The following table sets forth selected financial information for the Company. The selected financial information as of and for each of the years presented has been derived from the Company’s audited financial statements and in the opinion of management, presents fairly such financial information in conformity with GAAP except as described in Note 1 to the Selected Financial Information. The selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the Company’s financial statements and the notes thereto and the other financial information included elsewhere herein.
Includes writedowns for impairment and net changes in valuation 	allowances on real estate, mortgage loans and investment 	securities aggregating $5.5 million, $0.9 million, $(0.1) 	million, $(0.3) million, and $0.4 million for the years ended 	December 31, 2000, 1999, 1998, 1997, and 1996, respectively.
The Company derives its revenues principally from: (i) insurance, administrative and surrender charges on universal life and annuity products, (ii) asset management fees from separate account products, (iii) premiums on non-participating term life insurance, and (iv) net investment income and realized capital gains on general account assets. The Company’s expenses consist of insurance benefits provided to policyholders, interest credited on policyholders’ account balances, the cost of selling and servicing the various products sold by the Company, including commissions to sales representatives (net of any deferrals), and general business expenses.
Universal life (“UL”) and investment-type product fees were $158.2 million for 2000, an increase of $15.1 million, or 10.6%, from $143.1 million reported in the comparable prior year period. The principal reasons for the change from period to period are as follows:
The increases in VUL and UL were partially offset by a decrease 	in flexible premium variable annuity (“FPVA”) product 	fees which were $63.1 million for 2000, a decrease of $1.3 	million, from $64.4 million reported in the comparable prior 	year period, due to declines and fund values. The decline in 	annuity fund values was primarily due to increased competition 	in the marketplace, the introduction by some companies of bonus 	annuities, which the Company elected not to offer, and the aging 	of the block of business. The Company has taken actions to 	reverse this trend, including changes in agent compensation 	plans, the establishment of a conservation unit, introduction of 	an exchange program which allows policyholders to exchange their 	old policies to a new product series, and increased education 	and training of the Company’s career agency sales force to 	emphasize the value of our annuity line compared to the 	competition.
Premium revenue was $37.3 million for 2000, an increase of $28.1 million from $9.2 million reported in the comparable prior year period. Approximately $22.2 million of the increase was a result of increased cessions under a modified co-insurance agreement between U.S. Financial Life (“USFL”) and the Company. The additional increase is a result of renewal premiums relating to level term business, which has been trending upward since the Company began offering this product during the fourth quarter of 1997.
Net investment income was $92.7 million for 2000, a decrease of $2.0 million, or 2.1%, from $94.7 million reported in the comparable prior year period. The decrease was primarily related to a decrease in the average balances of invested assets of $31.9 million, which was partially offset by a 2 basis point increase in portfolio yields.
Other income was $12.1 million for the year ended December 31, 2000 compared to and $ 7.6 million for the year ended December 31, 1999, an increase of $4.5 million, or 59.2%. The increase is primarily due to higher funds received on supplementary contracts.
Universal life (“UL”) and investment-type product fees were $143.1 million for 1999, an increase of $21.1 million, or 17.3%, from $122.0 million reported in the comparable prior year period. The principal reasons for the change from period to period are as follows:
Flexible premium variable annuity (“FPVA”) product 	fees were $64.4 million for 1999, an increase of $8.4 million, 	from $56.0 million reported in the comparable prior year period. 	The increase in FPVA fees is primarily due to surrender charges, 	which were $7.1 million higher than in 1998. FPVA account value 	increased $103.5 million during 1999 to $4,279.6 million, as 	compared to $4,176.1 million in 1998. The increase in account 	value in 1999 resulted from new sales and other deposits of 	$378.5 million and market appreciation of $450.4 million, offset 	by approximately $725.4 million in withdrawals and surrenders. 	New sales of variable annuities during 1999 were $379 million, a 	decrease of $151 million, or 28.5%, from $529 million reported 	for 1998. The decline in annuity sales was primarily due to: 	(i) increased competition in the marketplace, (ii) the 	introduction by some companies of bonus annuities, which the 	Company elected not to offer, and (iii) delays in obtaining 	approval of the Company’s new annuity products in certain 	key states. During 1999, the Company took actions to reverse 	this trend, including changes in agent compensation plans, 	product improvements (including the addition of new fund options 	offered through the Company’s annuities), and increased 	education and training of the Company’s career agency sales 	force to emphasize the value of our annuity line compared to the 	competition.
UL product fees were $50.9 million for 1999, a decrease of $2.4 	million, from $53.3 million reported in the comparable prior 	year period. The decrease is primarily due to reduced loading 	and surrender charges of $2.0 million and lower unearned revenue 	(amount assigned to the policyholders for future services) of 	$0.5 million.
Premium revenue was $9.2 million for 1999, an increase of $7.5 million from $1.7 million reported in the comparable prior year period. Approximately $4.0 million of the increase was a result of a modified co-insurance agreement between U.S. Financial Life (“USFL”) and the Company. The additional increase is a result of renewal premiums and new premiums relating to level term business, which has been trending upward since the Company began offering this product during the fourth quarter of 1997.
Benefits to policyholders were $43.6 million for 1999, an increase of $8.7 million, or 24.9%, from $34.9 million reported in the comparable prior year period. The increase is primarily a result of higher UL death claims of $5.1 million to $30.8 million in 1999 from $25.7 million in 1998. Corporate-owned life insurance (“COLI”), a new product introduced in 1998, death claims (before reinsurance) increased to $2.9 million in 1999 from $0.0 million in 1998.
The following table sets forth the withdrawal characteristics and the surrender and withdrawal experience of the Company’s total annuity reserves and deposit liabilities at December 31, 2000 and 1999.
Annuity surrenders have decreased for the year ended December 31, 2000 and 1999 as compared to the comparable prior year periods primarily due to the aging of the block of business and consequent decrease in surrender charge rates and due to an increase in competition. In July, 1999, the Company responded to this trend by enhancing its variable annuity products by offering new investment fund choices. The Company has also embarked on a conservation program. In addition, the Company has established a special conservation unit and offers policyholders the opportunity to exchange their contracts for a new product series. The positive efforts are reflected in the decrease in surrender activity in 2000 as compared to 1999. See “New Business Information.”
At December 31, 2000, the Company had commitments to issue $4.8 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from 7.35% to 8.20%. The Company had no commitments outstanding for private fixed maturity securities as of December 31, 2000. In addition, at that date the Company had no outstanding commitments to issue any fixed rate commercial mortgage loans.
Of the $49.0 million of currently outstanding commercial mortgage loans in the Company’s investment portfolio at December 31, 2000, $3.6 million, $8.7 million and $0.0 million are scheduled to mature in 2001, 2002 and 2003, respectively. See “Investments - Mortgage Loans - Commercial Mortgage Loans”.
Aggregate contractual debt service payments on the Company’s debt at December 31, 2000, for 2001 and the succeeding four years are $5.4 million each year and $44.4 million thereafter.
The Company had total assets at December 31, 2000 of approximately $5.9 billion. Of the Company’s total assets at such date, approximately $1.8 billion represented assets held in the Company’s general account and approximately $4.1 billion were held in the Company’s separate accounts, for which the Company does not generally bear investment risk.
Fixed maturities consist of publicly traded debt securities and privately placed debt securities and represented 77.2% and 80.0% of total invested assets at December 31, 2000 and 1999, respectively.
The Company utilizes its investments in privately placed fixed maturities to exchange the overall value of the portfolio, increase diversification and obtain higher yields than are possible with comparable quality public market securities. These privately placed securities are also used to enhance cash flow as a result of sinking fund payments. Generally, private placements provide the Company with broader access to management information, strengthened negotiated protective covenants, call protection features and, where applicable, a higher level of collateral. They are, however, generally not freely tradable because of restrictions imposed by federal and state securities laws and illiquid trading markets.
Total problem, potential problem & restructured fixed 	maturities as a percent of total fixed maturities
Mortgage-Backed - Government & Agency 	industry are bonds collateralized by mortgages backed by the 	Federal National Mortgage Association, Government National 	Mortgage Association, Federal Home Loan Mortgage Corp., or 	Canadian Housing Authority.
At December 31, 2000, the Company’s largest unaffiliated single concentration of fixed maturities consisted of $46.1 million of carrying value of Federal Home Loan Mortgage Corporation (FHLMC) fixed maturities which represented approximately 3.5% of total invested assets at December 31, 2000. The largest non-government issuer consists of $21.0 million of Acuson notes. These notes represented approximately 1.6% of total invested assets at December 31, 2000. (See Note 10 to the Consolidated Financial Statements.) No other individual non-government issuer represents more than 1.5% of invested assets.
respectively, represented agency-issued pass-through and collateralized mortgage obligations (“CMOs”) secured by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association. The balance of such amounts was comprised of other types of mortgage-backed and asset-backed securities. The Company believes that its active monitoring of its portfolio of mortgage-backed securities and the limited extent of its holdings of more volatile types of mortgage-backed securities mitigate the Company’s exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At December 31, 2000 and 1999, 75.3% and 81.9%, respectively, of the Company’s mortgage-backed and asset-backed securities were assigned a NAIC Designation 1. In addition, the Company believes that it holds a relatively low percentage of CMOs compared to other life insurance companies.
CMOs are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. The majority of the CMOs in the Company’s investment portfolio have relatively low cash flow variability. In addition, approximately 57.4% of the CMOs in the portfolio have minimal credit risk because the underlying collateral is backed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. These CMOs offer greater liquidity and higher yields than corporate debt securities of similar credit quality and expected average lives.
The principal risks inherent in holding CMOs (as well as pass-through securities) are prepayment and extension risks arising from changes in market interest rates. In declining interest rate environments, the mortgages underlying the CMOs are prepaid more rapidly than anticipated, causing early repayment of the CMOs. In rising interest rate environments, the underlying mortgages are prepaid at a slower rate than anticipated, causing CMO principal repayments to be extended. Although early CMO repayments may result in acceleration of income from recognition of any unamortized discount, the proceeds typically are reinvested at lower current yields, resulting in a net +reduction of future investment income.
Asset-backed securities (“ABS”) are purchased both to diversify the overall credit risks of the fixed maturity portfolio and to provide attractive returns. The ABS portfolio is diversified both by type of asset and by issuer. The largest asset class exposure in the ABS portfolio is to credit card receivables. These are comprised of pools of both general purpose credit card receivables such as Visa and Mastercard and private label credit card receivable pools. Excluding the exposures to home equity loans (which represented 4.3% and 6.3%, of the ABS portfolio as of December 31, 2000 and 1999, respectively), the ABS portfolio is in general insensitive to changes in interest rates. As of December 31, 2000 and 1999, respectively, the ABS portfolio did not contain any pools of assets outside of the United States.
Mortgage loans comprised 8.8% and 12.6% of total invested assets at December 31, 2000 and 1999, respectively. Mortgage loans consisted of commercial and agricultural loans. As of December 31, 2000 and 1999, commercial mortgage loans comprised $49.0 million and $52.8 million or 42.2% and 32.0% of total mortgage loan investments, respectively. Agricultural loans comprised $67.1 million and $112.2 million or 57.8% and 68.0% of total mortgage loan investments, respectively.
The Company reviews its mortgage loan portfolio and analyzes the need for a valuation allowance for any loan which is delinquent for 60 days or more, in process of foreclosure, restructured, on “watchlist”, or which currently has a valuation allowance. Loans which are delinquent and loans in process of foreclosure are categorized by the Company as “problem” loans. Loans with valuation allowances, but which are not currently delinquent, and loans which are on the watchlist are categorized by the Company as “potential problem” loans. Loans for which the original terms of the mortgages have been modified or for which interest or principal payments have been deferred are categorized by the Company as “restructured” loans.
Gross interest income on restructured commercial mortgage loan balances that would have been recorded in accordance with the loans’ original terms was approximately $0.8 million and $1.1 million at December 31, 2000 and 1999. As a result of the restructurings, the gross interest income recognized in net income at December 31, 2000 and 1999 was $0.7 million and $0.9 million.
The following table presents the carrying amounts of problem and restructured commercial mortgages relative to the carrying value of all commercial mortgages as of the dates indicated. The table also presents the valuation allowances and writedowns recorded by the Company relative to commercial mortgages defined as problem and restructured as of each of the aforementioned dates.
Total valuation allowances/writedowns as a percent of problem 	and restructured commercial mortgages at carrying value before 	valuation allowances and writedowns
Total problem, potential problem & restructured agricultural 	mortgages as a percent of total agricultural mortgages
As of December 31, 2000 and 1999, there were $0.0 million 	and $0.1 million valuation allowances/writedowns relating to 	problem, potential problem and restructured agricultural 	mortgages.
The Company holds real estate as part of its general account investment portfolio. The Company has adopted a policy of not investing new funds in equity real estate except to safeguard values in existing investments or to honor outstanding commitments. As of December 31, 2000 and 1999, the carrying value of the Company’s real estate investments was $5.4 million and $6.9 million, respectively, or 0.4% and 0.5%, respectively, of general account invested assets. The Company owns real estate of $5.4 million and $5.3 million as of December 31, 2000 and 1999 respectively, and real estate acquired upon foreclosure of commercial and agricultural mortgage loans of $0.0 million and $1.6 million as of December 31, 2000 and 1999, respectively.
The cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of December 31, 2000 and 1999 are shown in the table below.
At December 31, 2000 and 1999, 3.7% ($49.0 million) and 4.0% ($52.8 million), respectively, of the Company’s general account invested assets consisted of commercial mortgage loans. Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances for impairment. The Company provides valuation allowances for commercial mortgage loans when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company’s results of operations. For the years ended December 31, 2000, 1999 and 1998, such increases (decreases) in valuation allowances aggregated $(0.3) million, $0.2 million, and $(0.4) million, respectively. The carrying value of commercial mortgage loans at December 31, 2000 was $49.0 million, which amount is net of $0.8 million representing managements best estimate of cumulative impairment losses at such date. However, there can be no assurance that additional provisions for impairment adjustments with respect to the real estate held for investment will not need to be made. Any such adjustments may have a material adverse effect on the Company’s financial position and results of operations.
The carrying value of real estate to be disposed of at December 31, 2000 and 1999 was $2.3 million and $1.6 million, net of impairment adjustments of $0.0 million and $0.4 million, valuation allowances of $0.2 million and $0.3 million, and accumulated depreciation of $1.2 million and $0.2 million, respectively. Once management identifies a real estate property to be sold and commences a plan for marketing the property, the property is classified as to be disposed of and a valuation allowance is established and periodically revised, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs (See Note 2 to the Financial Statements). Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company’s results of operations. For the years ended December 31, 2000, 1999 and 1998, such increases (decreases) in valuation allowances aggregated $(0.1) million and $0.3 million, and $ (0.1) million, respectively.