Federal Income Taxation of the Company

The Company files a consolidated return for federal income tax purposes, in which American Exchange and the Acquired Companies are not currently permitted to be included. At December 31, 2000, the Company (exclusive of American Exchange and the Acquired Companies) had net operating tax loss carryforwards of approximately $9.4 million that expire in the years 2005 to 2019. At December 31, 2000, the Company also had an Alternative Minimum Tax (AMT) credit carryforward for Federal income tax purposes of approximately $0.4 million that can be carried forward indefinitely. As a result of the change in ownership of the Company in July 1999, use of most of the loss carryforwards of the Company are subject to annual limitations.

American Exchange and the other U.S. Acquired Companies file a separate consolidated federal income tax return. At December 31, 2000, these companies had net operating loss carryforwards, most of which were incurred prior to their acquisition by the Company, of approximately $46.7 million that expire in the years 2007 to 2013. As a result of the change in ownership of the Company in July 1999 and the 1999 Acquisition, use of most of the loss carryforwards are subject to annual limitations.

At December 31, 2000 and 1999, the Company carried valuation allowances of $10.4 million and $11.3 million, respectively, with respect to its tax loss carryforwards (deferred tax assets). The Company determines a valuation allowance based upon an analysis of projected taxable income and through its ability to implement prudent and feasible tax planning strategies. The tax planning strategies include the expense reductions anticipated from the Company's recent reorganization and from the income generated by its administration companies WorldNet, AIAG and CHCS. As a result of the increased profitability of the Administrative Services segment, valuation allowances on certain of the non-life tax loss carryforwards were considered not necessary at December 31, 2000. The amount of the valuation allowance released was $1.3 million and was recorded as a benefit in the deferred income tax expense. This decrease was partially offset by the establishment of a valuation allowance for the purchased net operating losses of CHCS, which are subject to limitation on their use. Management believes it is more likely than not that the Company will realize the recorded net deferred tax assets.

The United States Insurance Subsidiaries are taxed as life insurance companies as provided in the Tax Code. The Omnibus Budget Reconciliation Act of 1990 amended the Tax Code to require a portion of the expenses incurred in selling insurance products to be capitalized and amortized over a period of years, as opposed to an immediate deduction in the year incurred. Instead of measuring actual selling expenses, the amount capitalized for tax purposes is based on a percentage of premiums. In general, the capitalized amounts are subject to amortization over a ten-year period. Since this change only affects the timing of the deductions, it does not, assuming stability of rates, affect the provisions for taxes reflected in the Company's financial statements prepared in accordance with GAAP. However, by deferring deductions, the change does have the effect of increasing the current tax expense, thereby reducing statutory surplus. Because of the Insurance Subsidiaries' net operating loss carryforwards, there was no material increase in the Company's current income tax provision for any of the three years in the period ended December 31, 2000 due to this provision.