the Company assumed as a part of the acquisition of SW Financial Controlling Interest.
As a result of the Company's repayment of PennCorp's senior and subordinated debt as part of the recapitalization, the Company realized during 2000 an after-tax extraordinary charge of $2.4 million representing the write-off of deferred costs and a 1% premium paid to holders of the subordinated debt as required by the terms of the indenture due to the early payoff.
Total income taxes (benefits) were allocated as follows for the years ended December 31:
The valuation allowance for deferred tax assets as of December 31, 2000 and 1999, was $92.2 and $83.7 million, respectively. The net change in the total valuation allowance for the years ended December 31, 2000 and 1999, was an increase of $9.0 and $38.9 million, respectively. The valuation allowance associated with tax assets is continually monitored by the Company in light of the dramatic changes in the operating structure and financial results of the Company. As a result of such analysis the Company increased the valuation allowance during 2000 and 1999. In each of the periods, the valuation allowance was incurred as the result of the increased likelihood that certain net operating losses and capital loss carryforwards would not be utilized and the impact or potential impact of a "change in control" as defined by the Internal Revenue Code Section 382. Change of control provisions of Section 382 limit the Company's ability to utilize certain tax benefits including net operating loss carryforwards in future periods.
In assessing the realization of deferred taxes, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Management believes it is more likely than not that the Company will realize the remaining benefits of these deductible differences, net of the existing valuation allowance as of December 31, 2000.
As of December 31, 2000 and 1999, valuation allowances have not been established for the deferred tax asset relating to the unrealized loss on investment securities. Management believes that the recognition of these unrealized losses can be managed through a tax planning strategy of holding the investment securities to maturity or until market conditions improve.
As of December 31, 2000, the Company has non-life consolidated net operating loss carryforwards of approximately $95.8 million for tax purposes which, if not utilized, will begin to expire in 2007. The Company has $104.8 million of non-life capital loss carryforwards which if not utilized, will begin to expire in 2004.
Under provisions of the Life Insurance Company Tax Act of 1959, certain special deductions were allowed to life insurance companies for federal income tax purposes. These special deductions were repealed by the Tax Reform Act of 1984, and the untaxed balances were frozen at their December 31, 1983 levels. These balances aggregate approximately $29.3 million for the Company's life insurance subsidiaries and are subject to taxation if certain levels of premium income or life insurance reserves are not maintained, or if the life insurance companies make excess distributions to shareholders. As it is not currently considered likely that a tax would become due on any such balances, no deferred income taxes have been provided. However, if such tax were to become payable, it would amount to approximately $10.3 million.
Loss per share is computed based on outstanding common shares of the recapitalized company for all years reported as if the recapitalization occurred at the beginning of 1998. As a result, the computation of loss per share does not include the preferred stock dividend requirements.
The following is a reconciliation of net loss applicable to common stock as well as common stock used to compute basic and diluted loss per share for the years ended December 31:
At December 31, 2000, the Company had 15,000,000 shares of $.01 par value common stock authorized and 9,059,000 shares issued and outstanding. The common stock has no preemptive or other subscription rights and there are no conversion rights, redemption or sinking fund provisions with respect to such shares.
A portion of the consideration for the acquisition of the Fickes and Stone Knightsbridge Interests included 173,160 shares of PennCorp's common stock due each of Messrs. Fickes and Stone on April 15, 2001. As a result of the acquisition, common stock and additional paid in capital increased $3,000 and $8.5 million, respectively, for the year ended December 31, 1998. Common shares due Mr. Stone were issued during 1998. These shares were later cancelled for no consideration pursuant to the Recapitalization Plan. Prior to the recapitalization, PennCorp's Board of Directors approved a settlement with Mr. Fickes pursuant to which PennCorp paid him approximately $700,000 to settle all outstanding claims arising from this transaction.
During the year ended December 31, 1999, PennCorp issued 188,235 shares of treasury stock to the chairman of the board of directors of PennCorp as a part of a special bonus award. The result was to decrease additional paid in capital and treasury shares by $1.4 million and $1.6 million, respectively. In addition, PennCorp recorded compensation expense of $115,000.
During 1999, PennCorp issued 71,072 shares to certain members of the board of directors as compensation. During the year ended December 31, 1998, certain employees exercised stock options and warrants resulting in the issuance of 616,572 shares of PennCorp's common stock. The result of such exercises was to increase common stock and additional paid in capital by $2,000 and $2.0 million, respectively.
During the year ended December 31, 1998, 83,260 stock options were exercised and issued to certain employees as discounted restricted common stock of PennCorp with vesting periods of three and four years. During the year ended December 31, 1998, PennCorp recognized $2.8 million of deferred compensation, associated with the issuance of this common stock. For the years ended December 31, 1999 and 1998, PennCorp recognized $180,000 and $2.3 million, respectively, of compensation expense. As of December 31, 1999, the balance of deferred compensation was $304,000 and was recorded as a reduction to shareholders' equity.
All stock options, stock awards and stock warrants granted under PennCorp's various stock plans were canceled at the consummation of the Recapitalization Plan.
The fair value of each option grant used to determine the pro forma amounts indicated in the previous table is estimated on the date of grant using the following weighted average assumptions for 2000, 1999 and 1998:
million. The debenture was issued by PLAIC and is held by SWFC. The PLAIC surplus debenture requires principal and interest payments to be made periodically in amounts sufficient to allow SWL Holdings to meet its cash requirements. These payments are subject to PLAIC's maintenance of capital and surplus of at least $1.2 million in excess of its investment in Southwestern Life. Any deviation from scheduled payments requires regulatory approval.
Statutes in Texas, the domiciliary state of the Company's insurance subsidiaries owned at December 31, 2000, restrict the payment of dividends by insurance companies to the available surplus funds derived from their net profits. The maximum amount of cash dividends that may be declared without regulatory approval in any twelve-month period is the greater of ten percent (10%) of the insurer's statutory surplus, as shown by its last annual statement on file with the Texas Department of Insurance, or one hundred percent (100%) of statutory net gain from operations for the preceding year. In addition, dividends may only be paid from earned surplus. Currently PLAIC relies on dividends and tax sharing payments from Southwestern Life. Because of the larger than normal dividends paid in 2000 associated with the recapitalization, most of the dividends in 2001 will be considered "extraordinary" under Texas law and will require insurance department approval. Any dividend considered "extraordinary" can not be paid until the earlier of: (i) 30 days after the Texas Insurance Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment, or (ii) the Texas Insurance Commissioner shall have approved such payment within the 30 day period. The Department has indicated verbally that it will approve Southwestern Life's requests to pay extraordinary dividends in 2001 but that indication is subject to earned surplus and demonstration of adequate statutory capital and surplus.
In December 1992, the NAIC adopted the RBC for Life and/or Health Insurers Model Act (the "Model Act"). The main purpose of the Model Act is to provide a tool for insurance regulators to evaluate the capital of insurers with respect to the risks assumed by them and determine whether there is a need for possible corrective action with respect to them.
On October 1, 1990, the Company established the PennCorp Financial, Inc. Retirement and Savings Plan, a defined contribution retirement plan, for eligible employees. This plan and the Marketing One Incorporated 401(k) Profit Sharing Plan merged with the Southwestern Financial Services Corporation Savings Investment Plan effective January 1, 1998 and the name of the plan was changed to the PennCorp Financial Group, Inc. Retirement and Savings Plan ("the PennCorp Plan"). The Company is in the process of changing the names of its benefit plans to be under the name of Southwestern Life. Employees are eligible to participate in the plan after six months of employment in which they are credited with 500 hours of service. Participants may contribute from 1 to 15% of pre-tax compensation and/or from 1 to 10% of after tax compensation. Each subsidiary participating in the plan matches each pay-period, 50% of pre-tax contributions up to 6% of compensation. If approved by the Board of Directors, each subsidiary may make a discretionary profit sharing contribution annually on behalf of employees eligible to participate in the plan based on their compensation for the prior plan year. Employee contributions are fully vested at all times. The employer matching contributions made for employees who participated in the PennCorp Plan prior to January 1, 1998 vest at the rate of 50% per calendar year of service. The employer matching contributions made for all other participants and the employer discretionary contribution vests at the rate of 20% per year of service. All participants are fully vested at death, disability or attainment of age 65. The assets of each account are invested at the direction of the participant. Eleven funds with various investment objectives are available to the participants. Distributions are normally made in a lump sum. Participants of the PennCorp Plan prior to January 1, 1998 may elect to receive an annuity in various forms of payment. Expenses related to this plan for years ended December 31, 2000, 1999 and 1998 amounted to $1.0 million, $1.5 million and $3.3 million. During 2000, 1999 and 1998, the sales of Businesses Held for Sale and restructuring constituted a partial plan termination of the PennCorp Plan. As a result, terminated employees became fully vested.
The Company has a bonus plan for officers. The amount available to pay awards for any year is determined by a committee of senior executives of the Company and is subject to the review and recommendation of the Compensation Committee and approval of the Board of Directors of the Company. Awards are based primarily on the achievement of specified operating objectives and the performance of eligible participants. The Company recognized expense of $1.2 million, $1.9 million and $3.4 million under this plan during the years ended December 31, 2000, 1999 and 1998, respectively.
analysis of the accumulated benefit obligation and the liability for accrued postretirement benefits for the year ended December 31, 2000 and 1999:
During 1999 and 1998, PennCorp recorded impairment provisions aggregating $58.5 million and $343.0 million, respectively, associated with Businesses Held for Sale. PennCorp recorded an impairment provision in order to reflect the difference in PennCorp's accounting basis in the Businesses Held for Sale and the fair value of the consideration that PennCorp would be likely to receive for such businesses.
During 2000, 1999 and 1998, the Company's insurance subsidiaries paid management and commitment fees aggregating $204, 000, $488,000 and $ 718,000, respectively, to investment funds managed by a former member of the PennCorp board of directors.
The Complaint alleged that defendants violated the Securities Exchange Act of 1934 by, among other things, issuing a series of materially false and misleading statements and omitting to state certain material facts regarding the Company's financial condition, including the value of certain of its assets, and by failing to timely disclose that the Company was under investigation by the Securities and Exchange Commission (the "SEC"). Plaintiffs sought to recover damages in unspecified amounts on behalf of themselves and all other purchasers of PennCorp's common stock and purchasers of PennCorp's subordinated notes during the period from February 8, 1996 through November 16, 1998.
On October 10, 2000, the SEC notified the Company that its formal investigation into possible violations of the federal securities laws had been terminated and no enforcement action had been recommended.
In May 1998, the North Carolina Attorney General's Office (the "NCAG") initiated an inquiry concerning certain life insurance products historically sold by Security Life and representations allegedly made by Security Life's agents and officers that non-smoker insureds would not be charged cost of insurance after the eighth policy year. The NCAG indicated that Security Life may be estopped to change its practice of not charging the cost of insurance for non-smoking policyholders after the eighth policy year on these policies because of certain representations made by agents and officers of Security Life. Although Security Life has not charged the cost of insurance for non-smoker policyholders after the eighth policy year on these policies, this practice is not guaranteed under the life insurance contracts, which specifically allow Security Life the right to change the cost of insurance rates in accordance with the parameters set forth in the contracts. Security Life responded to the NCAG's inquiry by denying that it is estopped from changing the cost of insurance rates on these policies based on the alleged representations, and is continuing to reserve its contractual rights to charge the cost of insurance on these policies in accordance with the parameters set forth in the life insurance contracts. In June 1998 the NCAG informed Security Life that it could not adjudicate this matter and left it mutually unresolved.
In June 1999 the North Carolina Department of Insurance ("NCDOI") asked Security Life about the status of its practice of not charging cost of insurance after the eighth contract year for non-smokers on these same insurance
On November 5, 1999, Security Life was served with a petition filed in state District Court in Dallas County, Texas, asserting a class action concerning such policies. The petition alleged that Security Life waived the right to charge cost of insurance after the eighth policy year on such non-smoker policies and to increase cost of insurance charges on such smoker policies. The petition alleged Security Life made these waivers through its marketing pieces and statements by its officers. The petition also alleged that not all of the facts were outlined in Security Life's communication to its policyholders describing the voluntary exchange program and therefore that program was deceptive.
The petition asked for declaratory judgment concerning the rights of the plaintiffs and the class of policyholders of such policies and for attorney's fees. The petition also asked for, among other things, an injunction to prevent Security Life from charging cost of insurance on such non-smoker policies or increasing cost of insurance charges on such smoker policies after the eighth policy year, and requested the court to rule that the releases signed by any such policyholders under the voluntary exchange program were null and void and those policyholders who signed the releases be given the option of reinstating their policies. On August 30, 2000, the lawsuit was amended to add a claim that Security Life had improperly reduced the interest rates credited to accumulated values in such policies in an effort to offset losses incurred by Security Life on those policies.
As of December 31, 2000, the Company had incurred $1.3 million of expenses for legal fees to be paid to plaintiffs' counsel and had accrued $4.7 million of additional policy liabilities in connection with the settlement. The recorded liability reflects costs the Company considers likely to be incurred in connection with the settlement based only on known or reasonably estimable or determinable factors. Therefore, the ultimate cost to the Company may be greater than estimated and may have a material adverse effect on the Company's financial condition, results of operations and cash flows.
In 1998, Schnoebelen brought suit in the United States District Court for the Southern District of California in San Diego, California against United Life alleging that United Life had not paid him all of the commissions to which he was entitled and alleging various contractual and tortious causes of action. When PennCorp sold United Life in 1999, it and PLAIC indemnified the buyer against certain losses resulting from this lawsuit and retained the responsibility for defending it.
Both Southwestern Life and the agent co-defendant timely filed answers denying all allegations made in the original petition and contesting venue for the action, and Southwestern Life subsequently filed a notice of removal removing the case to the United States District Court for the Eastern District of Texas located in Beaumont, Texas.
Only limited written discovery has been taken in this case to date. Southwestern Life denies any and all allegations made in the petition and intends to defend this case vigorously. There can be no assurance that Southwestern Life will be able to defend or resolve the issues presented in this action successfully or at all or that any verdict or other resolution would not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
against the demand and any subsequent litigation arising therefrom. There can be no assurance that Southwestern Life will be able to defend or resolve the issues presented in this matter successfully or at all or that any verdict or other resolution would not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Each of the definitive purchase and sale agreements the Company has consummated for Professional, the United Life Assets, KIVEX, the Career Sales Division, the Payroll Sales Division and Marketing One contain indemnification provisions which survive the closing of each sales transaction for varying periods of time. The indemnification provisions would be invoked by the purchasers should the Company be found in breach of certain representation and warranty provisions or upon the occurrence of specified events contained in the purchase and sale agreements. The Company has purchased representations and warranty insurance to cover potential indemnification claims arising under each of the definitive purchase and sale agreements in an aggregate amount of $20.0 million for all indemnification claims.
Southwestern Life is required, at least annually, to perform cash flow and asset adequacy analysis under differing interest rate scenarios. Based upon the results of these tests, Southwestern Life has determined that additional statutory reserves were not needed at December 31, 2000.
The Company's insurance subsidiaries at December 31, 2000 had outstanding commitments to invest up to $4.8 million in various limited partnership funds and other investments.
As of December 31, 2000, the Company sold substantially all of the mortgages originally held by United Life but retained by the Company as a part of the sale of the United Life Assets. The Company may be obligated to repurchase certain of the mortgages sold. At December 31, 2000, the Company had established a $1.2 million liability related to these contingencies.
In the normal course of business, the Company reinsures portions of certain policies that it underwrites to limit disproportionate risks. The Company retains varying amounts of individual insurance up to a maximum retention of $500,000 on any life. Amounts not retained are ceded to other insurance enterprises or reinsurers on an automatic or facultative basis. The Company cedes varying amounts of certain accident and health policies up to 80%.
The Company has developed restructuring plans to realign or consolidate certain operations resulting in restructuring costs incurred during 2000 and 1999, the fourth quarter of 1998 and the first quarter of 1998.
The fourth quarter 1998 Plan provided for the termination of 43 employees, including substantially all of the executive and administrative employees in PennCorp's Bethesda and New York offices, based on the decision to shut down the Bethesda and New York offices by May 31, 1999. Severance payments under the fourth quarter 1998 Plan were completed in 2000. PennCorp incurred costs of $4.0 million, $1.4 million and $1.1 million which were charged against the accrual during 1998, 1999 and 2000, respectively, for terminated employees.
The fourth quarter 1998 Plan recognized abandoned leasehold improvement costs in connection with the Company's plan to sublease or vacate the New York offices. PennCorp expensed $3.0 million principally as a result of abandoning the New York leased property.
Approximately 120 and 39 people, respectively, were terminated as a result of the decision to transfer all operations of Union Bankers to Raleigh and transfer operations of United Life from Baton Rouge to Dallas. In addition, PennCorp restructured certain of the operations in Raleigh. Certain employees in the areas of customer services, information technology, actuarial, legal, human resources and other policyholder service areas, totaling 54 people, were terminated under the Raleigh portion of the restructuring plan. The Company recognized severance costs totaling $3.8 million. The Company charged $297,000 and $4.4 million against the severance accrual during 1999 and 1998, respectively, as the result of termination payments. In addition, during 1999 and 1998 the Company adjusted the severance accrual in the amount of $322,000 and $405,000, respectively, due to the Company paying less severance costs as a result of natural attrition and other factors such as inter-company transfers of employees. During 1998, the Company also increased the severance accrual by $1.6 million as a result of the decision to terminate all 54 of Security Life's Raleigh employees.
The following methods and assumptions are used by the Company in estimating its fair value disclosures for financial instruments:
Fixed Maturities Available for Sale and Equity Securities: The fair values for fixed maturities available for sale are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services or are estimated based on expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. The fair values for equity securities are based on quoted market prices.
Notes Payable: The carrying value for outstanding notes payable other than the senior subordinated notes approximates the fair value as they carry variable interest rates of interest which adjust at least every 90 days. The fair value of the senior subordinated notes as of December 31, 1999 was determined based upon quotes from market makers.
Universal Life and Investment Contract Liabilities: The fair value of accumulation products approximates their cash surrender value.
The Company's fourth quarter 2000 loss primarily resulted from a decrease in deferred policy acquisition costs of approximately $6.5 million and an increase in policy liabilities of approximately $1.0 million as a result of correcting the method of calculation to properly incorporate the effects of reinsurance on certain term life policies. These adjustments resulted in a loss of approximately $7.5 million during the fourth quarter.