Effective January 1, 2003, our Self-Employed Agency (“SEA”) Division made certain refinements to its claim and future benefit liability estimates, the net effect of which decreased claim and future policy benefit liabilities and correspondingly increased operating income reported by the SEA Division in the amount of $4.8 million in the first quarter of 2003. See discussion below under the caption “Change in Reserving Estimates - Self-Employed Agency Division” and Note F of Notes to Consolidated Financial Statements.
The operating losses at the Company’s Life Insurance Division in 2003 were primarily attributable to a claim accrual increase associated with the Company’s former workers compensation business, a charge associated with the final resolution of litigation arising out of the closedown in 2001 of the Company’s former workers compensation business, costs associated with the closedown of the Company’s College Fund Life Division operations, and a decrease in investment income allocated to the segment.
Benefits, claims and settlement expenses increased by 46%, to $774.5 million in 2002 from $531.0 million in 2001. Benefits, claims and settlement expenses grew primarily as a result of a significant increase in premium revenue at the SEA and Group Divisions (including the incremental benefits,
Underwriting, policy acquisition costs and insurance expenses increased by 50%, to $432.5 million in 2002 from $288.4 million in 2001. The increase in such expenses was primarily due to the increase in first year premium revenue from the SEA Division (with respect to which the Company records a higher commission expense than with respect to premium revenue in policy renewal years) and premium growth at the Group Division (including the incremental underwriting, acquisition and insurance expenses associated with the Company’s Star HRG unit, which was acquired in February 2002).
Effective June 30, 2001, the Company changed its method for accounting for its investment in AMLI Residential from the equity method to the investment method. The effect of the accounting change was to increase the carrying value of AMLI Residential on the consolidated balance sheet of the Company at June 30, 2001 from $22.6 million to $62.8 million. As a result of the accounting change, the Company no longer recorded its share of AMLI Residential’s gains and losses but, rather, marks-to-market its investment in AMLI Residential. Accordingly, increases (or decreases) in the Company’s carrying value of its investment in AMLI Residential are now recorded as unrealized gains (or losses) with corresponding increases (or decreases) to the Company’s stockholders’ equity (net of tax). At December 31, 2002 and 2001, the Company’s carrying value of its investment in AMLI Residential was $54.3 million and $64.3 million, respectively.
The Company records an ROP liability to fund longer-term obligations associated with the ROP rider. This liability is impacted both by the techniques utilized to calculate the liability and the many assumptions underlying the calculation, including interest rates, policy lapse rates, premium rate increases on policies and assumptions with regard to claims paid. The Company has previously utilized a simplified reserving technique (described above) that it believed generated an appropriate ROP liability in the aggregate. However, the Company reviewed its ROP reserving technique in order to determine if refinements to the technique were appropriate. As a result of such review, and as more particularly described in the paragraph below, effective January 1, 2003, the ROP reserving technique was refined to utilize new mid-terminal reserve factors (calculated on a net level basis, using 4.5% interest, 1958 CSO mortality and, assuming 10% annual increases in future gross premiums) and to apply these factors to the historical premium payments on a contract-by-contract basis.
Includes borrowings from and/or repayments on loans from subsidiaries and proceeds from subsidiaries related to agent stock plans.
At December 31, 2003, the Company had $11.6 million of unrealized losses in its fixed maturities portfolio. Approximately 70% ($2.3 million) of the twelve (12) months or longer unrealized loss ($3.3 million) is concentrated in three securities. The $8.4 million in unrealized losses of less than twelve (12) months includes $8.1 million that is attributable to numerous securities with an unrealized loss of less than 10%.
During 2003, the Company sold its interest in Universal American Financial Corp., in connection with which it recognized a $2.5 million gain.