According to A.M. Best, life insurance in-force in the United States at December 31, 2000 totaled $23.1 trillion. Life insurance products typically fall within a spectrum ranging from insurance protection products that pay a sum of money upon the death of the insured to asset accumulation products that offer the insured a tax-advantaged investment vehicle for long-term savings. At the

insurance protection end of the spectrum is term life insurance. Term life insurance is often renewable on a yearly basis and pays a sum of money upon the death of the insured. In general, as you move along the spectrum, the investment component becomes increasingly more meaningful, with the end point being a variable annuity product, which is an asset accumulation product. Variable

annuities provide the policyholder the opportunity to vary benefit payments depending on the investment results of the assets held in the account. According to The VARDS Report, a variable annuity data publication, variable annuity sales totaled $138 billion in 2000.

According to A.M. Best, the percentage of new life insurance business written in the United States that is reinsured has risen from 34% in 1990 to 52% in 2000. Additionally, the percentage of United States life insurance in-force that was reinsured has grown from 20% in 1990 to 32% in 2000.

Renewable term, also referred to as risk premium reinsurance, which includes monthly renewable term and yearly renewable term, is

a plan of reinsurance in which the premium rates are not directly related to the premium rates on the original plan of insurance. Under renewable term reinsurance, the ceding life company reinsures the mortality risk with the Company. The amount reinsured in any one period is not based on the face amount of the policy, but rather on the net amount of risk the Company reinsures. The net amount of risk is typically defined as the difference between the death benefit and the cash value of a policy. The ceding life company establishes the policy reserves, which are reduced for the mortality risk reinsured with the Company, and pays all policy benefits, commissions and expenses involved in issuing and maintaining the business and, correspondingly, it establishes reserves specific to the mortality risk reinsured.

Under a coinsurance arrangement, the insured risks are ceded to the Company on essentially the same basis as underwritten by the ceding life company. The ceded risks include mortality, persistency, investment and expense. The Company shares the risks pro rata with the ceding life company. The Company receives a proportionate share of gross premiums from the ceding life company and provides contractual expense allowances to the ceding life company in recognition of expenses associated with the reinsured policies. Expenses include commissions and costs associated with underwriting, marketing, policy issue and maintenance. The Company also

pays the ceding life company its proportionate share of death benefits and other policy benefits. The Company holds the reserves on the ceded portion of the policy and is responsible for the associated obligations of the policy.

Modified coinsurance is similar to coinsurance except the ceding life company retains the reserves, and the assets related to the reserves. Modified coinsurance is used primarily for products that develop cash values and allows the ceding life company to retain the associated assets for investment purposes.

Under coinsurance and modified coinsurance agreements, the Company’s reinsurance premiums are materially higher than premiums paid on the renewable term reinsurance since the Company is reinsuring more risks. During the first year in which a policy is reinsured on a coinsurance basis, the Company is required to reimburse the ceding life company for its share of acquisition costs, including first year commissions and issuance expenses.

Reinsured policy revenues decreased $953,000, or 10%, from $9.4 million for the nine months ended September 30, 2000 to $8.5

million for the same period in 2001.

Net investment income increased $219,000, or 60%, from $368,000 for the nine months ended September 30, 2000 to $588,000 for the same period in 2001.

Operating expenses increased $381,000, or 39%, from $973,000 for the nine months ended September 30, 2000 to $1.4 million in same period of 2001.

Interest expense decreased $274,000, or 49%, from $557,000 for the nine months ended September 30, 2000 to $284,000 for the same

period in 2001.