Item 7 of our Annual Report on Form 10-K generally discusses year-to-year comparisons between the years ended December 31, 2020 and 2019. Discussions of information related to 2018 and year-to-year comparisons between 2019 and 2018 are not included in this Form 10-K. Comparative discussions between 2019 and 2018 can be found in “Item 7 - Management’s Discussions and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for year ended December 31, 2019.
We file reports with the United States Securities and Exchange Commission (the “SEC”), including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports as required. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an internet site at www.sec.gov that contains these reports and other information filed electronically by us. We make available through our website, https://investor.protective.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.
Retail Life and Annuity segment and Acquisitions segment. The pre-tax adjusted operating income in the Retail Life and Annuity segment and the Acquisitions segment were impacted by the effects of the COVID-19 pandemic on mortality and the equity markets. The COVID-19 pandemic has resulted in an increase in claims in the traditional life and universal life blocks. Further, the pandemic has resulted in significant volatility in equity markets which has impacted variable account values. Declining variable product account values accelerated the amortization of deferred acquisitions costs (“DAC”) and value of business acquired (“VOBA”), resulting in higher annuity guaranteed benefits, and generated lower fee income during the three months ended March 31, 2020. An improvement in equity markets since that time has resulted in an increase in account values, which resulted in the slowing of DAC and VOBA amortization and a decrease in guaranteed benefit reserves.
As variable account values increase, our exposure to claims related to guaranteed benefits have declined which resulted in lowering the required reserves associated with these guaranteed benefits. Additionally, the pandemic will continue to impact earnings based on the volume and severity of claims in the life insurance blocks related to COVID-19. The pandemic has also affected the manner in which our Acquisitions segment conducts due diligence, negotiates transactions, works with counterparties and integrates acquisitions, in each case adapting processes and procedures to reflect the increased reliance on technology and remote interactions as a result of COVID-19.
Total operating revenues increased $370.0 million, or 16.6% driven by a favorable impact due to post level activity in the traditional life blocks and higher investment income, offset by lower universal life net policy fees and variable annuity fee income.
Net premiums and policy fees decreased $12.8 million, or 10.6%, due to a decrease in GAP premiums of $6.4 million as a result of lower sales in prior periods and the related impact on earned premiums. Service contract premiums decreased $4.6 million due to higher ceded premiums and credit insurance premiums decreased $1.8 million as a result of declining sales.
Reinsurance premiums ceded increased $6.3 million, or 3.5%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. GAP ceded premiums increased $0.9 million, or 3.3%. Service contract ceded premiums increased $7.3 million, or 5.2%. Ceded premiums in the credit line decreased $1.9 million, or 18.8%.
(1)Interest rate change scenario subject to floor, based on treasury rates as of December 31, 2020 and 2019.
matrices. Security pricing is applied using a “waterfall” approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Based on the typical trading volumes and the lack of quoted market prices for available-for-sale and trading fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations. Where multiple broker quotes are obtained, the Company reviews the quotes and selects the quote that provides the best estimate of the price a market participant would pay for these specific assets in an arm's length transaction. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party service or an independent broker quotation. Included in the pricing of other asset-backed securities, collateralized mortgage obligations (“CMOs”), and mortgage-backed securities (“MBS”) are estimates of the rate of future prepayments of principal and underlying collateral support over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and rates of prepayments previously experienced at the interest rate levels projected for the underlying collateral. The basis for the cost of securities sold was determined at the Committee on Uniform Securities Identification Procedures (“CUSIP”) level on a first in first out basis. The committee supplies a unique nine-character identification, called a CUSIP number, for each class of security approved for trading in the U.S., to facilitate clearing and settlement. These numbers are used when any buy and sell orders are recorded.
Prior to January 1, 2020, on quarterly basis, the Company reviewed investments with unrealized losses for indications of other than temporary impairments. In addition to the factors noted above that are analyzed to determine if impairments are the result of credit losses, the Company also previously considered the duration that the security had been in an unrealized loss position in evaluating the need for any other-than-temporary impairments. Although no set formula was used in this process, the investment performance, collateral position, and continued viability of the issuer were significant measures considered, and in some cases, an analysis regarding the Company’s expectations for recovery of the security’s entire amortized cost basis through
On October 1, 2020, as part of a corporate initiative to consolidate and simplify PLC’s reserve financing structures and reduce related financial and operational costs, Golden Gate II Captive Insurance Company (“Golden Gate II”), Golden Gate III Vermont Captive Insurance Company (“Golden Gate III”), Golden Gate IV Vermont Captive Insurance Company (“Golden Gate IV”), and Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”), all of which are wholly owned captive insurance company subsidiaries of the Company (collectively the “Captives”) merged with and into (the “Captive Merger”) Golden Gate Captive Insurance Company (“Golden Gate”), a Vermont special purpose financial insurance company and a wholly owned subsidiary of the Company.
Also in conjunction with the Captive Merger, Golden Gate V and Red Mountain, LLC (“Red Mountain”), a wholly owned subsidiary of the Company, terminated the financing facility into which Golden Gate V and Red Mountain had entered into in 2012. This termination included redeeming the $822.3 million of fixed maturity securities issued by Red Mountain to Golden Gate V and the $806.0 million of non-recourse funding obligation issued by Golden Gate V to Red Mountain. As a result of these redemptions, the amortization of premiums recorded against the fixed maturities and non-recourse funding obligations which were previously marked to fair value in conjunction with the Merger was accelerated. The net impact of this non-cash acceleration of amortization was a $16.3 million reduction to income before taxes for the year ended December 31, 2020. This net impact was comprised of a reduction to net investment income of $72.3 million and a reduction to other operating expenses of $56.0 million. Refer to Note 4, Investment Operations and Note 14, Debt and Other Obligations, for additional detail around the impacted balances.
In conjunction with the Captive Merger, PLC terminated its interest support, yearly renewable term (“YRT”) premium support, and portfolio maintenance agreements with Golden Gate, Golden Gate II, Golden Gate V, and WCL. The interest support agreement provided that PLC would make payments to Golden Gate II if actual investment income on certain of Golden Gate II’s asset portfolios fell below a calculated investment income amount as defined in the interest support agreement, the YRT premium support agreements provided that PLC would make payments to Golden Gate and Golden Gate II in the event that YRT premium rates increased, and the portfolio maintenance agreements provided that PLC would make payments to Golden Gate, Golden Gate V, and WCL in the event of other-than-temporary impairments on investments that exceeded defined thresholds. The Company recognized $23.5 million of gains on these agreements for the year ended December 31, 2020.
For a derivative financial instrument to be accounted for as an accounting hedge, it must be identified and documented as such on the date of designation. For cash flow hedges, the effective portion of their realized gain or loss is reported as a component of other comprehensive income and reclassified into operations in the same period during which the hedged item impacts operations. Any remaining gain or loss, the ineffective portion, is recognized in current operations. For fair value hedge derivatives, their gain or loss as well as the offsetting loss or gain attributable to the hedged risk of the hedged item is recognized in current operations. Effectiveness of the Company’s hedge relationships is assessed on a quarterly basis.
The following states represent the primary locations of the Company’s commercial mortgage loan portfolio as of December 31:
During the year ended December 31, 2019, the Company funded $1.2 billion of new loans, with an average loan size of $7.9 million. The average size commercial mortgage loan in the portfolio as of December 31, 2019, was $5.1 million and the weighted-average interest rate was 4.5%. The largest single commercial mortgage loan at December 31, 2019 was $78.0 million.
During the year ended December 31, 2018, the Company funded $1.5 billion of new loans, with an average loan size of $9.1 million. The average size commercial mortgage loan in the portfolio as of December 31, 2018, was $4.4 million and the weighted-average interest rate was 4.6%. The largest single commercial mortgage loan at December 31, 2018 was $48.8 million.
An analysis of loans in a nonaccrual status is shown in the following chart:
At December 31, 2020, the Company has intercompany loss carryforwards of $658.4 million that are available to offset future taxable income of certain non-life subsidiaries under the terms of the tax sharing agreement with PLC. $27.6 million of these loss carryforwards will expire between 2036 and 2037 and the remaining loss carryforwards of $630.8 million have no expiration.
•The Stable Value Products segment sells fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. This segment also issues funding agreements to the FHLB, and markets GICs to 401(k) and other qualified retirement savings plans. The Company also has an unregistered funding agreement-backed notes program which provides for offers of notes to both domestic and international institutional investors.