Some of our life insurance products are specifically designed and marketed as policies that help a decedent's heirs to pay estate tax. Legislation enacted in the spring of 2001 increased the size of estates exempt from the federal estate tax, phased in reductions in the estate tax rate between 2002 and 2009 and repealed the estate tax entirely in 2010. This legislation, despite its reinstatement of the estate tax in 2011, could have a negative effect on our revenues from the sale of estate planning products. President Bush and members of Congress have expressed a desire to modify the existing legislation, which could result in faster or more complete reduction or repeal of the estate tax.
Our life insurance and annuity businesses are subject to comprehensive state regulation and supervision throughout the United States. State insurance regulators and the National Association of Insurance Commissioners, or the NAIC, continually reexamine existing laws and regulations, and may impose changes in the future that put further regulatory burdens on us, thereby increasing our costs of doing business or otherwise
Prior to Phoenix Life's demutualization, we focused on participating life insurance products, which pay policyholder dividends. As of December 31, 2004, 74.0% of our life insurance reserves were for participating policies. As a result, a significant portion of our expenses consists, and will continue to consist, of such policyholder dividends. Our net income is reduced by the amounts of these dividends. Policyholder dividends expense was $404.7 million during 2004, $418.8 million during 2003 and $401.8 million during 2002.
Phoenix Home Life demutualized on June 25, 2001 by converting from a mutual life insurance company to a stock life insurance company, became a wholly-owned subsidiary of PNX and changed its name to Phoenix Life Insurance Company, or Phoenix Life. See Note 3 to our consolidated financial statements in this Form 10-K for detailed information regarding the demutualization and closed block.
REVENUES Premiums..................................... $ 990.6 $ 1,042.2 $ 1,082.0 $ (51.6) $ (39.8) Insurance and investment product fees........ 534.9 500.9 493.8 34.0 7.1 Broker-dealer commission and distribution fee revenues.................. 56.9 81.5 85.0 (24.6) (3.5) Investment income, net of expenses........... 1,075.7 1,107.4 940.5 (31.7) 166.9 Unrealized gain on trading equity securities. 85.9 -- -- 85.9 -- Net realized investment gains (losses)....... (0.8) (98.5) (133.9) 97.7 35.4 ------------ ------------ ------------ ----------- ---------- Total revenues............................... 2,743.2 2,633.5 2,467.4 109.7 166.1 ------------ ------------ ------------ ----------- ----------
Insurance and investment product fees increased $34.0 million, or 7%, in 2004 from 2003 primarily due to $12.6 million increase in Asset Management fees and a $18.5 million increase for Life and Annuity. Asset Management private client and institutional investment product fees which are asset-based increased $9.8 million and $6.2 million, respectively as a result of increased assets under management. These increases were partially offset by lower other investment product fees as a result of decreased volumes in equity trading by certain of our clients, which resulted in lower commissions earned. Approximately 57% of our management fee revenues are based on assets as of the beginning of a quarter, which causes the trend in fees to lag behind that of assets under management. The increase in Life and Annuity revenues in 2004 is primarily due to higher universal life insurance fees of $14.3 million, principally from cost of insurance, or COI, fees, and higher annuity fees primarily due to higher fee-based funds on deposit. Corporate and Other fees decreased in 2004 due to the sale of our India software services subsidiary.
Net realized investment losses decreased $35.4 million, or 26%, in 2003 from 2002, primarily due to lower impairments from improved credit market conditions including a $26.6 million reduction in impairment losses related to debt securities pledged as collateral related to our consolidated and higher net transaction related gains.
the ongoing operations of the business. Investment income on debt and equity securities pledged as collateral as well as interest expense on non-recourse collateralized obligations, both related to three consolidated collateralized obligation trusts we sponsor, are included in the Corporate and Other segment. Excess investment income on debt and equity securities pledged as collateral represents investment advisory fees earned by our asset management subsidiary and are allocated to the Asset Management segment as investment product fees for segment reporting purposes only. Also, all interest expense is included in the Corporate and Other segment, as are several smaller subsidiaries and investment activities which do not meet the criteria of reportable segments. These include our remaining international operations and the run-off of our group pension and guaranteed investment contract businesses.
Total segment income return on equity is 4.1%, 3.0% and (2.9)% for 2004, 2003 and 2002, respectively. Total segment return on equity is calculated as total segment income as a percentage of the average of beginning and end of year adjusted stockholders' equity as follows:
Other operating expenses decreased $6.9 million, or 2%, in 2003 from 2002 as a result of generally lower non-deferrable operating expenses, partially offset by higher employee benefit costs.
Year Ended December 31, Changes Summary Venture Capital Financial Data: ------------------------------------ ----------------------- ($ amounts in millions) 2004 2003 2002 2004/03 2003/02 ----------- ----------- ----------- ----------- ----------- Results of Operations Net realized gains (losses) on partnership cash and stock distributions............... $ 7.4 $ 4.9 $ (4.7) $ 2.5 $ 9.6 Net unrealized gains (losses) on partnership investments.................... 13.6 37.1 (47.2) (23.5) 84.3 Partnership operating expenses............... (1.7) (5.8) (7.4) 4.1 1.6 ----------- ----------- ----------- ----------- ----------- Segment net investment income (loss)......... 19.3 36.2 (59.3) (16.9) 95.5 Applicable income taxes (benefit)............ 6.8 12.7 (20.7) (5.9) 33.4 ----------- ----------- ----------- ----------- ----------- Segment net income (loss).................... $ 12.5 $ 23.5 $ (38.6) $ (11.0) $ 62.1 =========== =========== =========== =========== ===========
International income increased $5.1 million in 2004 over 2003 due primarily to higher earnings from an Argentine affiliate combined with lower losses from our India software services affiliate, which was sold in 2004.
International results decreased $5.6 million in 2003 from 2002, due primarily to lower equity in earnings from Aberdeen.
The selection of a 100 basis point immediate, parallel increase or decrease in interest rates is a hypothetical rate scenario used to demonstrate potential risk. While a 100 basis point immediate, parallel increase or decrease does not represent our view of future market changes, it is a reasonably possible hypothetical near-term change that illustrates the potential impact of such events. Although these fair value measurements provide a representation of interest rate sensitivity, they are based on our portfolio exposures at a point in time and may not be representative of future market results. These exposures will change as a result of on-going portfolio transactions in response to new business, management's assessment of changing market conditions and available investment opportunities.
As of December 31, 2004 Interest Rate Sensitivity of Fixed Income ---------------------------------------------------- Financial Instruments: -100 Basis +100 Basis ($ amounts in millions) Carrying Point Point Value Change Fair Value Change ------------ ------------ ------------ ------------
Guaranteed Minimum Death Benefit Exposure: 2004 2003 ($ amounts in millions) ----------- -----------
United States government and agency........................ $ 679.1 $ 625.4 $ -- $ -- State and political subdivision............................ 446.5 413.7 -- -- Foreign government......................................... 194.9 175.9 119.9 108.1 Corporate.................................................. 6,630.3 6,337.9 735.1 702.8 Mortgage-backed............................................ 3,195.4 3,073.6 58.0 49.3 Other asset-backed......................................... 1,256.0 1,230.0 161.1 175.0 ----------- ----------- ----------- ----------- Total debt securities...................................... $12,402.2 $11,856.5 $ 1,074.1 $ 1,035.2 =========== =========== =========== ===========
At the end of each reporting period, we review all securities for potential recognition of an other-than-temporary impairment. We maintain a watch list of securities in default, near default or otherwise considered by our investment professionals as being distressed, potentially distressed or requiring a heightened level of scrutiny. We also identify securities whose carrying value has been below amortized cost on a continuous basis for zero to six months, greater than six months to 12 months, greater than 12 months to 24 months and greater than 24 months. This analysis is provided for investment grade and non-investment grade securities and closed block and outside of closed block securities. Using this analysis, coupled with our watch list, we review all securities whose fair value is less than 80% of amortized cost (significant unrealized loss) with emphasis on below investment grade securities with a continuous significant unrealized loss in excess of six months. In addition, we review securities that had experienced lesser percentage declines in value on a more selective basis to determine if a security is other-than-temporarily impaired.
For debt securities in the closed block with gross unrealized losses, 74% of the unrealized losses pertain to investment grade securities and 26% of the unrealized losses pertain to below investment grade securities.
Historically, our Life Companies have used cash flow from operations and investment activities to fund liquidity requirements. Their principal cash inflows from life insurance and annuities activities come from premiums, annuity deposits and charges on insurance policies and annuity contracts. In the case of Phoenix Life, cash inflows also include dividends, distributions and other payments from subsidiaries. Principal cash inflows from investment activities result from repayments of principal, proceeds from maturities, sales of invested assets and investment income. The principal cash inflows from our discontinued group accident and health reinsurance operations come from our reinsurance, recoveries from other retrocessionaires and investment activities. See Note 17 to our consolidated financial statements in this Form 10-K for additional information.
The postretirement plan is unfunded. The projected benefit obligation and, therefore, its funded status was $(70.3) million and $(78.7) million as of December 31, 2004 and 2003, respectively. The increases in the projected benefit obligations of the employee plan and the supplemental plan at December 31, 2004 as compared to December 31, 2003 is principally the result of accrued service cost, interest cost and the effects of the lowering of the assumed discount rate from 6.0% at December 31, 2003 to 5.75% at December 31, 2004.