Our investment objective is to maximize after tax yield while maintaining safety of capital and providing adequate liquidity for our insurance operations. We seek to meet these objectives and simultaneously manage interest rate risk and market risk by investing in primarily investment-grade fixed maturity securities that have similar cash flows to the liabilities they support, and are diversified by industry, issuer, type and geography. We utilize the services of a professional asset management firm specializing in the management of assets for insurance companies to assist in meeting these objectives. Our invested assets are managed to maximize long term risk adjusted returns consistent with and in support of our product liabilities and capital position. Based on the current interest rate environment, we anticipate that reinvestment of our money at investment maturity dates during 2001 will result in decreasing yields compared to yields upon reinvestment during 2000.
We also purchase reinsurance for our life insurance and accident and health lines of business to mitigate the impact of potential large or unusual claims on our liquidity and operating results. Our life insurance reinsurance program provides for coverage for individual life insurance claims greater than $400,000.
Farm Family Casualty and United Farm Family are specialized insurance companies that provide property and casualty insurance coverages to farms, agribusiness, other generally related businesses and residents of rural and suburban communities. Farm Family Casualty provides insurance to members of the state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states. Membership in a state Farm Bureau organization is a prerequisite for voluntary insurance coverage with Farm Family Casualty, except for employees of the Company and its affiliates. United Farm Family provides similar property and casualty insurance products in Pennsylvania and Maryland. United Farm Family began operations in these states during 1998. Membership in a state Farm Bureau organization is not a prerequisite for purchasing insurance coverage from United Farm Family.
Traditional life insurance products include those products with fixed and guaranteed premiums and benefits, and consist principally of whole life and term insurance policies. Life insurance premiums are recognized as premium revenue when due. Group insurance premiums are recognized as premium revenue over the time period to which the premiums relate. Benefits and expenses are associated with earned premiums to result in the recognition of profits over the life of the contracts. This association is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred acquisition costs.
For the years ended December 31, 2000 and December 31, 1999, participating policyholder dividends were $10.5 million and $7.2 million, respectively, and (loss) income attributable to participating policyholders was $(8.5) million and $9.7 million, respectively.
Funds on deposit from policyholders - Deposit funds include investment contracts that earn interest at either fixed or variable rates. Interest rates are adjusted monthly to market rates for those investment contracts with a variable rate. The carrying value is the fair value for these liabilities. Other investment contracts earn interest at a fixed rate for one, three or five-year terms. Fair value for these liabilities is set by discounting future cash flows to present value at current market rates.
There was no valuation allowance for deferred income tax assets as of December 31, 2000 or 1999. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. Management believes the benefits of the deductible differences recognized as of December 31, 2000 and 1999 will ultimately be realized.
The Company sponsors incentive savings plans for the benefit of its employees. A portion of the contributions made by the Company are discretionary, based on the profits earned by the Company. The Company's expense associated with the plans was $1.5 million, $1.2 million, and $0.9 million in 2000, 1999 and 1998, respectively.
1998 - no options were granted. 1999 - dividend yield of 0.0%, expected volatility of 25.64%, risk-free interest rate of 5.32%, and an expected life of six years. 2000 - dividend yield of 0.0%, expected volatility of 27.25%, risk-free interest rate of 6.15%, and an expected life of six years.
The National Association of Insurance Commissioners ("NAIC") requires insurance companies to calculate and report risk based capital information under a set of formulas which measure statutory capital and surplus needs based on a regulatory definition of the risks in a company's mix of products and its balance sheet. As of December 31, 2000, Farm Family Casualty's, Farm Family Life's and United Farm Family's total capital exceeds the threshold level of regulatory action, as defined by the NAIC.
The Company has two reportable segments: property and casualty insurance and life insurance, which offer different products and services. The property and casualty insurance segment includes activities related to the Special Farm Package product, a flexible multi-line package of insurance coverages, and other insurance products covering personal and commercial automobiles, businessowners and homeowners. The life insurance segment includes activities related to individual whole life, term and universal life products, single and flexible premium deferred annuity products, single premium immediate annuity products and disability income insurance products. The Company uses operating income (net income excluding realized investment gains (losses) and nonrecurring items, net of taxes) to measure the financial results of its segments.
/s/ PricewaterhouseCoopers LLP Albany, New York February 16, 2001, except for Note 20 as to which the dates are February 27, 2001 and March 28, 2001