Management believes that the Company´s present facilities are adequate for its anticipated needs.
<F1> Includes extraordinary loss of $514 thousand or $.02 per share.
The Company has one reportable operating segment with two primary lines of business  individual annuities and individual life insurance. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Premiums shown on the Company´s consolidated financial statements in accordance with GAAP consist of premiums received for whole or term life insurance products, as well as that portion of the Company´s single premium immediate annuities which have life contingencies. With respect to that portion of single premium annuity contracts without life contingencies, as well as single premium deferred annuities and universal life insurance products, premiums collected by the Company are not reported as premium revenues, but rather are reported as additions to policyholders´ account balances. With respect to products that are accounted for as policyholders´ account balances, revenues are recognized over time in the form of policy fee income, surrender charges and mortality and other charges deducted from the policyholders´ account balances. The Company´s operating earnings are derived primarily from these revenues, plus the Company´s investment results, including realized gains (losses), less interest credited, benefits to policyholders and expenses.
Comparison of Fiscal Year 2000 to Fiscal Year 1999 and Fiscal Year 1999 to Fiscal Year 1998.
Total annuity considerations and life insurance premiums increased to approximately $58.9 million in fiscal 1999 from approximately $32.2 million in fiscal 1998, an increase of approximately 82.8%. Of this amount, annuity considerations increased to approximately $54.4 million in fiscal 1999 from approximately $28.1 million in fiscal 1998, an increase of approximately $26.3 million.
Universal life and investment type policy fee income was approximately $.7 million in fiscal 2000, as compared to approximately $2.6 million in fiscal 1999 and approximately $2.1 million in fiscal 1998. The decrease in 2000 is attributed to a decline in the number of policies surrendered during 2000 that were within the surrender charge period. Policy fee income consists principally of amounts assessed during the period against policyholders´ account balances for mortality charges and surrender charges.
Realized investment losses amounted to approximately $8.5 million in fiscal 2000, as compared to approximately $2.8 million of gains in fiscal 1999 and gains of approximately $17.2 million in fiscal 1998. Realized investment losses for December 31, 2000 and gains for the years ended December 31, 1999 and 1998 include realized investment losses of approximately $22.8 million, $14.8 million and $8.3 million, respectively, attributable to writedowns of certain securities contained in the Company´s investment portfolio. Realized investment gains (losses) result from sales of certain equities and convertible securities, and calls and sales of fixed maturity investments in the Company´s investment portfolio. There can be no assurance that the Company´s investment portfolio will yield comparable investment results in future periods.
Total benefits and expenses for fiscal 2000 aggregated approximately $226.5 million, as compared to approximately $208.6 million for fiscal 1999 and approximately $170.5 million for fiscal 1998. This represents an increase of approximately 8.6% comparing fiscal 2000 to fiscal 1999 and an increase of approximately 22.4% comparing fiscal 1999 to fiscal 1998. The reasons for these changes will be discussed under the respective components below.
The Insurance Company´s average credited rates for reserves and account balances for the 12 months ended December 31, 2000, 1999 and 1998 were less than the Company´s ratio of net investment income to mean assets for the same periods as noted above under "Net Investment Income." Although management does not currently expect material declines in the spread between the Company´s average credited rate for reserves and account balances and the Company´s ratio of net investment income to mean assets (the "Spread"), there can be no assurance that the Spread will not decline in future periods or that such decline will not have a material adverse effect on the Company´s financial condition and results of operations. Depending, in part, upon competitive factors affecting the industry in general, and the Company in particular, the Company may, from time to time, adjust the average credited rates on certain of its products. There can be no assurance that the Company will reduce such rates or that any such reductions will broaden the Spread.
The interest expense on the Company´s notes payable amounted to approximately $9.77 million in fiscal 2000, approximately $8.96 million in fiscal 1999 and approximately $7.12 million in fiscal 1998. The increase in interest expense in fiscal 2000 and 1999 is attributable to the increase in the Company´s notes payable.
The change in the net DAC for fiscal 2000 resulted in a credit of approximately $11.0 million, as compared to a credit of approximately $5.2 million in fiscal 1999 and a credit of approximately $2.4 million in fiscal 1998. Such changes are due (i) to the increase in costs associated with recent new product sales which have been deferred and are amortized in proportion to the recognition of earned revenue and (ii) to the effect of revisions to estimated gross profits on unamortized deferred acquisition costs which are reflected in the year such estimated gross profits are revised.
Income tax expense was approximately $17.1 million for fiscal 2000, as compared to approximately $21.3 million in fiscal 1999 and approximately $22.5 million in fiscal 1998. The decrease in income taxes in fiscal 2000 is primarily attributable to realized capital losses during fiscal 2000.
For the reasons discussed above, the Company had net income of approximately $40.9 million in fiscal 2000, net income of approximately $47.7 million in fiscal 1999 and net income of approximately $49.2 million in fiscal 1998.
The Company is an insurance holding company and its primary uses of cash are debt service obligations, operating expenses and dividend payments. The Company´s principal sources of cash are dividends from the Insurance Company, sales of and interest on the Company´s investments and rent from its real estate. During 2000, the Company´s Board of Directors increased the quarterly dividend rate to $.10 per share. During 2000 and 1999, the Company purchased and retired 1,506,200 and 918,300 shares of common stock, respectively. At December 31, 2000, the Company was authorized to purchase approximately an additional 411,000 shares of common stock.
Principal sources of funds at the Insurance Company are premiums and other considerations paid, net investment income received and proceeds from investments calle, redeemed or sold. The principal uses of these funds are the payment of benefits on annuity contracts and life insurance policies, (including withdrawals and surrender payments), the payment of policy acquisition costs, operating expenses and the purchase of investments.
For purposes of the Company´s consolidated statements of cash flows, financing activities relate primarily to "dollar roll" repurchase transactions, and to sales and surrenders of the Company´s annuity and universal life insurance products. The payment of dividends by the Company to its stockholders also is considered to be a financing activity. Net cash provided by (used in) the Company´s financing activities amounted to approximately $183.7 million, $130.1 million and $(21.9) million in fiscal 2000, 1999 and 1998, respectively. These fluctuations primarily are attributable to the new Senior Notes, higher policyholder account balances (as a result of increased sales), partially offset by the repayment of amounts outstanding under the Company´s line of credit during fiscal 1999.
During the first quarter of 1999, the Company sold $100 million of its 7 7/8% Senior Notes due 2009. The net proceeds were used to retire all of the outstanding $50 million, 9 1/2% Senior Notes and to repay the amounts outstanding on the bank line of credit. The repayment of the 9 1/2% Senior Notes resulted in an extraordinary loss of $514 thousand, after income taxes of $276.5 thousand.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and other relevant market rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a discussion of the Company´s primary market risk exposures and how those exposures are currently managed as of December 31, 2000.
The primary market risk to the Company´s investment portfolio is interest rate risk. The Company´s exposure to equity price risk and foreign exchange risk is not significant. The Company has no direct commodity risk.
Based on market values and prevailing interest rates as of December 31, 2000, a hypothetical instantaneous increase of 100 basis points would produce a loss in fair value of fixed maturity assets of approximately $176.3 million. Since the Company is able to hold its fixed maturity securities to maturity, it does not expect to realize significant losses under such a hypothetical scenario.
To meet its anticipated liquidity requirements, the Company purchases investments taking into account the anticipated future cash flow requirements of its underlying liabilities. In managing the relationship between assets and liabilities, the Company analyzes the cash flows necessary to correspond with the expected cash needs on the underlying liabilities under various interest rate scenarios. In addition, the Company
The Insurance Company is subject to Regulation 130 adopted and promulgated by the NYSDI. Under this Regulation, the Insurance Company´s ownership of below investment grade debt securities is limited to 20.0% of total admitted assets, as calculated under statutory accounting practices. As of December 31, 2000 and 1999, approximately 7.92% and 8.37%, respectively, of the Insurance Company´s total admitted assets were invested in below investment grade debt securities.
of these limited partnerships. However, management does not expect this entire amount to be called because certain of these limited partnerships are nearing the end of the period during which investors are required to make contributions. The Company may make selective investments in additional limited partnerships as opportunities arise. In general, risks associated with such limited partnerships include those related to their underlying investments (i.e., equity securities, debt securities and real estate), plus a level of illiquidity, which is mitigated by the ability of the Company to take annual distributions of partnership earnings. There can be no assurance that the Company will continue to achieve the same level of returns on its investments in limited partnerships as it has historically or that the Company will achieve any returns on such investments at all. Further, there can be no assurance that the Company will receive a return of all or any portion of its current or future capital investments in limited partnerships. The failure of the Company to receive the return of a material portion of its capital investments in limited partnerships, or to achieve historic levels of return on such investments, could have a material adverse effect on the Company´s financial condition and results of operations.
is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer´s solvency. The amount of these assessments in prior years has not been material, however, the amount and timing of any future assessment on the Insurance Company under these laws cannot be reasonably estimated and are beyond the control of the Company and the Insurance Company. Recent failures of substantially larger insurance companies could result in future assessments in material amounts.
The Company seeks to manage its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the market value of the Company´s fixed maturity portfolio increases or decreases in an inverse relationship with fluctuations in interest rates, and the Company´s net investment income increases or decreases in direct relationship with interest rate changes. For example, if interest rates decline, the Company´s fixed maturity investments generally will increase in market value, while net investment income will decrease as fixed income investments mature or are sold and proceeds are reinvested at the declining rates, and vice versa. Management is aware that prevailing market interest rates frequently shift and, accordingly, the Company has adopted strategies which are designed to address either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company´s average cost of funds would be expected to increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. In addition, the market value of the Company´s fixed maturity portfolio decreases resulting in a decline in shareholders´ equity. Concurrently, the Company would attempt to place new funds in investments which were matched in duration to, and higher yielding than, the liabilities associated with such annuities. Management believes that liquidity necessary in such an interest rate environment to fund withdrawals, including surrenders, would be available through income, cash flow, the Company´s cash
reserves or from the sale of short-term investments. In a declining interest rate environment, the Company´s cost of funds would be expected to decrease over time, reflecting lower interest crediting rates on its fixed annuities. Should increased liquidity be required for withdrawals in such an interest rate environment, management believes that the portion of the Company´s investments which are designated as available for sale in the Company´s consolidated balance sheet could be sold without materially adverse consequences in light of the general strengthening in market prices which would be expected in the fixed maturity security market.
Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company´s control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities-an Amendment of FASB Statement No. 133 ("SFAS 138"). In June 1999, the FASB also issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") until January 1, 2001. SFAS 133, as amended by SFAS 138, requires, among other things, that all derivatives be recognized in the consolidated balance sheets as either assets or liabilities and measured at fair value. The corresponding derivative gains and losses should be reported based upon the hedge relationship, if such a relationship exists. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in income. The impact of adopting SFAS 133, as amended by SFAS 138, will not have a material impact on the consolidated financial statements.
In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, Accounting for transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125 ("SFAS 140"). SFAS 140 is effective for transfers after March 31, 2001 and is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The Company does not believe that adoption of this FASB will have a material impact on its consolidated financial statements.
In March 1998, the National Association of Insurance Commissioner ("NAIC") adopted the Codification of Statutory Accounting Principles (the "Codification"). The Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The NYSDI required adoption of the Codification with certain modifications, for the preparation of statutory financial statements effective January 1, 2001. The adoption of Codification by the NAIC and the Codification as modified by the NYSDI, as currently interpreted, did not adversely affect statutory capital and surplus as of January 1, 2001.