During September 1995, the Company and Citizens Security acquired the common stock of Integrity National Life Insurance Company from an unaffiliated insurance holding company. The aggregate purchase price for the Integrity acquisition, as finally adjusted, was $9,419,000 (including $437,000 of net transaction costs). Integrity National was merged into Citizens Security during 1995.
1 Net of write-downs on bonds whose decline in value is believed to be other-than-temporary 2 Fair values as of December 31, 2001 were obtained from the Company's investment advisor's portfolio review, which used market prices from Shaw Data Services
The Company had no guarantee or other type of enhancement associated with the issuers represented above.
During 2001, the Company generated approximately $6,394,000 of cash flow from operations, while using $467,000 in 2000, and generating $361,000 in 1999. The 2001 increase is principally attributable to growth of Preneed Life premium collections and refunding of Federal income tax deposits made during the prior year. The 2000 decrease is principally attributable to Federal income tax deposits required early in the year.
The Company is subject to various market risks. However, the most significant such risks relate to fluctuations in prices of equity securities and interest rates. Although the Company experienced negative total returns on its equity portfolio in 2001 and 2000, historically these returns have been very favorable and the Company has successfully managed the risk of equity security price fluctuations over many years. As described above, the Company does not anticipate that investment markets will continue to deteriorate at the rate encountered during 2001 and 2000. The Company and its investment advisory firm, SMC Advisors, Inc. devote significant attention to the equity markets and reposition the Company's portfolio upon detection of adverse risk trends associated with individual securities or overall markets. SMC Advisors, Inc. also manages market risks associated with investments in option securities, as described in Item 8, Note 3 of the Notes to Consolidated Financial Statements. The fair value of the Company's equity portfolio was approximately $8,117,000 and $12,578,000 at December 31, 2001 and 2000, respectively. Accordingly, a 10% decline in equity prices would have reduced the fair value of the Company's equity portfolio by $811,700 and $1,257,800 at December 31, 2001 and 2000, respectively.
The annual change in net unrealized investment appreciation or depreciation, at December 31, 2001, 2000 and 1999, and the amount of net realized investment gain or loss included in net income for the respective years then ended are shown below. The 2001 change in net unrealized appreciation for fixed maturities shown below is after recognizing the January 1, 2001 pretax transition adjustment of approximately $471,532, as described in Note 17.
The amortized cost and fair value of investments in fixed maturities at December 31, 2001, by contractual maturity are shown below. Expected maturities for investments in fixed maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations, sometimes without prepayment penalties.
The following table sets forth the computation of basic and diluted earnings (losses) per share. No dividends were paid or accrued for 2001, 2000, or 1999.
Policy Loans: The carrying amount of policy loans approximates their fair value. At December 31, 2001 and 2000, the fair value of policy loans was $4,136,649 and $4,270,588, respectively.
Effective January 1, 2001, the Company adopted Financial Accounting Standards Board Statement ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138. This statement requires that all derivatives be recognized as either assets or liabilities in the balance sheet at their fair value, and sets forth the manner in which gains or losses thereon are to be recorded. The treatment of such gains or losses is dependent upon the type of exposure, if any, for which the derivative is designated as a hedge. Currently, the Company has not designated any derivatives as hedges. Adoption of SFAS No. 133 resulted in a January 1, 2001 transition adjustment that reduced net income and increased accumulated other comprehensive income by approximately $311,000. This adjustment consists of a pretax total of $471,000 less a $160,000 tax benefit.