In addition, in conjunction with our acquisition of the insurance operations of Family Health Plan Cooperative ("FHP") in November 2000, we assumed a 10-year lease for a 60,000 square-foot facility with an additional 10,000 square feet of storage space in Brookfield, Wisconsin. On March 29, 2002, we assigned this lease to APS. However, we would remain liable in the event that APS would default on this lease.
o improving underwriting techniques and pricing products appropriately to reflect underlying cost trends;
Insured medical products revenue in 2002 increased 7.8% to $1,240.1 million from $1,150.4 million in 2001. The increase in premium revenue in 2002 is primarily due to the Combination and resultant addition of one quarter of the UWS business. The number of insured medical members as of December 31, 2002 decreased to 456,836 from 530,480 as of December 31, 2001. The decrease in membership in 2002 is primarily due to BCBSUW's exit from the Medicare+Choice program, effective January 1, 2002, and cancellations of unprofitable business in the Milwaukee market.
Net investment income and realized investment gains (losses) in 2002 increased 9.6% to $13.7 million from $12.5 million in 2001. Included in net realized investment gains (losses) in 2002 are $3.2 million in losses relating to fixed income investments for which impairment in value was deemed to be other-than-temporary. The increase in net investment income and realized investment gains (losses) in 2002 is primarily due to an increase in invested assets resulting from several factors, including the addition of one quarter of earnings on the UWS invested assets due to the Combination, and investment income on proceeds from the sales of AMSG shares and IRG. Partially offsetting the increase in investment income from invested assets was the elimination of BCBSUW investment income related to intracompany financing arrangements with UWS, subsequent to March 31, 2001, due to the Combination and a decrease in interest rates on new investment purchases. Average annual investment yields, excluding net realized investment gains, investment income from affiliates, and other interest income, were 4.4% in 2002 and 5.8% in 2001.
The insured medical products SGA expense ratio in 2002 was 11.2% compared with 9.6% in 2001. The increase in the SGA expense ratio in 2002 resulted primarily from a decrease in revenue from cancellation of unprofitable business that was not matched by a decrease in staff due to efforts to maintain service levels. Fourth quarter 2002 SGA expenses included $2.5 million related to the consolidation of operating centers, of which $2.3 million related to the insured medical segment.
Insured medical products revenue in 2001 increased 125.3% to $1,150.4 million from $510.6 million in 2000. The increase in 2001 is primarily due to the Combination and the resultant addition of UWS business.
The loss from investment in affiliates increased to $22.7 million in 2001 from $6.5 million in 2000. The $22.7 million loss in 2001 is comprised of our pro rata share of AMSG's net income of $2.0 million for 2001, BCBSUW's share of UWS income of $0.4 million for the first quarter of 2001, and other affiliate net income of $0.1 million, offset by a $25.2 million write-down of the investment in AMSG to its market value as of December 31, 2001. This write-down was deemed appropriate based on management's decision to no longer classify the investment in AMSG as a strategic long-term asset. The 2000 loss from investment in affiliates of $6.5 million is comprised of a $7.6 million loss related to UWS, offset by a $1.1 million equity share in the net income of AMSG.
To meet periodic cash flow requirements, we make borrowings under our bank line of credit ("LOC"). The line of credit is with a commercial bank and has an interest rate equal to the London Interbank Offered Rate ("LIBOR"), plus 2.0%, adjusted monthly with interest payments due monthly. The LOC permits aggregate borrowings among certain subsidiaries, excluding the corporate holding company, up to $20.0 million. At December 31, 2002, the outstanding balance on this LOC was $7.5 million. The LOC terminates, and all borrowings then outstanding are due, on April 30, 2003.
In addition, we had a term business note ("term note") with a commercial bank for $7.5 million originated on December 31, 2001, which was repaid in full in the third quarter of 2002. The term note had a rate of interest equal to LIBOR plus 1.5%, with payment of principal and interest due in quarterly installments beginning June 30, 2002.
Subsequent to September 11, 2001, we observed significant variability in our claims patterns. Experience for claims incurred appeared to be artificially low, and we attributed a portion of this variability to an estimated increase in lag times between the dates claims were incurred and submitted to us. In addition, we anticipated increased utilization relating to business we were exiting at the end of 2001, including certain CompcareBlue groups and Medicare+Choice. Our ultimate experience relating to these matters was more favorable than estimated.
We frequently face challenges from domestic tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income. In evaluating the exposure associated with our various filing positions, we record reserves for probable exposures when identified. Based on our evaluation of our tax positions, we believe we have appropriately accrued for probable exposures and there are no reasonably possible amounts due in excess of the amounts accrued. To the extent we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of amounts accrued, our income tax expense in a given financial statement period may be materially impacted.
Overall membership in our health benefits plans has decreased substantially recently, in large part due to our efforts to eliminate unprofitable business. No state or federal regulatory body has expressed concern to us over our divestiture of unprofitable business. A further reduction in the number of subscribers to our health care programs could adversely affect our financial position, results of operations, and cash flows. Factors that could contribute to a loss of membership include:
We operate in a highly competitive environment which may affect our ability to maintain or increase our membership or premium rates or to contract with providers on attractive terms. We face competition from other managed care companies, hospitals, health care facilities, and other health care providers, some of which have substantially greater financial and other resources than we have.
OUR BUSINESS IS DEPENDENT IN PART ON THE SERVICE OF NON-EXCLUSIVE INDEPENDENT AGENTS AND BROKERS WHO MAY REFER THEIR BUSINESS TO OUR COMPETITORS.
THE HEALTH BENEFITS INDUSTRY IS SUBJECT TO NEGATIVE PUBLICITY, WHICH CAN ADVERSELY AFFECT OUR PROFITABILITY.
o adversely affecting our ability to market our products and services;
HEALTH CARE DEVELOPMENTS OR AN ECONOMIC DOWNTURN IN WISCONSIN MAY HARM OUR RESULTS.
In addition, Wisconsin insurance law prohibits any person from acquiring control of us, and thus indirect control of our insurance subsidiaries, without the prior approval of the OCI. Any purchaser of 10% or more of the voting securities of a corporation is presumed to have acquired control of the corporation unless the OCI determines otherwise. Therefore, even if the provisions of our Amended and Restated Articles of Incorporation and Bylaws described above were amended, repealed or held to be unenforceable, any person wishing to acquire control of us or of any substantial portion of our outstanding shares, with or without the approval of our board of directors or shareholders, would first be required to obtain the approval of the OCI.
Any acquisition of Cobalt will require the approval of our board of directors and the holders of a majority of the shares of our common stock. As long as the Foundation beneficially owns more than 50% of our common stock, it will be able, by itself, to block any such proposed transaction even if our board of directors and other shareholders would otherwise favor the transaction. In addition, for so long as the Foundation beneficially owns at least 20% of our outstanding shares, we must consult with the Foundation prior to soliciting, or upon receiving, a business combination proposal which, if consummated, would result in our then existing shareholders owning less than a majority of the outstanding shares of the resulting company. The Foundation is expected to vote its shares of our common stock on proposed merger and sale transactions based upon its best interests. The interests of the Foundation in a merger or sale transaction may be different from the interests of other shareholders.
Certain costs of acquiring new insurance policies for workers' compensation and certain individual health products have been deferred. Deferred acquisition costs of $16,280,000 and $9,488,000 at December 31, 2002 and 2001, respectively, are included in other current and noncurrent assets and are being amortized over the estimated premium-paying periods of the related policies. Acquisition costs of $10,862,000, $4,467,000, and $2,661,000 were capitalized in 2002, 2001, and 2000, respectively. Deferred acquisition costs of $4,070,000, $3,384,000, and $2,289,000 were amortized during 2002, 2001, and 2000, respectively.
Health services premiums are recognized as revenue in the period in which enrollees are entitled to care. Managed care consulting revenues are generally recognized when services are rendered. Case management revenues are recognized when services are billed. Receivables management revenues are recognized when cash is received.
Premiums are typically billed to insureds in advance of the respective coverage periods and are included in premium receivable upon the effective date of coverage. Premiums received from insureds but not yet earned under the policy are recorded as advance premiums and earned pro-rata throughout the policy period.
Administrative expenses include costs associated with maintenance of membership records, claim processing and payment, coordination of benefits, billing/cash collection, and other services on self-funded business. In addition, administrative expenses include amounts incurred in conjunction with the BlueCard PPO program administered by the Company. The Company is reimbursed for claims paid and a fee is received for the administrative costs associated with providing these services. Under the BlueCard PPO program, the Company does not maintain membership but receives an administrative fee and percentage of discounts for members from other Blue plans that access medical care in Wisconsin. Benefits paid on self-funded programs were $697,691,000, $561,194,000, and $522,566,000 in 2002, 2001, and 2000, respectively, and are excluded from the accompanying consolidated statements of operations. Administrative fees received, related to these programs, totaled $30,638,000, $28,067,000, and $24,716,000 in 2002, 2001, and 2000, respectively, and are included in other revenue in the accompanying consolidated statements of operations.
As noted above, income (loss) from investment in affiliates, net of tax, in the Company's consolidated statement of operations for the year ended December 31, 2002 included a gain of $9,981,000, net of tax expense of $1,109,000, resulting from the sale of 4,401,500 shares of AMSG during the first and second quarters of 2002. Also included in income (loss) from investment in affiliates for the year ended December 31, 2001, is a loss of $25,163,000 relating to a write-down of the Company's investment in AMSG to market value as of December 31, 2001. At December 31, 2001, the market value of AMSG stock was $12.45 per share. This write-down was deemed appropriate based on management's decision in December 2001 to no longer classify its investment in AMSG as a strategic long-term asset.
The recorded tax assets and liabilities do not reflect potential tax benefits which may result from income tax deductions claimed from 1987 to 2000 relating to the write-off of certain intangible assets held as of January 1, 1987. The IRS has disallowed these deductions and is currently litigating whether similar deductions taken by other Blue Cross plans are allowable. This litigation may prevent the Company from closing tax years even after the 1987 litigation is resolved. In addition, the recorded tax assets and liabilities do not reflect the potential tax benefits of a $192,577,000 deduction taken on the Company's 2001 income tax return related to the transfer of 100% of the stock of BCBSUW to the Foundation as a condition of the conversion to for-profit status that took place on March 23, 2001. Although the IRS had previously ruled that similar transfers by other Blue Cross plans were tax deductible, it recently revoked or retracted those rulings. Until additional guidance is provided by the courts or the IRS regarding these matters, no tax benefit will be recorded.
As a Medicare fiscal intermediary and PSC, the Company is subject to regulations covering allowable cost reimbursements and operating procedures. The laws and regulations governing fiscal intermediaries and PSCs are complex and subject to interpretation. The Company believes that it is in material compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory actions including fines in excess of fees received, significant penalties, and exclusions from being a government contractor for these programs.
Since IRG was not considered part of Cobalt for financial reporting purposes until the Combination, there were no operations to report for discontinued operations for the three months ended March 31, 2001 and the year ended December 31, 2000.