American Indemnity Company, a subsidiary of American Indemnity Financial Corporation, owns two adjacent and connected buildings in Galveston, Texas, which serve as its home office. One building is seven stories and the other is three stories. These buildings are occupied primarily by American Indemnity Company with a small amount of office space leased to tenants.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001, COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
For the year ended December 31, 2001, our consolidated net operating income, which excludes net realized gains and losses on securities, was $24,214,000, or $2.41 per share, compared to $16,713,000, or $1.67 per share, for the year ended December 31, 2000. The results of our property and casualty segment improved, due primarily to an increase in premiums earned. Our life insurance segment also contributed to our earnings growth, as annuity deposits drove an increase in net investment income.
The rates we pay for reinsurance increased on our reinsurance contracts that renewed on January 1, 2002, and those contracts now limit or exclude coverage for terrorist activities. We will utilize terrorist exclusions on our direct policies, as such exclusions are approved by state regulators. We expect price increases to occur in the property and casualty insurance industry due to the anticipated industry-wide increase in reinsurance rates, and we have already begun our own price increases.
We utilize premiums collected to pay policyholder claims and expenses. As a measure of our underwriting profitability, we calculate a statutory “combined ratio,” which is the sum of two ratios, the loss ratio and the expense ratio. The loss ratio is calculated by dividing net losses and net loss adjustment expenses incurred by net premiums earned. The expense ratio is calculated by dividing underwriting expenses incurred by net premiums written, adjusting for policyholder dividends. Generally, if the statutory combined ratio is below 100 percent, an underwriting profit exists; if the statutory combined ratio is above 100 percent, an underwriting loss is reported. In 2001, our statutory combined ratio was 104.7 percent, which compares favorably with the industry statutory combined ratio of 117.0 percent, as estimated by A.M. Best Company, a leading insurance industry rating agency and data provider. Our statutory combined ratio was 106.1 percent in 2000. After-tax charges in 2001 for catastrophes, including the September 11 events, were $17,524,000, or $1.75 per share, compared to $15,778,000, or $1.57 per share, in 2000. Without the effect of catastrophes, our statutory combined ratio was 97.0 percent in 2001 and 98.2 percent in 2000.
We calculated our statutory combined ratios using financial statements prepared according to statutory accounting principles. We are required to use statutory
accounting principles when preparing and reporting our financial results to the state insurance departments in those states where we are domiciled. Statutory accounting principles focus on policyholders’ surplus and solvency of an insurer and are generally more conservative than generally accepted accounting principles.
To establish loss and loss adjustment expense reserves, we make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in our financial statements. Actual results could differ materially from those estimates. The estimate of these reserves is subjective and complex and requires us to make estimates about the future payout of claims, which is inherently uncertain. When we establish and adjust reserves, we do so given our knowledge of the circumstances and claim facts. Historically, we have over-estimated our reserves for losses on an aggregate basis. We attribute this over-estimation to our diligent approach to reserving and our rigorous claims adjusting and settlement processes. To the extent that we have over- or under-estimated our loss and loss adjustment expense reserves, we adjust the reserves in the period the over- or under-estimate is determined.
In 2001, our statutory loss ratio was 74.4 percent, compared to 74.2 percent in 2000. The “pure” loss ratio, which is net losses incurred without loss adjustment expenses incurred divided by net premiums earned, was 61.4 percent in 2001 and 59.9 percent in 2000. We use the pure loss ratio to measure our profitability by line and make pricing and underwriting decisions based upon these results. In the following table, we present the pure loss ratio for each of the last three years for each of our lines of business.
”Fire and allied lines” in this table includes fire, allied lines, homeowners, commercial multiple peril and inland marine.
Other liability insurance covers businesses for liability for bodily injury and property damage arising from general business operations, accidents on their premises and products manufactured or sold. Our pure loss ratio in the other liability line of business has been favorable when compared with our other lines of business. Our pure loss ratio was 36.2 percent in 2001 and 32.3 percent in 2000. Appropriate pricing, and restrictive underwriting guidelines have contributed to the favorable results in the other liability line of business.
The pure loss ratio for our workers’ compensation line of business deteriorated to 72.4 percent in 2001, from 48.6 percent in 2000. Results in 2000 were unusually favorable because we settled many workers’ compensation cases favorably, which led to lower payments than were reserved. In 2001, the frequency and severity of the claims reported to us increased, and many of our workers’ compensation cases have not settled favorably. We carefully continue to underwrite this line of business and have further tightened our eligibility guidelines.
Our fidelity and surety bond business had some deterioration in 2001 when compared to 2000. The pure loss ratio was 14.1 percent in 2001 and 11.8 percent in 2000. This line continues to be our most profitable. However, for the past several years a soft surety insurance market and competitive pressures have contributed to depressed rates for this line of business. We have recently initiated rate increases and stricter underwriting guidelines to address the conditions in this line.
annuity and universal life policyholder accounts, compared to $42,410,000 in 2000. We establish our interest crediting rates based upon current market conditions and maintain a favorable “spread” because our average crediting rates on our policyholder account balances are less than the ratio of net investment income to average invested assets. We decreased interest crediting rates during 2001 for new deposits. The increase in our expense for interest on policyholders’ accounts for the year was primarily a result of the interest credited on existing account balances. We believe that annuity growth continues to be driven by our ability to distribute and service this product as well as by general market conditions during the current year, as private investors shift their focus from variable to non-variable annuity products.
Premium rate increases and new annuity deposits resulted in additional funds to be invested in 2001. This led to growth in our investment portfolio and resulted in an increase in net investment income earned during the year. In 2001, net investment income was $98,909,000, compared to $86,867,000 in 2000, an increase of 14 percent. More than 90 percent of our investment income originates from interest on fixed income securities. Our remaining investment income is derived from dividends on equity securities, interest on other long-term investments, interest on policy loans and rent earned from tenants in our home office. The investment yield, which is investment income divided by average invested assets, was 6.7 percent in 2001 and 6.6 percent in 2000.
Our effective income tax rate of 16 percent was less than the applicable federal tax rate of 35 percent due primarily to our portfolio of tax-deductible securities and a reduction in deferred tax liabilities.
In 2001, we eliminated a deferred tax liability of $1,143,000 which we had established in connection with a Revenue Agent Review and other tax contingencies related to the 1999 purchase of American Indemnity Financial Corporation. The Revenue Agent Review has been settled, and we believe that the reserve for other tax contingencies is unnecessary at December 31, 2001. The effect of the elimination was a reduction of deferred tax liabilities and a reduction in federal income tax expense of $1,143,000.
At December 31, 2001, we had $26,605,000 of net operating loss carryforwards acquired in the purchase of American Indemnity Financial Corporation in August 1999. The utilization of these net operating losses is limited by the Internal Revenue Code. The net operating losses began to expire prior to our purchase of American Indemnity Financial Corporation and will continue to expire in various future years through 2019. Realization of the deferred tax asset associated with the net operating loss carryforwards is dependent on generating sufficient taxable income to utilize the net operating losses prior to their expiration.
Due to uncertainty of the realizable value of the deferred tax asset, we recorded a valuation allowance of $8,934,000. The valuation allowance recorded on our deferred tax asset decreased $2,436,000 from 2000, due primarily to the utilization of net operating loss carryforwards. In the future, if we can use the net operating losses acquired in the purchase of American Indemnity Financial Corporation, the related reduction in the valuation allowance will be recorded as a reduction to goodwill until goodwill has been eliminated, at which point the reduction in the allowance will reduce federal income tax expense.
For the year ended December 31, 2000, net income was $15,527,000, or $1.55 per share, compared to $15,384,000, or $1.53 per share, for 1999. A hailstorm occurring in New Orleans on January 23, 2000 contributed $3,829,000 of after-tax net losses to the 2000 results. Net operating income, which is after-tax net income, excluding realized investment gains (losses) and other income, improved in 2000 to $16,713,000, or $1.67 per share, from $13,476,000, or $1.34 per share, in the prior year. This improvement resulted primarily from increased premium revenue and a reduction of operating expenses due to the consolidation of certain of our functions. However, after-tax realized investment losses and other income of $(1,186,000) in 2000, compared to after-tax realized investment gains and other income of $1,908,000 in 1999, weakened net income for the year ended December 31, 2000. In August 1999, we acquired American Indemnity Financial Corporation, a holding company that owns four property and casualty insurance companies. The year 2000 results included in our Consolidated Financial Statements include twelve months of results of operations of American Indemnity Financial Corporation. The 1999 results include five months of results of operations of American Indemnity Financial Corporation.
B) The fidelity and surety line of business had a pure loss ratio of 11.8 percent in 2000, compared to 2.1 percent in 1999. Despite this increase, our results in the fidelity and surety line were considerably better in 2000 than those reported for the fidelity and surety industry by A.M. Best Company. The 2000 pure loss ratio for the fidelity and surety industry was 31.3 percent. The continued growth of construction projects, coupled with shortages in the construction labor market, contributed to increased losses in these lines, for us as well as for the industry as a whole.
Our life segment’s largest expenditure is interest credited to annuities and universal life policies. In 2000, two primary factors, growth in new and existing account balances and higher interest rates, contributed to the increase in interest credited of $42,410,000, which was a 31 percent increase from $32,286,000 in 1999.
We reported net investment income of $86,867,000 in 2000, compared to $75,317,000 in 1999, primarily as a result of growth in our investment portfolio. The portfolio balance grew by $124,761,000. Over 90 percent of our net investment income originated in 2000 from interest on fixed income securities. We derived the remaining amount from dividends on equity securities, interest on other long-term investments, interest on policy loans and rent earned from tenants in our home office. The investment yield, which is investment income divided by average invested assets, was 6.6 percent in 2000 and 6.5 percent in 1999.
Our realized investment gains (losses) and other income, after-tax, was $(1,186,000) in 2000, compared to $1,908,000 in 1999. Losses we recognized on the sale of securities held by the American Indemnity group of companies and two security write-downs were the major factors of the decline in 2000. We included as other income interest income of $257,000 in 2000 and $632,000 in 1999. This interest income related to a refund in connection with a federal income tax Revenue Agent Review for previous tax years.
Our provision for Federal income taxes was $1,822,000 for 2000 and $1,834,000 for 1999. Pre-tax income was very similar between the two years, as were the components of federal income tax expense. At December 31, 2000, we had $29,709,000 of net operating loss carryforwards, the utilization of which is limited by the Internal Revenue Code. These net operating losses were acquired in the purchase of American Indemnity Financial Corporation in August 1999 and will expire in various future years through 2019. We recorded a net deferred tax liability of $12,245,000 at December 31, 2000 and $7,430,000 at December 31, 1999. The deferred tax liability increased primarily due to net unrealized appreciation on investment securities. We had a valuation allowance of $11,370,000 as of December 31, 2000 related to American Indemnity Financial Corporation net operating losses. The valuation allowance
As of December 31, 2001, 89 percent of our fixed income securities were investment grade, as defined by the National Association of Insurance Commissioners Securities Valuation Office, and had ratings of Class 1 or Class 2. We are able to hold a majority of our fixed income securities to maturity, but we have moved toward an increased concentration of available-for-sale fixed income securities to take advantage of constantly changing market conditions. At December 31, 2001, $1,142,614,000, or 83 percent, of our fixed income security portfolio was classified as available-for-sale, compared to $928,947,000, or 77 percent, at December 31, 2000. Our remaining fixed income securities are classified as held-to-maturity and are reported at amortized cost. We did not have securities classified as trading securities at December 31, 2001 or December 31, 2000.
We defer and capitalize, to the extent recoverable, commissions and other costs of underwriting insurance, which vary with and are primarily related to the production of our property and casualty lines of business. To attain a matching of revenue to expense, the deferred acquisition costs asset is amortized over the life of the insurance policies written. Growth in premiums written will typically result in an increase of the deferred acquisition costs asset. However, the deferred acquisition costs asset is limited by unprofitability in individual lines of business. Therefore, if a line of business is unprofitable, we are limited in the underwriting expenses, if any, that we may capitalize and amortize for that line of business. In addition, a premium deficiency will be recognized if the expected loss ratio for a line of business exceeds 100 percent. This deficiency is charged against unamortized deferred acquisition costs to the extent necessary to eliminate the deficiency.
Our life insurance segment’s deferred acquisition costs asset decreased between December 31, 2000 and December 31, 2001 by $1,624,000, or 2 percent. To date, our experience has generally been consistent or favorable to the assumptions used in determining
The Consolidated Financial Statements have been prepared on the basis of generally accepted accounting principles, which differ in some respects from those followed in preparing our statutory reports to insurance regulatory authorities. Our stand-alone statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the Insurance Departments of the states in which we are domiciled (“statutory accounting practices”). Effective January 1, 2001, these states have adopted the National Association of Insurance Commissioners’ codified statutory accounting practices. Refer to Note 8 for further discussion.
Certain amounts included in the Consolidated Financial Statements for prior years have been reclassified to conform with the 2001 financial statement presentation.
Certain costs of underwriting new business, principally commissions, premium taxes and variable underwriting and policy issue expenses, have been deferred. Such costs are being amortized as premium revenue is being recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, losses and expenses incurred, and certain other costs expected to be incurred as the premium is earned.
The costs of acquiring new life business, principally commissions and certain variable underwriting, agency and policy issue expenses, have been deferred. These costs are being amortized to income over the premium paying period of the related traditional policies in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue, and over the anticipated lives of nontraditional policies in proportion to the ratio of the expected annual gross margins to the expected total gross margins. The expected premium revenue and gross margins are based upon the same mortality and withdrawal assumptions used in determining future policy benefits. For nontraditional policies, changes in the amount or timing of expected gross margins will result in adjustment to the cumulative amortization of these costs.
The effect on the amortization of deferred policy acquisition costs for revisions to estimated gross
Investments in held-to-maturity fixed income securities are recorded at amortized cost. We have the ability to hold these investments until maturity. Available-for-sale fixed income securities, equity securities and other long-term investments are recorded at fair value. Policy loans and short-term investments are recorded at cost. Included in investments at December 31, 2001 and 2000, are securities on deposit with various regulatory authorities, as required by law, with carrying values of $1,042,341,000 and $896,059,000, respectively.
In 2001 and 2000, we wrote down a small amount of holdings in our fixed income portfolio as a result of other-than-temporary declines in market value and recognized a net realized loss, before tax, of $3,841,000 in 2001 and $2,932,000 in 2000. We continue to review the other-than-temporarily impaired securities for appropriate valuation on an ongoing basis.
For purposes of reporting cash flows, cash and cash equivalents include cash and non-negotiable certificates of deposit with original maturities of three months or less. Negative cash balances are included in accrued expenses and other liabilities. Net income taxes paid during 2001, 2000 and 1999 were $4,280,000, $2,088,000 and $505,000, respectively. Through December 31, 2000, tax and interest payments received in connection with the settlement of a federal income tax RAR were $1,160,000 and $889,000, respectively. There were no significant payments of interest other than interest credited to policyholders’ accounts in 2001, 2000 or 1999.
In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” which becomes effective January 1, 2002. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. Additionally, an acquired intangible asset should be recognized separately from goodwill if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. Recognized intangible assets (other than those with an indefinite life) will then be amortized over their estimated useful lives. The adoption of SFAS No. 141 will have no effect on our Consolidated Financial Statements.
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which becomes effective January 1, 2002. SFAS No. 142 eliminates the amortization of goodwill over its estimated useful life, but requires goodwill to be subject to at least an annual assessment for impairment by applying a fair-value-based test.We are currently evaluating the impact that the adoption of SFAS No. 142 will have on our results of operations and financial position.
In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which becomes effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. We have not yet determined the impact that the adoption of this statement will have on our Consolidated Financial Statements.
A reconciliation of the amortized cost (cost for equity securities) to fair values of investments in held-to-maturity and available-for-sale fixed income securities, equity securities and other long-term investments as of December 31, 2001 and 2000 is as follows.
Proceeds from sales of available-for-sale investments during 2001, 2000 and 1999 were $74,921,000, $68,963,000, and $35,653,000, respectively. Gross gains of $4,401,000, $8,172,000, and $2,920,000, respectively, were realized on those sales. Gross losses of $4,948,000, $10,987,000 and $895,000, respectively, were realized on those sales in 2001, 2000 and 1999.
The net investment income for the years ended December 31, 2001, 2000 and 1999 is composed of the following.
Policy loans are carried at the actual amount loaned to the policyholder. No policy loans are made for amounts in excess of the cash surrender value of the related policy. Accordingly, in all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies and by the policyholders’ account balance for interest-sensitive policies.
We are not aware of any significant contingent liabilities as far as environmental issues are concerned. Because of the type of property coverage we write, there exists the potential for exposure to environmental pollution and asbestos claims. Our underwriters are aware of these exposures and use limited riders or endorsements to limit exposure.
The table below provides an analysis of changes in our life policy claim liabilities for 2001 and 2000 (net of reinsurance amounts). United Life's policy claim liabilities are determined using actuarial estimates. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions for such things as medical costs, environmental hazards and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term.
The State of Iowa Insurance Department governs the amount of dividends that may be paid to stockholders without prior approval by the Insurance Department. Based on these restrictions, we could make a maximum of $150,257,000 in dividend distributions to stockholders in 2002. Dividend payments by the insurance subsidiaries to United Fire are subject to similar restrictions in the states in which they are domiciled. We received $275,000 of dividends from our subsidiaries in 2001, compared to none in 2000.
These rates were lower than the applicable federal tax rates of 35 percent, due primarily to our portfolio of tax-exempt securities and a reduction in contingent tax liability.
The defined benefit pension plan covers substantially all employees. Under this plan, retirement benefits are primarily a function of the number of years of service and the level of compensation. It is our policy to fund this plan on a current basis to the extent deductible under existing tax regulations. We used December 31 as the date for measuring plan assets and liabilities.
Effective January 1, 2000, the postretirement health care plans of United Fire and American Indemnity Financial Corporation were merged. This merger brought all non-retired American Indemnity Financial Corporation employees into our plan; retired American Indemnity Financial Corporation employees were not affected by this merger and will retain their full benefits accrued under the American Indemnity Financial Corporation plan. The merged defined benefit postretirement health care plan covers substantially all benefit-eligible employees. The plan pays stated percentages of most necessary medical and dental expenses incurred by retirees, after subtracting payments by Medicare or other providers and after the stated deductible has been met. Participants become eligible for the benefits if they retire from United Fire after reaching age 55 with 10 or more years of participation in the plan and 10 or more years of employment with the plan sponsor. The plan is contributory, with retiree contributions generally adjusted annually.
The following table provides a reconciliation of the changes in both plans’ benefit obligations and fair value of plan assets and a statement of the funded status for 2001 and 2000. The table includes the obligations and fair values acquired in connection with the purchase of American Indemnity Financial Corporation. The amounts related to the acquisition are based on valuations as of December 31, 1999, which approximates the valuation had it been measured as of the acquisition date.
The following table provides the components of net periodic benefit cost for the plans for 2001, 2000 and 1999.
The assumptions used in the measurement of our benefit obligations are shown in the following table.
We have a profit-sharing plan in which employees who meet service requirements are eligible to participate. The amount of our contribution is discretionary and is determined annually, but cannot exceed the amount deductible for federal income tax purposes. Our contribution to the plan for the years ended December 31, 2001, 2000 and 1999, was $1,728,000, $793,000 and $503,000, respectively.
We also have an Employee Stock Ownership Plan (“ESOP”) for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the plan upon completion of one year of service, meeting the hourly requirements with United Fire and attaining age 21. Contributions to this plan are made at the discretion of United Fire. These contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. Contributions are made in stock or cash, which is used by the Trustee to acquire shares of United Fire stock to allocate to participants’ accounts. As of December 31, 2001, 2000 and 1999, the ESOP owned 127,190, 127,386 and 123,733 shares of Company stock, respectively. Shares owned by the ESOP are included in shares issued and outstanding for purposes of calculating earnings per share and dividends paid on the shares are charged to retained earnings. We made contributions to the plan of $60,000, $50,000 and $60,000 in 2001, 2000 and 1999 respectively.
We have a nonqualified employee stock option plan, which authorizes the issuance of up to 500,000 shares of United Fire common stock to employees. The plan is administered by the Board of Directors. The Board has the authority to determine which employees will receive options, when options will be granted, and the terms and conditions of the options. The Board may also take any action it deems necessary and appropriate for the administration of the plan. Pursuant to the plan, the Board may, at its sole discretion, grant options to any employees of United Fire or any of its affiliated companies, including any director. These options are granted to buy shares of United Fire’s stock at the market value of the stock on the date of grant. The options vest and are exercisable in installments of 20 percent of the number of shares covered by the option award each year from the grant date. To the extent not exercised, installments shall accumulate and be exercisable by the optionee, in whole or in part, in any subsequent year included in the option period, but not later than 10 years from the grant date.
Options granted pursuant to the plan may not be sold, pledged, assigned or transferred by the optionee. In cases of termination, any unexercised accrued installments of the option granted under the plan to such terminated optionee shall expire and become unexercisable as of the earlier of: (a) the expiration of the applicable option period, or (b) 30 days after the termination of employment occurs, provided however, that we may, in our discretion, extend said date up to and including a date one year following such termination of employment. In cases of death or disability, any unexercised accrued installments of the option granted under the plan to such optionee shall expire and become unexercisable as of the earlier of: (a) the applicable option expiration date, or (b) the first anniversary of the date of death of such optionee (if applicable), or (c) the first anniversary of the date of the termination of employment by reason of disability (if applicable).
There were no options exercised, forfeited or expired during 2001 and 2000.
The following table summarizes information regarding the stock options outstanding at December 31, 2001.
We have two reportable business segments in our operations; property and casualty insurance and life insurance. The property and casualty segment has five locations from which it conducts its business. All offices target a similar customer base and market the same products, using the same marketing strategies, and are therefore aggregated. The life insurance segment operates from our home office. The accounting policies of the segments are the same as those described in Significant Accounting Policies in Note 1. The two segments are evaluated by management, based on both a statutory and a generally accepted accounting principles basis. Results are analyzed, based on profitability (i.e. loss ratios), expenses and return on equity. Since all insurance is sold domestically, we have no revenues allocable to foreign operations. The analysis that follows is reported on a generally accepted accounting principles basis and is reconciled to our Consolidated Financial Statements.
“Fire and allied lines” in this table includes fire, allied lines, homeowners, commercial multiple peril and inland marine.
Cash dividends per common share of $.72 and $.71 were declared in 2001 and 2000, respectively. In the calculation of 2001 earnings per share, certain of the stock options granted to employees were included in the computation of diluted earnings per share because the option exercise prices were less than the weighted average market price of the common shares over the period the options were outstanding during 2001. No options were included in the calculation of diluted earnings per share as of December 31, 2000, because the option exercise prices were greater than the weighted average market price of the common shares over the period the options were outstanding during 2000. All options were still outstanding as of December 31, 2001 and 2000.
The change in our stockholders’ equity from transactions and other events and circumstances from non-shareholder sources is referred to as comprehensive income. It includes all changes in equity during a period except those resulting from investments by shareholders and dividends to shareholders.
On August 10, 1999, we acquired American Indemnity Financial Corporation as a wholly owned subsidiary for approximately $30,211,000 in cash in exchange for 1,962,410 shares of common stock. The transaction was accounted for using the purchase method of accounting. Common stockholders of American Indemnity Financial Corporation received approximately $14.35 per share of common stock at the closing of the transaction and deferred consideration of up to $1.00 per share, subject to adjustments relating to indemnities. The purchase price paid for American Indemnity Financial Corporation has been allocated to the assets acquired and liabilities assumed, based on their fair values, and the excess purchase price has been recorded as goodwill. Goodwill of $7,846,000 is being amortized on a straight-line basis for a period of 10 years. An escrow account with a balance of $1,990,000 is included in our Consolidated Balance Sheets in other assets for potential payment of the deferred consideration. Any payments out of this account to American Indemnity Financial Corporation shareholders will be deemed additional consideration, and as such, would be recorded as additional goodwill relating to the purchase of American Indemnity Financial Corporation.
In connection with the purchase, we developed a plan (the “exit plan”) to close certain branches and involuntarily terminate certain employees of American Indemnity Financial Corporation. A liability of $972,000, to reflect employee termination benefits of $626,000 and future contractual lease payments related to abandoned facilities of $346,000, was included in the allocation of the purchase price. The exit plan was completed by December 31, 1999. All of this liability was paid as of December 31, 2000.
The 1999 amounts in the consolidated statements of operations include American Indemnity Financial Corporation’s results for the period of August 10, 1999, through December 31, 1999. The following schedule summarizes the assets acquired and the liabilities assumed as of August 10, 1999.
The following table presents the unaudited pro forma results of operations for 1999 had the acquisition occurred on January 1, 1999.
At December 31, 2001, our future minimum rental payments are as follows (in thousands).
Our audit was made for the purpose of forming an opinion on the basic financial statements of the Company taken as a whole. The supplementary schedules (Schedule III-Supplementary Insurance Information, Schedule IV-Reinsurance, Schedule V-Valuation and Qualifying Accounts, and Schedule VI-Supplemental Information Concerning Property and Casualty Insurance Operations) are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Certain amounts included in this schedule for earlier years have been reclassified to conform with the 2001 financial statement presentation.