Surrender fee income. Surrender fee income decreased to $179 million for the year ended December 31, 2002 from $358 million for the year ended December 31, 2001. The decrease in 2002 primarily reflects fewer lapses in the block of business acquired in the Toho Transfer.
Change in deferred acquisition costs, net. Deferred acquisition costs include costs and expenses which vary with and are primarily related to the acquisition of insurance and investment contracts, such as first year commissions in excess of ultimate renewal commissions and policy issue expenses, including certain support costs such as underwriting. Under U.S. GAAP, these costs are deferred ($1,381 million as of December 31, 2002 and $1,393 million as of December 31, 2001) and recognized ($576 million as of December 31, 2002 and $507 million as of December 31, 2001) in relation to either the premiums or gross profits from the underlying contracts. Change in deferred acquisition costs, net decreased $81 million to $(805) million for year ended December 31, 2002 from $(886) million for year ended December 31, 2001. The change in deferred acquisition costs is primarily the result of the decline in the value of assets in our variable annuity business, as well as additional amortization of $40 million resulting from equity market performance and $16 million recognized in connection with the securitization transaction conducted by our parent.
Amortization of Intangible, Net. Amortization of intangibles decreased $731 million in 2001 to $516 million from $1,247 million in 2000. The decrease in amortization expense in 2001 is primarily a result of the significant surrender activity experienced in 2000 associated with the Toho Transfer.
The following table sets forth certain summarized financial data for our Lifestyle Protection and Enhancement segment for the years ended December 31:
Each of the categories of assets shown in the table above represents portfolios of assets that are highly-rated. Examples of each category follow: commercial mortgage loans-loans on diversified commercial property; fixed maturities-domestic and foreign, corporate and government securities; other receivables-primarily policy loans.
As of December 31, 2002, we had $7.3 billion in deferred acquisition costs (DAC) and other intangible assets. DAC represents costs associated with the sale of our insurance policies that are not charged to income when incurred. Other intangible assets are principally the present value of future profits (PVFP) on insurance policies acquired in purchase transactions. DAC and other intangible assets are subsequently charged to income, over the lives of the underlying contracts, in relation to the anticipated emergence of revenue or profits.
Deferred acquisition costs are reviewed to determine if they are recoverable from future income, including investment income, and, if not considered recoverable, are charged to expense.
Premium revenue, benefits, underwriting, acquisition and insurance expenses are reported net of the amounts relating to reinsurance ceded to other companies. Amounts due from reinsurers for incurred and estimated future claims are reflected in the reinsurance recoverable asset. The cost of reinsurance is accounted for over the terms of the related treaties using assumptions consistent with those used to account for the underlying reinsured policies.
The following table presents the activity in Intangible Assets for the years ended December 31:
The method we use to value PVFP in connection with acquisitions of life insurance entities is summarized as follows: (1) identify the future gross profits attributable to certain lines of business, (2) identify the risks inherent in realizing those gross profits, and (3) discount those gross profits at the rate of return that we must earn in order to accept the inherent risks.
A variety of instruments, including interest rate and currency swaps and currency forwards (for further discussion see Note 12), are employed to achieve management’s interest rate objectives. Effective interest rates are lower under these “synthetic” positions than could have been achieved by issuing debt directly. The following table shows our borrowing positions at December 31, 2002 and 2001, considering the effects of swaps.
During 2002, we together with certain affiliates created an investment center of excellence by transferring the majority of our respective investment personnel to an affiliate, GE Asset Management Incorporated (“GEAM”). In May 2002, we entered into various investment management agreements with GEAM under which we incurred expenses of $28 million payable to GEAM as compensation for the investment services.
The following is a summary of segment activity for 2002, 2001 and 2000: