Legislation or other regulatory reform that increases the regulatory requirements imposed on us or that changes the way we are able to do business may significantly harm our business or results of operations in the future. For example, some states have imposed new time limits for the payment of uncontested covered claims and require health care and dental service plans to pay interest on uncontested claims not paid promptly within the required time period. Some states have also granted their insurance regulatory agencies additional authority to impose monetary penalties and other sanctions on health and dental plans engaging in certain “unfair payment practices.” If we were to be unable for any reason to comply with these requirements, it could result in substantial costs to us and may materially adversely affect our results of operations and financial condition. In addition, in some of our businesses, such as individual medical products, our revenues and net income will be affected by our ability to get regulatory approval for rate increases. Where rate increases are unacceptable to us, we could withdraw from a state but may for a limited period of time be required to participate in state sponsored risk pools for our former insureds who cannot get replacement policies.
Future policy benefits and expense reserves for pre-funded funeral life insurance contracts are recorded as the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions are selected using best estimates for expected investment yield, inflation, mortality and withdrawal rates. These assumptions reflect current trends, are based on Company experience and include provision for possible unfavorable deviation. An unearned revenue reserve is also recorded for these contracts which represents the balance of the excess of gross premiums over net premiums that is still to be recognized in future years’ income in a constant relationship to insurance in force.
DAC relating to property contracts, warranty and extended service contracts and single premium credit insurance contracts are amortized over the term of the contracts in relation to premiums earned.
Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors or countries could result in additional writedowns in future periods for impairments that are deemed to be other-than-temporary. See also “Investments” in Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this report.
Interest expense increased by $55 million from $1 million for the year ended December 31, 2003 to $56 million for the year ended December 31, 2004. The increase was the result of two senior notes that we issued in February 2004. See “- Liquidity and Capital Resources.”
Income taxes decreased by $9 million, or 14%, from $65 million for the year ended December 31, 2002, to $56 million for the year ended December 31, 2003. This decrease was mainly due to a decrease in pre-tax income and a lower effective tax rate in 2003.
Fees and other income increased by $10 million, or 43%, from $23 million for the year ended December 31, 2002, to $33 million for the year ended December 31, 2003, due to additional insurance policy fees and higher fee-based product sales in individual markets, such as sales of our non-insurance health access discount cards.
Net earned premiums and other considerations increased by $21 million, or 2%, from $1,256 million for the year ended December 31, 2003, to $1,277 million for the year ended December 31, 2004. Net earned premium growth was driven by our disability business. Group disability net earned premiums increased by
Amortization of deferred gain on disposal of businesses decreased by $10 million, or 15%, from $68 million for the year ended December 31, 2003, to $58 million for the year ended December 31, 2004. This decrease was consistent with the anticipated run-off of the business ceded to The Hartford in 2001 and John Hancock in 2000.
On May 3, 2004, we sold our WorkAbility division and recorded a $9 million loss on disposal of business in the second quarter of 2004.
Distributions on preferred securities decreased by $111 million, or 98%, from $113 million for the year ended December 31, 2003, to $2 million for the year ended December 31, 2004. The decline was due to the early redemption of $1,250 million of preferred securities in December 2003 and $196 million of preferred securities in January 2004.
The conclusion of the 2003 reserve studies determined that, in the aggregate, the reserves were redundant. The reserve discount rate on all claims was changed to reflect the continuing low interest rate environment. The net impact of these adjustments was a reduction in reserves of approximately $18 million, which included $3 million of reserve release relating to the group dental business.