Pursuant to an arrangement between NMIC and certain of its subsidiaries, during 2004 the Company leased on average approximately 926,000 square feet of office space in the three-building home office complex and in other offices in central Ohio. Also, approximately 120,000 square feet and 160,000 square feet of office space are located in Berwyn, Pennsylvania (leased) and Newark, Delaware (owned), respectively. Of this amount, 90,000 square feet in the Berwyn, Pennsylvania office is subleased. The Company believes that its present facilities are adequate for the anticipated needs of the Company.
(xi) General economic and business conditions which are less favorable than expected;
For those products amortized in relation to estimated gross profits, the most significant assumptions involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Company’s long-term assumption for net separate account performance is currently 8%. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. The assumed net separate account return assumptions used in the VOBA models are intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, the Company’s policy regarding the reversion to the mean process does not permit such returns to be negative or in excess of 15% during the three-year reversion period.
Net realized losses on investments, hedging instruments and hedged items totaled $30.8 million, $69.4 million and $79.4 million in 2004, 2003 and 2002, respectively, and included other-than-temporary impairments of $103.4 million, $170.4 million and $124.2 million in 2004, 2003 and 2002, respectively. Non-impairment
Amortization of DAC increased to $442.1 million in 2004 compared to $399.5 million in 2003. The increase in DAC amortization expense primarily was attributable to the Individual Investments segment due to higher estimated gross profits on the underlying business. Amortization of DAC decreased by $278.6 million in 2003 from $678.1 million in 2002. The substantial decrease in DAC amortization in 2003 reflects an acceleration of DAC amortization recorded in the third quarter of 2002. As part of the regular quarterly analysis of DAC, at the end of the third quarter of 2002, the Company determined that using actual experience to date and assumptions consistent with those used in the second quarter of 2002, its individual variable annuity DAC balance would be
During the second quarter of 2004, the Company reorganized its segment reporting structure and now reports four segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other. The Company has reclassified segment results for all prior periods presented to be consistent with the new reporting structure.
Policy charges increased to $525.7 million in 2004, up 18% from $445.3 million in 2003, which was down 4% from $463.3 million in 2002. The increase in 2004 was due to higher variable asset fees as average separate account values increased by 17%. Policy charges in 2003 were lower than 2002 primarily due to a 3% decrease in average separate account assets compared to the prior year.
Other income, which includes fees for administration-only cases and NTC products, increased 46% in 2004 compared to 2003, which was up 44% from 2002. The increases primarily were due to growth in private sector retirement plans sold through NTC, which now accounts for 28% and 21% of private sector retirement plan account values in 2004 and 2003, respectively. Also contributing to the year over year increases was the continued growth in administration-only business in public sector.
NFS is a holding company whose principal asset is the common stock of NLIC. The principal sources of funds for NFS to pay interest, dividends and operating expenses are existing cash and investments and dividends from NLIC and other subsidiaries.
Certain assumptions have been made about retirement patterns in the amounts reported. Actual retirements may differ significantly from those projected and may result in early withdrawal of contract funds, which could cause the timing of the obligations reported to vary significantly. In addition, contractual surrender provisions exist on an immaterial portion of these contracts that could decrease and/or accelerate those obligations presented. Most of the contracts with potentially accelerated timing of payments are subject to surrender charges which are generally calculated as a percentage of deposits made and are assessed at declining rates during the first seven years after a deposit is made. Amounts disclosed herein include an estimate of those accelerated payments, net of applicable surrender charges. Furthermore, in developing the estimates of payments due by period, the Company followed the process for determining future interest crediting rates as described in note 7 above.
In addition, the Company makes discretionary pension plan and other postretirement benefit plan contributions. See Note 19 to the consolidated financial statements included in the F pages of this report for a detailed discussion of plan contributions.