We derive revenue primarily from premiums from reinsurance assumed on life business from existing treaties and from premiums on new treaties; investment income; realized gains and losses from our investment portfolio and fees from our financial solutions and wealth management businesses.
Statement of Financial Accounting Standard ("SFAS") No. 60 "Accounting and Reporting by Insurance Enterprises" applies to our traditional life policies with continuing premiums. For these policies, reserves for future policy benefits are computed based upon expected mortality rates, lapse rates, investment yields, expenses and other assumptions established at policy issue, including a margin for adverse deviation. Once these assumptions are made for a given treaty or group of treaties, they will not be changed over the life of the treaty. We periodically review actual historical experience and relative anticipated experience compared to the assumptions used to establish reserves for future policy benefits. Further, we determine whether actual and anticipated experience indicates that existing policy reserves together with the present value of future gross premiums are sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. Significant changes in experience or assumptions may require us to provide for expected losses on a group of treaties by establishing additional net reserves. Because of the many assumptions and estimates used in establishing reserves
In December 2003, the FASB revised FASB Interpretation No. 46 and 46R, "Consolidation of Variable Interest Entities" ("FIN 46" and "FIN 46R") which was originally issued in January 2003. FIN 46R addresses whether certain types of entities, referred to as variable interest entities ("VIEs"), should be consolidated in a company's financial statements. A company must consolidate a VIE in which it has an ownership, contractual or other financial interest if it is determined to be the primary beneficiary. A primary beneficiary has a variable interest that will absorb a majority of the expected losses if they occur, receive a majority of the entity's expected returns, or both. We are the primary beneficiary of the collateral finance facilities discussed in Note 8 to the Consolidated Financial Statements, except for the Stingray Investor Trust, and have consolidated the variable interest entities in accordance with FIN 46R. The Stingray Investor Trust, discussed in Note 8 to the Consolidated Financial Statements, is a variable interest entity but we are not considered to be the primary beneficiary of the Investor Trust. Accordingly, it is not consolidated in accordance with FIN 46R.
When analyzing the impact of collateral finance facilities on the consolidated results, it is important to understand that this expense is offset by the investment income earned on the fixed maturity investments from the collateral finance facility transactions. The net margin represents the excess of the yield on earning assets over the interest rate costs associated with the collateral finance facility.
Total revenues increased by 46% in 2004 compared to 2003. The increase in premiums earned is primarily due to the impact of the acquisition of Scottish Re Life Corporation on December 22, 2003 and growth in the
The change in value of derivatives, net of related deferred amortization costs, arises from the application of DIG B36, which was implemented on October 1, 2003. During 2004 this amounted to a gain of $4.6 million. This change in value arose principally because of an increase in risk free interest rates. The change in value of the embedded derivatives during the period from October 1, 2003 to December 31, 2003 amounted to a gain of $13.9 million. The gain arose from an increase in the risk free rates.
Prior to 2005, our Life Reinsurance International Segment specialized in niche markets in developed countries and broader life insurance markets in the developing world and focused on the reinsurance of short-term group life policies and aircrew "loss of license" insurance. In 2005, the International Segment became actively engaged in the reinsurance of United Kingdom and Ireland traditional solutions business and annuity products. The life insurance and annuity products are similar to those offered in the Life Reinsurance North America Segment.
Claims and other policy benefits decreased by 22% to $81.6 in 2004 from $104.2 million in 2003. In comparison to the prior year, claims have been impacted by the implementation of the new administrative system and the related improvement in the estimates of cedant balances. During 2004 we recognized claims and other policy benefits of $1.8 million in respect of the recapture of the portfolio described above. In addition, during 2004 we incurred $1.0 million in respect of a claim from our stop loss business. Partially offsetting these increases was the release of reserves of $3.1 million relating to recapture of the portfolio described above. Claims and other policy benefits in 2004 also include $2.1 million of claims relating to our share of two Lloyd's of London life syndicates. Claims and other policy benefits in 2003 were favorably impacted by a $3.4 million release of reserves on the sale of our unit linked business in 2003.
2005. For the purposes of computing the financial covenants, the collateral finance facilities and their associated costs are excluded.