o our ability to price our insurance products at a level that enables us to earn a margin over the cost of providing benefits and the expense of acquiring customers and administering those products;
o our returns on invested assets, net of the amounts we credit to policyholders' accounts;
o the amount of our account values and changes in their fair value, which affect the amount of asset management fees we receive;
will allow for a recovery of value; and the financial condition and near-term prospects of the issuer. When it is determined that a decline in value is other than temporary, the carrying value of the security is reduced to its fair value, with a corresponding charge to earnings. This corresponding charge is referred to as an impairment and is reflected in "Realized investment gains (losses), net" in the statements of operations. The level of impairment losses can be expected to increase when economic conditions worsen and decrease when economic conditions improve.
The future policy benefit reserves at December 31, 2004 represented 6% of our total liabilities and relate primarily to term life products and are determined in accordance with GAAP as the present value of expected future benefits to or on behalf of policyholders plus the present value of future expenses less the present value of future net premiums. The expected future benefit payments are based on mortality, lapse, maintenance expense, interest rate assumptions, and also consider the risk of adverse deviation in our actual results from the results assumed in establishing our reserves. Our mortality assumptions are generally based on the Company's historical experience or standard industry tables, as applicable. Our interest rate assumptions are based on factors such as market conditions and expected investment returns. Collectively, these assumptions are "locked-in" upon the issuance of new policies and continue to be used in subsequent periods to establish the reserves. We review our assumptions to determine whether the reserves together with the expected future premiums are sufficient to provide for the expected future benefit payments and expenses. In particular, we review our mortality assumptions annually and conduct full actuarial studies every three years. Generally, we do not expect our mortality trends to change significantly in the short-term and to the extent these trends may change we expect such changes to be gradual over the long-term. If, based on our review, there have been significant adverse changes in actual experience compared to the experience we assumed at the time the policy was issued we may be required to provide for expected future losses by establishing premium deficiency reserves. The assumptions used to establish premium deficiency reserves represent our current best estimate of experience with no provision for adverse deviation. Once established, premium deficiency reserves are no reduced for subsequent improvement in experience but may be increased for subsequent adverse deviations in experience. As of December 31, 2004, we do not have material premium deficiency reserves related to these products.
DAC associated with the term life policies of our domestic individual life insurance business is amortized in proportion to gross premiums. We evaluate the recoverability of our DAC related to these policies as part of our premium deficiency testing. If a premium deficiency exists, we reduce DAC by the amount of the deficiency or to zero through a charge to current period earnings. If the deficiency is more than the DAC balance, we then increase the reserve for future policy benefits by the excess by means of a charge to current period earnings. Generally, we do not expect significant short-term deterioration in experience, and therefore do not expect significant writedowns of the related DAC.
In evaluating the DAC for our domestic variable life insurance and annuity products, future rate of return assumptions are evaluated using a reversion to mean approach, a common industry practice. Under this approach, we consider actual returns over a period of time and project returns for the future period so that the assets grow at the expected rate of return for the entire period. If the projected future rate of return is greater than our maximum future rate of return, we use our maximum reasonable future rate of return. For variable annuities products, our expected rate of return is 8% per annum, which reflects an expected rate of return of 8.9% per annum for equity type assets. The future equity rate of return used varies by product, but was under 8.9% per annum for all of our variable annuity products for our evaluation of deferred policy acquisition costs as of December 31, 2004.
See "-Results of Operations" for a discussion of the impact of DAC amortization on our results of the life and annuities products.
To the extent our effective tax rate increases or decreases by 1 percent of income from operations before income taxes and cumulative effect of accounting change, consolidated income from operations before cumulative effect of accounting change would have increased or declined by $0.4 million in 2004.
From December 31, 2003 to December 31, 2004 there was an increase of $403 million in total assets from $3,219 million to $3,621 million. The largest increase was in separate account assets, which increased by $187 million in 2004 primarily from market value appreciation of $197 million as a result of continued strength in the equity markets, positive cash flows (sales less withdrawals) and partially offset by the implementation of AICPA Statement of Position 03-1, "SOP 03-1," in 2004. SOP 03-1 requires among other things, that certain individual market value adjusted annuity, "MVA," contracts be accounted for under general account accounting treatment. As a result of the adoption, approximately $40 million of fixed maturities formerly classified as separate account assets were reclassified as general account assets. Fixed maturities increased by $121 million as a result of the adoption of SOP 03-1 and investing positive cash flows. Reinsurance recoverables increased $50 million from last year primarily as a result of larger reinsurance reserves held due to the new coinsurance agreement with Prudential Arizona Reinsurance Captive Company or, PARCC, to reinsure the entire term business. Reinsurance reserves under coinsurance are generally much larger than those for yearly renewable term, "YRT." Cash and cash equivalents are higher by $36 million as cash received from financing and operating activities exceeded cash used in investing activities in 2004. DAC increased nearly $7 million driven by an $8 million increase from the implementation of SOP 03-1 and a change in unrealized gains. DAC also decreased $2 million as a result of $23 million of amortization mostly offset by $21 million in net capitalization of acquisition expenses. Capitalization in the Life business reflects a reduction of $37 million resulting from capitalization of ceding allowances that are part of the new coinsurance agreement mentioned above. Excluding ceded DAC on the coinsurance agreement, capitalization of distribution expenses from new sales exceeded amortization of DAC.
Revenues increased by $13 million, from $158 million in 2003 to $171 million in 2004. Policy charges and fee income, consisting primarily of mortality and expense, loading and other insurance charges assessed on general and separate account policyholders' fund balances, increased by $8 million, from $70 million in 2003. The increase was a result of a $6 million increase for individual life products while annuity products added $2 million. Mortality and sales based loading charges for life products increased as a result of growth in the in force business. The gross variable in force business grew to $11.5 billion at December 31, 2004 from $10.3 billion at December 31, 2003. Annuity fees are mainly asset based fees which are dependent on the fund balances that are affected by net sales as well as asset depreciation or appreciation on the underlying investment funds in which the customer has the option to invest. Average annuity fund balances have increased over last year as a result of favorable market performance and positive net sales.
Premiums decreased by $6 million from $38 million in 2003 to $32 million in 2004, due to increased reinsurance premiums resulting from the new coinsurance agreement with PARCC, effective August 1, 2004, to reinsure 90% of the entire term book of business, replacing existing YRT reinsurance on that business. Coinsurance premiums are generally greater than YRT and as a result, total reinsurance term premiums were $23 million higher than last year, exceeding $19 million of growth in the direct term business. Extended term life insurance decreased $2 million as a result of comparatively favorable market performance in the current year, which caused a decrease in lapses. Premiums in the annuity business resulting from annuitizations, increased less than $1 million from last year.
Realized investment gains and losses improved by $3 million as a result of increased gains on sales of fixed maturities and less impairments in the current year as a result of continued improvement in the credit environment.
The change in reserves for annuity products was essentially unchanged from the prior year. Included in the change in reserves, are changes for annuity guaranteed minimum death benefits which were lower due to continued favorable market performance during 2004.
The GMDB feature provides annuity contractholders with a guarantee that the benefit received at death will be no less than a prescribed minimum amount. This minimum amount is based on the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary, or more typically, the greatest of these values, depending on features offered in various contracts and elected by the contractholders. With the adoption of SOP 03-1 effective January 1, 2004, we recorded a liability of $1.6 million based on application of an expected loss ratio to "cumulative assessments" through the balance sheet date, and then subtracting "cumulative excess payments" through that date. Also, in our periodic evaluation of unamortized deferred policy acquisition costs associated with our variable annuity business, we considered the expected net costs associated with the guaranteed minimum death benefits in our calculation of expected gross profits from this business. Accordingly, the effect of establishing the guaranteed minimum death benefit reserve related to this business was partially offset by an increase of less than $1 million in unamortized deferred policy acquisition costs.