The following analysis of our consolidated financial condition and results of operations should be read in conjunction with "Selected Financial Data" and the consolidated financial statements and accompanying notes included elsewhere in this report. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions developed by our management. Any adjustments to reported bases of assets or liabilities resulting from changes in estimates are reflected in earnings in the period the estimates are revised. Certain management estimates are based, in part, on information provided by ceding companies. Our ceding companies periodically update, refine and revise the reinsurance information they provide to us. This revised data is reflected in earnings as changes in estimates.
determine that the value of an investment has declined (other than temporarily) we write the investment down to its fair value with a charge to realized losses. Realized gains and losses are determined using the specific identification method.
These estimates and assumptions can have a significant effect on the amounts we report in our financial statements. See Note 2 of the "Notes to Consolidated Financial Statements" for additional information regarding our accounting policies.
Invested assets, including cash and cash equivalents, amounted to approximately $423,780,000 at December 31, 2001 as compared with approximately $321,819,000 at December 31, 2000. The change in invested assets during 2001 was due primarily to the receipt of $137 million from a third party reinsurer that is used to fund cedents collateral requirements plus unrealized gains during the period, offset by funds used by the Company's operating activities and dividends paid to shareholders. At December 31, 2001 unrealized gains total approximately $6,418,000 as compared to approximately $2,065,000 at December 31, 2000. The change in unrealized gains is principally related to movement in the general level of interest rates during 2001.
At December 31, 2001, $3,749,000 at fair value, or 1.2% of the invested assets (0.9% of Stockholders Equity), consisted of below investment grade securities, as compared with approximately $8,983,000 or 3.4%
The following table summarizes our investment results, excluding interest earned on funds withheld under modified coinsurance agreements, for the periods ended December 31, 2001, 2000, and 1999.
We have no material commitments for capital expenditures as of December 31, 2001.
The acquisition was accounted for as a purchase and the operating results of Annuity and Life Reassurance America have been included in the Company's financial statements since the date of acquisition. Prior to closing, the inforce insurance business of Annuity and Life Reassurance America was 100% reinsured by Annuity and Life Reassurance America with its former owner, a subsidiary of Swiss Re, who will continue to administer the business reinsured. Accordingly, there will be no earnings from the in-force business at the acquisition date accruing to the Company currently or in the future.
The Company's liability for contracts providing reinsurance for life insurance policies is recorded in the balance sheet as reserves for future policy benefits. The reserve is estimated using a net level premium method utilizing actuarial assumptions for mortality, persistency, interest and expenses established when the contract is underwritten. These assumptions are based on anticipated experience with a margin for adverse deviation. If the reserves for future policy benefits plus the present value of expected future gross premiums are insufficient to provide for expected future benefits and expenses, deferred policy acquisition costs are written down and, if required, a premium deficiency reserve is established by a charge to income. Traditional annuities are recorded at the present value of expected future benefit payments.
The amounts related to the reinsured business referred to above are included on the Company's Balance Sheet as Receivable for Reinsurance Ceded and Reserves for Future Policy Benefits. At December 31, 2001 and 2000, the amounts included in these accounts were $97,800,000 and $104,500,000, respectively.
Annuity and Life Re America and Annuity and Life Reassurance America, Inc. are subject to all applicable Federal and State taxes of the United States. U.S. income taxes applicable to our U.S. operations are not material to the consolidated financial statements and, therefore, no separate item appears on the income statement or balance sheet. At December 31, 2001 and 2000 the Company had reflected a deferred tax liability of $314,000 and $95,000, respectively, related to U.S. income taxes on unrealized gains from its U.S. operations. No deferred tax asset or liability related to operating income has been recognized. GAAP net operating income (loss) for the year ending 2001, 2000, and 1999 was $891,000, $(945,000), and $(219,000), respectively. The GAAP net operating loss carryforward of $273,000 begins expiring in 2020. The tax basis net operating loss carryforward at December 31, 2001 was $5,680,000, which begins expiring in 2019.