We consider the following accounting policies to be critical due to the amount of judgment and uncertainty inherent in the application of these policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. In addition, if factors such as those described in Exhibit 99.01 attached to this report cause actual events to differ from the assumptions used in applying the accounting policies and calculating financial estimates, our business, results of operations, financial condition and liquidity could be materially adversely affected.
Concurrently with the completion of our initial public offering, we completed the acquisition of Kanawha and its subsidiaries. For financial reporting purposes, we have treated the acquisition as if it closed on December 31, 2004, rather than the actual closing date of December 21, 2004, as the effects of the acquisition for the period from December 21, 2004, through December 31, 2004, were not material to our predecessor’s consolidated statements of operations, cash flows and changes in shareholders’ equity for the year ended December 31, 2004.
Total benefits and expenses decreased $0.9 million, or 0.6%, to $144.3 million in the year ended December 31, 2004, from $145.2 million in the year ended December 31, 2003. The primary factors causing this increase are explained in “-Policyholder Benefits” and “-General Insurance Expenses” below.
Other policyholder liabilities, which are comprised primarily of dividend accumulations and advance premiums, increased by $0.3 million, or 2.9%, to $10.8 million as of December 31, 2004, from $10.5 million as of December 31, 2003. The increase in 2004 was primarily due to an increase in dividend accumulations of $0.2 million and an increase in advanced premium payments of $0.1 million.
The provisions of Statement 132 remain in effect until the provisions of Statement 132 (revised 2003) are adopted. Disclosure of the benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter is effective for fiscal years ending after June 15, 2004. The additional disclosure provisions were adopted by our predecessor in 2003.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Predecessor at December 31, 2003 and the Company at December 31, 2004, and the Predecessor’s consolidated results of operations and cash flows for the years ended December 31, 2002, 2003 and 2004 and the Company’s results of operations and cash flows for the period January 21, 2004 (inception) through December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
The Predecessor’s deferred acquisition costs at December 31, 2004, were eliminated upon the closing of the acquisition of the Predecessor as part of the application of GAAP purchase accounting requirements. The Company began recording deferred acquisition costs prospectively on January 1, 2005.
State insurance laws and regulations prescribe accounting practices for determining statutory net income and equity for insurance companies. In addition, state regulators may permit statutory accounting practices that differ from prescribed practices. The Company does not have any permitted accounting practices.
The Company adopted the Predecessor’s defined benefit retirement plan, deferred contribution plan, and deferred compensation plan. These plans were unchanged by the Kanawha acquisition and remain in effect.
The Predecessor recorded an additional minimum pension liability of $0.2 million and $0.0 million, in 2003 and 2004 respectively, for the unfunded portion of the accumulated benefit obligation.
Mortgage loans included loans to related parties of approximately $6.3 million and $0.0 million at December 31, 2003, and 2004, respectively.
The Company is assessed amounts by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in