The Company leases administrative and marketing office space in approximately 25 cities, including approximately 33,571 square feet in Birmingham (excluding the home office building), with most leases being for periods of three to ten years. The aggregate annualized rent is approximately $6.0 million.
Average Life Insurance In-Force(1) Traditional $296,399,244 $224,298,764 $159,093,485 32.1 41.0 Universal life 40,416,769 36,865,396 33,529,411 9.6 9.9 _____________________________________________ $336,816,013 $261,164,160 $192,622,896 29.0 35.6 _____________________________________________
INCOME BEFORE INCOME TAX $ 87,300 $ 95,150 $ 95,097 (8.3) 0.1 ________________________________________
Benefits and settlement expenses were down for 2004 and 2003, due to the decline in business in-force as well as normal fluctuations in mortality. Amortization of DAC decreased during 2004 due to the overall decline in business as well as lower gross profits on certain universal life blocks primarily caused by higher mortality. The general decline in premiums drove the decrease in amortization of DAC in 2003. Other operating expenses decreased during 2004 due to conversion costs incurred for the Conseco acquisition during 2003 as well as lower agent commissions incurred as a result of lower net premiums. The decrease in other operating expenses in 2003 was primarily driven by lower commission expense and conversion costs incurred in 2002 for the Inter-State and First Variable acquisitions.
Sales Fixed annuity $443,170 $163,516 $628,367 171.0% (74.0)% Variable annuity 282,926 350,590 324,507 (19.3) 8.0 _________________________________________ $726,096 $514,106 $952,874 41.2 (46.0) _________________________________________
Foreign currency swaps $ 519 $ 2,687 $ 71,099 $ (2,168) $(68,412) Foreign currency adjustments on stable value contracts (44) (1,711) (75,172) 1,667 73,461 Derivatives related to corporate debt 17,601 1,359 41,487 16,242 (40,128) Derivatives related to mortgage loan commitments (1,652) 4,738 (30,335) (6,390) 35,073 Other derivatives 3,167 5,477 21,229 (2,310) (15,752) _______________________________________ ________________________ Total realized gains (losses) - derivatives $19,591 $ 12,550 $ 28,308 $ 7,041 $(15,758) _______________________________________ ________________________
Currently, the Company’s insurance subsidiaries have statutory surplus and risk-based capital levels well above regulatory required levels. At December 31, 2004, the primary insurance subsidiaries had the following insurer financial strength ratings:
The timing of premium payments to, and receipt of expense allowances from, reinsurers may differ from the Company’s receipt of customer premium payments and incurrence of expenses. These timing differences introduce variability in certain components of the Company’s statements of income, and may also introduce variability in the Company’s quarterly results.
The Company is exposed to potential risks from recent legislation requiring companies to evaluate their internal control over financial reporting.
The market values of fixed maturities change due to interest rate changes, credit related events, and other factors. As prescribed by GAAP, investments deemed as “available for sale” are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of share-owners’ equity. Furthermore, investments deemed as trading securities by the Company are recorded at their market values with any resulting unrealized gains and losses reported in net realized gains. The Company’s trading securities were consolidated as of December 31, 2003 in conjunction with the adoption of FIN 46, therefore, there was no income effect for 2003.
The Company has entered into asset swap arrangements to, in effect, sell the equity options embedded in owned convertible bonds in exchange for an interest rate swap that converts the remaining host bond to a variable rate instrument. In 2004, 2003, and 2002, the Company recognized an immaterial loss, a $3.0 million gain, and a $2.0 million gain, respectively, for the change in the asset swaps’ fair value and recognized a $4.0 million gain, a $0.1 million gain, and a $7.8 million loss, respectively, to separately record the embedded equity options at fair value.
2004 2003 2002 ______________________________________________________________________________________________________________ Cash paid during the year: Interest on debt $ 49,107 $ 45,341 $ 39,553 Income taxes 117,240 66,082 132,039 ______________________________________________________________________________________________________________ Noncash investing and financing activities: Reissuance of treasury stock to ESOP $ 888 $ 877 $ 59 Change in unallocated stock in ESOP 378 410 540 Stock-based compensation 9,331 10,204 3,239 Change in collateral for securities lending transactions 214,824 83,456 250,806 ______________________________________________________________________________________________________________ Acquisitions and related reinsurance transactions: Assets acquired $ 0 $ 0 $ 358,897 Liabilities assumed 0 0 (489,412) ______________________________________________________________________________________________________________ Net $ 0 $ 0 $(130,515) ______________________________________________________________________________________________________________
4. Long-Term Debt, Subordinated Debt Securities, and Liabilities Related to Variable Interest Entities
The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment’s primary focus is on life insurance policies sold to individuals.