FIC’s mutual commitments with its life insurance policyholders and annuitants - policyholders to pay premiums and make future deposits, FIC to pay annuities and death benefits - stretch far into the future. This means that FIC’s consolidated statement of operations and balance sheet must necessarily embody several significant estimates about future events. The rates at which its customers will actually die, or will withdraw their funds in response to interest rate changes or other factors, and the returns that FIC will be able to earn on its investments, must all be estimated far into the future in order to judge whether the Company is truly operating currently at a profit and whether its consolidated balance sheet is properly reflecting the current value of its assets and liabilities. Most of these estimates are embodied in balance sheet accounts such as deferred policy acquisition costs, the present value of future profits of acquired businesses, and policy liability reserves. The consolidated balance sheet of the Company presented with this report reflects the result of an extensive review and revision of these accounts and estimates by the Company’s management.
including amortization of DAC and PVFP of $121,000, premium revenue and policyholder benefits and expenses of $202,000, accrued investment income and accounts receivable of $395,000, reinsurance receivables and contractholder deposit funds of $303,000, and policyholder benefits and expenses and interest in contractholder deposit funds totaling $1.5 million.
During 2003, the Company reduced its investment in cash and short-term investments significantly, shifting funds to investments in debt instruments. A substantial portion of these funds, along with proceeds from maturing investments and sales, were reinvested during the first half of 2003 in assets (collateralized mortgage obligations (“CMOs”), asset-backed securities, and private placements) that the then-incumbent management of the Company expected would increase overall returns on invested assets. Following a review of the investment portfolios of the life insurance subsidiaries of the Company in September 2003, the Investment Committee of the Company’s then newly elected Board of Directors recommended the engagement of a third-party investment manager to provide ongoing, professional management of the portfolios. In October 2003, the life insurance subsidiaries entered into investment management agreements with Conning. Under these agreements, Conning manages the investment security portfolios of the Company’s life insurance subsidiaries in accordance with investment policies set by the Company’s Board of Directors.
The Company and Conning continued the realignment of the portfolio in 2004. During 2004, the Company decreased its investment in mortgage-backed securities (including asset-backed securities) significantly, from 53.8% to 37.4% of its total investment in fixed maturities. With the reduction of this exposure to mortgage and asset-backed securities, the Company increased its holdings in corporate securities from 33.8% to 51.4%, substantially all of which are in investment grade securities.
In 2002, operating expenses included approximately $2.9 million in unusual expenses, including an employment contract buy-out with James M. Grace, a former officer of the Company, a charitable contribution in January 2002 to the Mitte Foundation in the amount of $1 million, the costs of a special investigation, and a charge for uncollectible agent balances.
$2.0 million of expenses for the estimated loss for the rental and operation of a leased office building through December 2005.
Certain Non-traditional Long-Duration Contracts and for Separate Accounts.” AcSEC developed the SOP to address the evolution of product designs since the issuance of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” and SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments” and the need for interpretive guidance to be developed in three areas: separate account presentation and valuation; the accounting recognition given sales inducements (bonus interest, bonus credits, persistency bonuses); and the classification and valuation of certain long-duration contract liabilities.