Subsequent to repossession (or acquisition in the case of development properties), if the value of the property declines such that the fair market value, less selling costs, from the disposition of the asset is less than its carrying value, an impairment is recognized in the statement of operations.
During the fiscal years ended September 30, 2002 and 2001, the Consolidated Group reported approximately $8.3 million and $4.3 million, respectively, in other than temporary impairments on certain fixed income securities. The impairments were primarily due to deterioration in the underlying collateral of certain asset-backed securities in addition to credit deterioration in some higher yielding corporate bond investments.
Additionally, the Consolidated Group may sell pools of Receivables directly to purchasers, including its affiliates. These sales are typically without recourse, except for a period of time during which the Consolidated Group is generally required to repurchase or replace any Receivables that do not conform to the representations and warranties made at the time of sale.
The market rates on the above lottery trust sales were calculated at 2.0% over the Treasury benchmark on the date of the sale, which is consistent with corporate bonds with similar credit profiles along with recent transactions involving large blocks of lottery Receivables.
The Internal Revenue Service (IRS) has notified the Participants by general public notice that they have taken the position that the tax benefits relative to the investment would be disallowed. Western Life has received an audit notice from the IRS for the tax year in which the benefit attributable to the investment was claimed. However, a specific review of Western Life’s investment and related activity has not yet taken place. At September 30, 2002, the Consolidated Group cannot reasonably estimate a loss, if any, associated with this transaction. In the event of an unfavorable determination relative to the investment, the earnings of the Consolidated Group would be adversely affected by amounts disallowed in excess of $11.2 million, including interest if applicable. Any amounts that may be disallowed, up to $11.2 million including any applicable interest, as a result of an unfavorable determination are recoverable from Metropolitan under the terms of the supplement to the Federal Tax Sharing Agreement.
for impairment. During the fiscal year ended September 30, 2000, the Consolidated Group revised its expected foreclosure and loss severity assumptions for the sub-prime loans that were previously acquired by the Consolidated Group. Originally, the assumptions used for the sub-prime loans were based on the historical performance of the Consolidated Group’s Receivable portfolio, which were primarily seller-financed Receivables. The Consolidated Group used the seller-financed based assumptions because they anticipated that the sub-prime loans that were being acquired would perform the same as the seller-financed loans. When the Consolidated Group determined that the expected performance of the sub-prime loans differed from its initial assumptions, and such actual performance is not generally known until 12-24 months after origination, it revised the expected future loss rate accordingly. The Consolidated Group discontinued its acquisitions of sub-prime loans in January 2001.
The Consolidated Group’s asset base is comprised partially of Commercial Loans. Commercial Loans make up approximately 24% of the interest-sensitive assets as of September 30, 2002. These assets tend to be short-term in nature (weighted average maturity is approximately 26 months). The Consolidated Group intends to continue to expand its investments in Commercial Loans. This, along with the management of the interest sensitive liability portfolio, should enable the Consolidated Group to effectively monitor and control its interest-rate sensitivity over time.