In April 2003, the Company completed an analysis of its assumptions related to its group long-term income protection claim reserves. Included in the analysis was a review of active claim reserves, IBNR reserves, and claim reopen reserves. An active claim reserve is established for future benefit payments when a claim is incurred and reported to the Company. IBNR reserves are established on claims which are estimated to have been incurred but not yet reported to the Company. Claim reopen reserves are established for those claimants who have previously recovered but who are anticipated to return to disabled status under the same disability and within a specified period of time, as contractually allowed by the disability policy. The analysis was initiated based on lower claim resolution rates observed during the first quarter of 2003. The claim resolution rate is the rate of probability that a disability claimant will recover, die, or reach maximum benefit limits and no longer receive benefit payments from the Company. Generally, claim resolution rates vary by the age of the claimant at the time of disability, duration or length of time since the disability initially occurred, and claim diagnosis. The claim resolution rates for group long-term income protection during the first quarter of 2003 were below levels anticipated for reserves and were lower
The Company has various stock-based employee compensation plans. Prior to 2003, the Company accounted for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and selected the prospective method of adoption allowed under the
As previously noted, the Company has entered into an agreement to dispose of its Canadian branch. Due to this agreement, the results of the Canadian branch are reflected as discontinued operations in the consolidated statements of operations in each of the years for which results are presented. Accordingly, the discussion of results by segment below does not include amounts related to those operations. The sale of the Company’s Japanese operation does not meet the accounting criteria for discontinued operations because of the Company’s ongoing reinsurance arrangement with the buyer of that company.
The Income Protection segment includes the group long-term and short-term income protection insurance, recently issued and closed block lines of individual income protection insurance, group and individual long-term care, and managed disability.
interest adjusted loss ratio was 43.4 percent and 39.2 percent for 2002 and 2001, respectively. Submitted incidence rates decreased in 2002 relative to 2001, but paid claim incidence rates for the individual income protection - recently issued line of business increased from 2001. The net claim resolution rate for 2002 decreased compared to the 2001 results. Individual income protection - recently issued reported an increase in the commission ratio, but benefited from an improved operating expense ratio for 2002 as compared to 2001.
Group life 2002 sales, relative to the prior year, decreased 16.6 percent, with the decrease noted in all case size markets. This was partially due to the Company’s strategic decision to focus on integrated sales of life and income protection and less on stand-alone life. In addition, two large group life cases totaling approximately $41.7 million were sold during 2001.
Operating revenue in the Corporate segment was $31.6 million in 2003, compared to $34.0 million in 2002 and $45.6 million in 2001. The Corporate segment reported operating losses of $193.5 million in 2003, $155.0 million in 2002, and $165.2 million in 2001. Interest and debt expense increased from $169.6 million in 2001 and $162.4 million in 2002 to $187.2 million in 2003 due to the impact of the offering in May 2003 and the long-term debt offerings in 2002, as discussed under “Liquidity and Capital Resources.” Included in operating expenses for 2003 is approximately $15.0 million in severance and pension benefit payouts related to the change of the Company’s president and chief executive officer.
• $14.8 million loss during the fourth quarter of 2001 on securities issued by a large manufacturer of wheels for automobiles, after the company announced in December 2001 that it would seek bankruptcy protection. The write-down represented 7.0 percent of the total write-downs for 2001. The company also announced in September 2001 that it would restate results for the previous year and first quarter of the current year because of accounting errors and issued restated results in the fourth quarter of 2001. The investment was originally purchased as part of the Company’s below-investment-grade strategy. Prior to its write-down, the investment had been in an unrealized loss position for a period of greater than two years but less than three years. The circumstances of this impaired investment have no impact on other investments.
Investing cash inflows consist primarily of the proceeds from the sales and maturities of investments. Investing cash outflows consist primarily of payments for purchases of investments. Net cash used in investing activities was $2,107.9 million and $1,586.9 million for the years ended December 31, 2003 and 2002, respectively. The $521.0 million increase in net cash used in investing activities in 2003 over 2002 is partly attributable to the Company’s $1,151.7 million increase in investments acquired as a result of the deployment of the cash generated from the Company’s combined offering during 2003. The Company generated $1,362.8 million in higher proceeds from maturities of available-for-sale securities in 2003 than in 2002, primarily due to an increase in bond calls and mortgage backed security prepayments that resulted from the lower interest rate environment. The Company received $573.0 million less in proceeds from sales of available-for-sale securities during 2003 compared to 2002. During 2002 and 2001, the Company essentially completed its portfolio repositioning initiated subsequent to the merger in June 1999. In 2003, the Company was more focused on investing, and its sales were primarily related to the reduction and restructuring of its below-investment-grade portfolio.
The U.S. pension plans experienced a negative pension expense in 2002 and 2001 that increased before tax income in the amount of $2.6 million and $17.7 million, respectively, in each of those years. In 2003, the Company experienced a pension expense of $41.8 million that decreased before tax income.
The following table summarizes the timing of anticipated settlements of interest rate swaps outstanding at December 31, 2003, whereby the Company receives a fixed rate and pays a variable rate. The weighted average interest rates assume current market conditions.
related to the Company’s derivative holdings, and there was no component of the derivative instruments’ gain or loss excluded from the assessment of hedge effectiveness.
During 2003, the Company’s valuation allowance decreased by $7.5 million related to its investment in foreign operations.
As of December 31, 2003, the Company’s subsidiaries had net operating loss carryforwards of approximately $599.2 million, capital loss carryforwards of $37.7 million, and foreign tax credit carryforwards of $43.9 million, $18.0 million of which pertains to continuing operations. The majority of the net operating loss carryforwards will begin to expire, if not utilized, in 2019. If not utilized, capital loss carryforwards of $2.6 million, $13.1 million, and $22.0 million will begin to expire in 2005, 2007, and 2008, respectively. In 2007 and 2008, $19.6 million and $24.3 million, respectively, of the foreign tax credit carryforwards will begin to expire if not utilized.
Note 9 - Debt and Company-Obligated Mandatorily Redeemable Preferred Securities - Continued
This reinsurance agreement transfers risk and is accounted for as a long-duration reinsurance contract in accordance with the provisions of Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The underlying operating results of this contract are reflected in other income, and any realized gain or loss from the sale of assets is reflected as a realized investment gain or loss in the Company’s consolidated statements of operations.