Consolidated income from continuing operations increased 37.6% in 2004 to $245.3 million and increased 38.8% in 2003 to $178.3 million. Diluted earnings per share from continuing operations were $3.90 for 2004 compared to $3.46 for 2003 and $2.59 for 2002. A majority of our earnings during these years were attributed primarily to traditional reinsurance results in the U.S. Claims and other policy benefits as a percentage of net premiums during 2004 and 2003 were 80.0% and 79.8%, respectively, and within our range of expectations. Additionally, 2004 and 2003 income from continuing operations for our U.S. Traditional operations benefited from the Allianz Life transaction as twelve months and six months of financial results were included, respectively.
Consolidated investment income increased 24.7% and 24.3% during 2004 and 2003, respectively. These increases related to a growing invested asset base due to positive cash flows from our mortality operations and deposits from several annuity reinsurance treaties, offset, in part, by declining invested asset yields primarily due to a decline in prevailing interest rates. The cost basis of invested assets increased by $1.5 billion, or 17.7%, in 2004 and increased $2.1 billion, or 32.3%, in 2003. In excess of $400 million of the increase in the cost basis of invested assets during 2003 was due to the Company's
The amount of policy acquisition costs and other insurance expenses, as a percentage of net premiums, was 14.9%, 13.5%, and 16.3% in 2004, 2003 and 2002, respectively. Overall, these percentages will fluctuate due to varying allowance levels within coinsurance-type arrangements, the timing of amounts due to and from ceding companies, as well as the amortization pattern of previously capitalized amounts, which are based on the form of the reinsurance agreement and the underlying insurance policies. Additionally, the mix of first year coinsurance versus yearly renewable term can cause the percentage to fluctuate from period to period.
Total expenses, which is comprised primarily of interest credited, policy benefits, and acquisition costs increased 21.2% and 86.5% in 2004 and 2003, respectively. Contributing to the increase in 2004 are policy acquisition costs, which increased $13.7 million due to the conversion of the funds withheld treaty previously discussed and interest credited, which increased $26.9 million, or 22.5%, primarily due to the 22.2% increase in the average invested asset base discussed above. The decrease in the deferred acquisition costs associated with the change in value of the embedded derivatives from $30.7 million in 2003 to $22.9 million in 2004 somewhat offset the increased expenses. The increase in expenses for 2003 compared to 2002 is attributable to the implementation of Issue B36 and growth in business for the comparable periods.
includes the effect of approximately $1.6 million in policy liabilities for the December 26, 2004 Indian Ocean tsunami. The lower loss ratio for the current period is primarily due to better mortality experience compared to the prior year. Historically, the increase in percentages is primarily the result of several large permanent level premium in-force blocks assumed in 1998 and 1997. These blocks are mature blocks of permanent level premium business in which mortality as a percentage of premiums is expected to be higher than the historical ratios. The nature of level premium permanent policies requires the Company to set up actuarial liabilities and invest the amounts received in excess of early-year mortality costs to fund claims in the later years when premiums, by design, continue to be level as compared to expected increasing mortality or claim costs. Claims and other policy benefits, as a percentage of net premiums and investment income, were 70.8% during 2004 compared to 74.0% in 2003 and 74.0% in 2002. Death claims are reasonably predictable over a period of many years, but are less predictable over shorter periods and are subject to significant fluctuation.
The calculation of the claim reserve liability for the entire portfolio of accident and health business requires management to make estimates and assumptions that affect the reported claim reserve levels. The net reserve balance as of December 31, 2004 and 2003 was $57.4 million and $54.5 million, respectively. Management must make estimates and assumptions based on historical loss experience, changes in the nature of the business, anticipated outcomes of claim disputes and claims for rescission, anticipated outcomes of arbitrations, and projected future premium run-off, all of which may affect the level of the claim reserve liability. Due to the significant uncertainty associated with the run-off of this business, net income in future periods could be affected positively or negatively. The consolidated statements of income for all periods presented reflect this line of business as a discontinued operation. Revenues associated with discontinued operations, which are not reported on a gross basis in the Company's consolidated statements of income, totaled $1.4 million, $4.8 million and $3.3 million for 2004, 2003 and 2002, respectively.
Some treaties give ceding companies the right to request that the Company place assets in trust for their benefit to support their reserve credits in the event of a downgrade of the Company's ratings to specified levels. As of December 31, 2004, these treaties had approximately $326.8 million in reserves. Assets placed in trust continue to be owned by the Company, but their use is restricted based on the terms of the trust agreement. Securities with an amortized cost of $808.2 million were held in trust for the benefit of certain subsidiaries of the Company to satisfy collateral requirements for reinsurance business at December 31, 2004. Additionally, securities with an amortized cost of $1,608.1 million, as of December 31, 2004, were held in trust to satisfy collateral requirements under certain third-party reinsurance treaties. Under certain conditions, RGA may be obligated to move reinsurance from one RGA subsidiary company to another RGA subsidiary or make payments under the treaty. These conditions include change in control of the subsidiary, insolvency, nonperformance under a treaty, or loss of reinsurance license of such subsidiary. If RGA was ever required to perform under these obligations, the risk to the consolidated company under the reinsurance treaties would not change; however, additional capital may be required due to the change in jurisdiction of the subsidiary reinsuring the business and may create a strain on liquidity.
The Company has no obligations, assets or liabilities other than those reflected in the consolidated financial statements. Further, the Company has not engaged in trading activities involving non-exchange traded contracts reported at fair value, nor has it engaged in relationships or transactions with persons or entities that derive benefits from their non-independent relationship with RGA.
Income Taxes. RGA and its eligible U.S. subsidiaries file a consolidated federal income tax return. The U.S. consolidated tax return includes RGA, RGA Americas Reinsurance Company, Ltd., RGA Reinsurance, RGA Barbados, RGA Technology Partners, Inc., RCM and Fairfield Management Group, Inc. ("Fairfield"). Due to rules that affect the ability of an entity to join in a consolidated tax return, RGA Sigma Reinsurance SPC files a separate tax return, even though it is considered a U.S. taxpayer. The Company's Argentine, Australian, Canadian, Malaysian, South African, Irish and United Kingdom subsidiaries are taxed under applicable local statutes. The Company's branch operations are taxable under U.S. tax law and applicable local statutes.
In the fourth quarter of 2004, the Company increased the amount of liabilities associated with the AFJP business by $10.0 million, so that the overall amount of the liabilities reflects the Company's current estimate of the value of its obligations, and reflects the uncertainty regarding the amount and timing of claims payments and the outcome of any negotiated settlements.
million, respectively, in letters of credit from various banks were outstanding between the various subsidiaries of the Company. Fees associated with letters of credit are not fixed for periods in excess of one year and are based on the Company's ratings and the general availability of these instruments in the marketplace.
The Company has revolving credit facilities in the United States, the United Kingdom, and Australia, under which it may borrow up to approximately $231.1 million. As of December 31, 2004, the Company had drawn approximately $106.1 million under these facilities at interest rates ranging from 1.63% to 6.38% during the year. The Company may draw up to $175.0 million on its U.S. revolving credit facility that expires in May 2006. As of December 31, 2004, the Company had $50.0 million outstanding under this facility. Terminations of revolving credit facilities and maturities of senior notes over the next five years total $56.1 million in 2005 and $150.0 million in 2006.