Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. For example, assessing the value of certain investments requires the Company to perform an analysis of expected future cash flows or rates of prepayments. Other investments, such as collateralized mortgage or bond obligations, represent selected tranches of a structured transaction, supported overall by underlying investments in a wide variety of issuers. The Company’s specific accounting policies related to its invested assets are discussed in the Notes to the Consolidated Financial Statements.
Premiums and policy fees were $735.9 million in 2003, a decrease of $74.4 million or 9.2% from 2002 premiums and policy fees. In 2003, the Company substantially completed its recovery of all of the previously mentioned reinsurance overpayments. As a result, $18.4 million of premiums and policy fees were recorded in 2003 related to the collection of the reinsurance overpayment. Overall, premiums and policy fees in the Life Marketing segment declined $21.5 million from 2002, reflecting an increase in the use of reinsurance. Premiums and policy fees from the Conseco transaction resulted in an increase of $7.2 million. Premiums and policy fees from older acquired blocks decreased $17.8 million as a result of normal lapsing of policies resulting from deaths of insureds or terminations of coverage. Premiums and policy fees in the Annuities segment increased by $0.4 million in 2003. Premiums and policy fees in the Asset Protection segment decreased by $41.0 million due to reduced credit earned premiums attributable to lower sales and the termination of non-core lines of business. Premiums and policy fees in the Corporate and Other segment decreased by $1.8 million.
The following table sets forth for the periods shown the amount of net investment income, the percentage change from the prior period, and the percentage earned on average cash and investments:
Derivative Year Ended Financial All Other December 31 Instruments Investments --------------------------------------------------------------- (in thousands) 2001 $(1,114) $(8,740) 2002 28,308 910 2003 12,550 58,064 ---------------------------------------------------------------
Other income was $100.2 million in 2002, a decrease of $20.4 million, or 17.0% from the $120.6 million reported for 2001. In 2002, revenues from the Company’s broker-dealer subsidiary increased $1.8 million. Other income from the Company’s direct response businesses decreased $6.7 million due to reduced emphasis on selling other companies’ products. Revenues from the service contract businesses decreased $12.7 million due to lower sales caused by general economic conditions. The sale of an inactive charter in 2002 resulted in a gain of $2.7 million. Other income from all other sources decreased $5.5 million.
The majority of unrealized losses in the Company’s investment portfolio can be attributed to interest rate fluctuations have been deemed temporary. As indicated above, when the Company’s investment management deems an investment’s market value decline as other than temporary, it is written down to estimated market value. In all cases, management will continue to carefully review and monitor each security.
Realized losses are comprised of both write-downs on other-than-temporary impairments and actual sales of investments.
As discussed earlier, the Company’s management considers several factors when determining other than temporary impairments. Although the Company generally intends to hold securities until maturity, the Company may change its position as a result of a change in circumstances. Any such decision is consistent with the Company’s classification of all but a specific portion of its investment portfolio as available for sale. During the year ended December 31, 2003, the Company sold securities in an unrealized loss position with a market value of $524.8 million resulting in a realized loss of $6.3 million. For such securities, the proceeds, realized loss and total time period that the security had been in an unrealized loss position are presented in the table below.
At December 31, 2003, the Company had $4.7 billion of stable value product account balances with an estimated fair value of $4.7 billion (using discounted cash flows), and $3.5 billion of annuity account balances with an estimated fair value of $3.5 billion (using surrender values).
The market values of fixed maturities increase or decrease as interest rates fall or rise. As prescribed by generally accepted accounting principles, investments deemed as “available for sale” are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of share-owners’ equity. Furthermore, investments deemed as trading securities by the Company are recorded at their market values with any resulting unrealized gains and losses reported in net realized gains. The Company’s trading securities were consolidated as of December 31, 2003 in conjunction with the adoption of FIN 46, therefore, there was no income effect for the year then ended.
Year Expected Amortization --------------------------------------------- 2004 $32,400 2005 30,700 2006 29,200 2007 28,000 2008 26,800 ---------------------------------------------
For mortgage-backed securities in an unrealized loss position for greater than 12 months, $23.3 million of the unrealized loss relates to securities issued in Company-sponsored commercial loan securitizations. The Company does not consider these unrealized loss positions to be other than temporary, because the underlying mortgage loans continue to perform consistently with the Company’s original expectations.
The criteria for payment of performance awards is based primarily upon a comparison of the Company’s average return on average equity and total rate of return over a four-year award period (earlier upon the death, disability, or retirement of the executive, or in certain circumstances, of a change in control of the Company) to that of a comparison group of publicly held life and multiline insurance companies. If the Company’s results are below the median of the comparison group, no portion of the award is earned. If the Company’s results are at or above the 90th percentile, the award maximum is earned. Awards are paid in shares of Company Common Stock.
In addition to pension benefits, the Company provides limited healthcare benefits to eligible retired employees until age 65. This postretirement benefit is provided by an unfunded plan. This benefit has no material effect on the Company’s consolidated financial statements. For a closed group of retirees over age 65, Protective provides a prescription drug benefit. At December 31, 2003, the Company’s liability related to this benefit was $0.3 million. The Company’s obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
2003 2002 ----------------------------------------------------------- Carrying Carrying Amounts Fair Values Amounts Fair Values --------------------------------------------------------------------------------------------------------------- Assets (see Notes 1 and 2): Investments: Fixed maturities $13,355,911 $13,355,911 $11,664,065 $11,664,065 Equity securities 46,731 46,731 64,523 64,523 Mortgage loans on real estate 2,733,722 2,958,052 2,518,152 2,826,133 Short-term investments 519,419 519,419 448,399 448,399 Cash 136,698 136,698 101,953 101,953 Liabilities (see Notes 1 and 4): Stable value product account balances 4,676,531 4,736,681 4,018,552 4,124,192 Annuity account balances 3,480,577 3,475,167 3,697,495 3,751,223 Debt: Bank borrowings 25,000 25,000 30,000 30,000 Senior and Medium-Term Notes 429,415 419,825 369,166 382,545 Subordinated debt securities 221,650 234,526 215,000 218,580 Other (see Note 1): Derivative financial instruments 153,219 153,219 92,801 92,801 ---------------------------------------------------------------------------------------------------------------
The Company estimates the fair value of its mortgage loans using discounted cash flows from the next call date.