Change in option value of equity indexed products and market value adjustments on total return strategy annuities.
measure utilized by investors, analysts and the Company to assess the Company’s position in the industry. A summary of our protection products segment operations follows:
We recognize premiums on traditional life insurance policies as revenues when the premiums are due. Amounts received as payments for universal life and equity indexed life insurance policies are not recorded as premium revenue, but are instead recorded as a policyholder liability. Revenues from the universal life and equity indexed life policies consist of charges for the cost of insurance, policy administration and policy surrender and are shown as product charges. All revenue is reported net of reinsurance ceded.
Persistency. Persistency, which we measure in terms of a lapse rate, is a key driver of our business as it refers to the policies which remain in our block of business. A low lapse rate means higher persistency indicating more business is remaining in force to generate future revenues. Annualized lapse rates were 6.7% in 2004 compared to 6.5% in 2003 and 7.3% in 2002. Our persistency experience remained within our pricing assumptions.
Underwriting, Acquisition and Other Expenses. Underwriting, acquisition and other expenses are a key driver of our business as they are costs of our operations. Expenses decreased in 2004 and 2003 compared to the respective prior years primarily due to lower operating expenses resulting from the restructuring activities that took place in 2003 and prior years to integrate the ILICO life operations and also due to increased reimbursement from reinsurers of non-deferrable commission and expense allowances, as more policies are subject to reinsurance.
Amortization of DAC and VOBA. The amortization of DAC and VOBA are expense items which increased in 2004 and 2003 as compared to the respective prior years. DAC and VOBA are generally amortized in proportion to policy gross margins which increased in both years, resulting in higher amortization expense.
Dividend expense decreased for 2004 and 2003 compared to the respective prior years. The decreases were primarily due to reduced closed block earnings, resulting from lower closed block revenues and net investment income as the closed block in force business continues to decline, and from closed block dividend reductions.
Outlook. We expect to continue to shift our sales to higher return products, in particular the equity indexed life products. We also expect to continue to realize operating efficiencies as we continue to centralize our administrative functions.
environment as we focused sales on our higher returning equity indexed products. The reduced traditional annuity sales offset the increase in equity indexed products.
The deposits we receive on accumulation products are not recorded as revenue but instead as a policyowner liability. Surrender charges collected on accumulation products are recorded as revenue and shown as a product charge. Product charges increased in 2004 and 2003 as compared to the respective prior years due to the growth in the business.
Persistency. Persistency, which we measure in terms of a withdrawal rate, is a key driver of our business as it refers to the policies which remain in our block of business. A low withdrawal rate reflects higher persistency indicating more business is remaining in force to generate future revenues. Withdrawals represent funds taken out of accumulation products by policyowners not including those due to the death of policyowners. Annuity withdrawal rates without internal replacements continued to improve in 2004 as compared to 2003 and 2002 and amounted to 8.5%, 9.5% and 10.6%, respectively. Annuity withdrawals without internal replacements totaled $1,118.1 million in 2004, $1,196.9 million in 2003 and $1,288.2 million in 2002. Our withdrawal experience remained within our pricing assumptions.
Product Spread. Product spread is a key driver of our business as it measures the difference between the income earned on our invested assets and the rate which we credit to policyowners, with the difference reflected as segment operating income. Asset earned rates and liability crediting rates were as follows for our annuity products:
IMO Operations. IMO operations are a key driver of our business as the earnings from the IMOs can be a significant component of the accumulation products segment operating income. IMOs have contractual arrangements to promote our insurance products in their networks of agents and brokers. Additionally, they also contract with third party insurance companies. We own five such IMOs. The income from IMO operations primarily represents annuity commissions received by our IMOs from those third party insurance companies. Net IMO operating income decreased $6.2 million in 2004 and $3.7 million in 2003 compared to the respective prior years due to changes in distribution strategies and higher operating expenses, including litigation costs in 2004.
The other operations consist of our non-core lines of business outside of protection and accumulation products. These lines of business include holding company revenues and expenses, operations of our real estate management subsidiary, and accident and health insurance. The pre-tax operating loss of our other operations increased in 2004 compared to 2003 primarily due to increased holding company expenses, such as Sarbanes-Oxley internal control regulations, the OCEANs exchange and succession activities in 2004, and lower investment income of our real estate management subsidiary.
A reconciliation of our segment pre-tax operating income to net income as shown in our consolidated statements of income follows:
Unrealized gains (losses) on open block options and trading investments also will fluctuate from period to period depending on prevailing interest rates, the economic environment, the timing of investment sales and credit events. We use options to hedge our equity indexed products. In accounting for derivatives, we adjust our options to market value, which, due to the economic environment and stock market conditions, resulted in an unrealized gain of $48.0 million in 2004, an unrealized gain of $62.9 million in 2003 and an unrealized loss of $40.0 million in 2002. In addition, we also have trading securities that back our total return strategy traditional annuity products. The market value adjustment on the trading securities resulted in an unrealized gain of $8.5 million in 2004, a gain of $26.8 million in 2003 and a loss of $5.2 million in 2002. Most of the unrealized gains and losses on the options and trading securities are offset by similar adjustments to the option portion of the equity indexed product reserves and to the total return strategy annuity reserves. The reserve adjustments are reflected in policyowner benefits expense in the consolidated statements of income and are included in the fair value change as additional expense of $35.7 million in 2004 and $65.7 million in 2003, and reduced expense of $28.8 million in 2002.
The fair value change in options embedded within our equity indexed products and the fair value changes on our total return strategy traditional annuity contracts are being recorded at fair value. As previously discussed, these fair value changes are offset by similar adjustments to unrealized gains (losses) on investments related to the fair value changes on the options that hedge the equity indexed products and on the trading securities that back the total return strategy products.
Reinsurance Adjustments. Reinsurance related adjustments in 2003 consist of the release of an $8.2 million liability in conjunction with the settlement and amendment of a reinsurance arrangement and a $4.3 million true-up of pre-2003 reinsurance settlements under a reinsurance arrangement between ILIC’s open block and closed block.
Demutualization Costs. The 2002 demutualization costs are primarily for commissions, postage and printing under a commission-free program required by ILIC’s demutualization which allowed shareholders with less than one hundred shares to redeem their shares for cash or to purchase additional shares, commission-free, to reach a holding of at least one hundred shares. Since these costs are not ongoing, they have been excluded from our segment results.
Restructuring Costs. Restructuring costs relate to our consolidation of various functions in connection with a restructuring of our protection products and accumulation products operations and investment activities which began in the third quarter of 2001. The objective of the restructuring plan was to eliminate duplicative functions for all business units and to reduce on-going operating costs. Corporate administrative functions were transitioned so they are performed primarily in Des Moines, Iowa. Protection products administration processes were transitioned so they are performed in Des Moines; Woodbury, New York; or outsourced. Accumulation products functions were transitioned to Topeka, Kansas. Investment activities were restructured to eliminate certain real estate management services which have been outsourced.
The restructuring charges expensed in 2003 included pre-tax severance and termination benefits of $3.0 million related to the termination of approximately ten positions and for severance accrual adjustments and other pre-tax costs of $20.3 million primarily related to the impairment loss on the Indianapolis office building, expenses associated with the merger of IL Annuity into ILIC, and systems conversion costs. The restructuring charges expensed in 2002 included pre-tax severance and termination benefits of $9.5 million related to the elimination of approximately 240 positions and other pre-tax costs of $11.7 million primarily related to systems conversion and relocation of employees. Charges for all restructuring activities were completed in 2003.
Income Tax Expense. The effective income tax rate for 2004 varied from the prevailing corporate rate primarily as a result of reductions in the income tax accrual and deferred tax asset valuation allowances. The accrual reduction amounting to $3.7 million in 2004 represents an overpayment of tax in prior years for which
a refund is expected. There were also accrual reductions of $16.7 million in 2004, for the release of provisions originally established for potential tax adjustments which have been settled or eliminated. In addition, the deferred tax asset valuation allowance was reduced $16.4 million in 2004 as a result of the realization of capital loss carry forwards. The effective income tax rate for 2003 and 2002 varied from the prevailing corporate rate primarily due to tax exempt income.
The Financial Accounting Standards Board’s Derivatives Implementation Group issued SFAS 133 Implementation Issue No. B36, “Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates both Interest Rate Risk and Credit Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the Issuer of that Instrument,” or DIG Issue B36. DIG Issue B36 applies to modified coinsurance and coinsurance with funds withheld arrangements where interest is determined by reference to a pool of fixed maturity assets or a total return debt index. DIG Issue B36 considers the reinsurer’s receivable from the ceding company to contain an embedded derivative that must be bifurcated and accounted for separately under SFAS 133. We adopted DIG Issue B36 on October 1, 2003, which included the reclassification of certain securities supporting the products being reinsured from available-for-sale to held for trading. The net cumulative effect of the change in accounting for DIG Issue B36 after income taxes was an expense of $1.3 million in 2003.
As a holding company, AmerUs Group Co.’s cash flows from operations consist of dividends from subsidiaries, if declared and paid, interest from income on loans and advances to subsidiaries (including a surplus note issued to us by ALIC), investment income on our assets and fees which we charge our subsidiaries, offset by the expenses incurred for debt service, salaries and other expenses.
We generated cash flows from operating activities of $930.4 million, $394.9 million and $920.1 million for the years ended December 31, 2004, 2003, and 2002, respectively. Operating cash flows were primarily used to increase our investment portfolio.
We have a $200 million revolving credit facility (which we refer to as the Revolving Credit Agreement) with a syndicate of lenders. As of December 31, 2004, there was no outstanding loan balance under the facility. The Revolving Credit Agreement provides for typical events of default and covenants with respect to the conduct of business and requires the maintenance of various financial levels and ratios. Among other covenants, we (a) cannot have a leverage ratio greater than 0.35:1.0, (b) cannot have an interest coverage ratio less than 2.50:1.0, (c) are prohibited from paying cash dividends on common stock in excess of an amount equal to 3% of consolidated net worth as of the last day of the preceding fiscal year, (d) must cause our insurance subsidiaries to maintain certain levels of risk-based capital, and (e) are prohibited from incurring additional indebtedness for borrowed money in excess of certain limits typical for such lines of credit. We closely monitor all of these covenants to ensure continued compliance.
The sources of cash of our insurance subsidiaries consist primarily of premium receipts; deposits to policyowner account balances; and income from investments, sales, maturities and calls of investments and repayments of investment principal. The uses of cash are primarily related to withdrawals of policyowner account balances, investment purchases, payment of policy acquisition costs, payment of policyowner benefits, payment of debt, income taxes and current operating expenses. Insurance companies generally produce a positive cash flow from operations, as measured by the amount by which cash flows are adequate to meet benefit obligations to policyowners and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business.
Matching the investment portfolio maturities to the cash flow demands of the type of insurance being provided is an important consideration for each type of protection product and accumulation product. We continuously monitor benefits and surrenders to provide projections of future cash requirements. As part of this monitoring process, we perform cash flow testing of assets and liabilities under various scenarios to evaluate the adequacy of reserves. In developing our investment strategy, we establish a level of cash and
securities which, combined with expected net cash inflows from operations and maturities and principal payments on fixed maturity investment securities, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. There can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since withdrawal and surrender levels are influenced by such factors as the interest rate environment and general economic conditions and the claims-paying and financial strength ratings of the insurance subsidiaries.
Through their respective memberships in the Federal Home Loan Banks (FHLB) of Des Moines and Topeka, ALIC and American are eligible to borrow under variable-rate short term fed funds arrangements to provide additional liquidity. These borrowings are secured and interest is payable at the current rate at the time of each advance. There were no borrowings outstanding under these arrangements at December 31, 2004. In addition, ALIC has long-term fixed rate advances from the FHLB outstanding of $12.6 million at December 31, 2004.
We participate in a securities lending program whereby certain fixed maturity securities from the investment portfolio are loaned to other institutions for a short period of time. We receive a fee in exchange for the loan of securities and require initial collateral equal to 102 percent, with an on-going level of 100 percent, of the market value of the loaned securities to be separately maintained. Securities with a market value of approximately $342.6 million and $154.6 million were on loan under the program and we were liable for cash collateral under our control of approximately $351.7 million and $158.8 million at December 31, 2004 and 2003, respectively. The collateral held under the securities lending program has been included in cash and cash equivalents in the consolidated balance sheet and the obligation to return the collateral upon the return of the loaned securities has been included in accrued expenses and other liabilities.
At December 31, 2004, the statutory capital and surplus of the insurance subsidiaries was approximately $1,046 million. Management believes that each insurance company has statutory capital which provides adequate risk based capital that exceeds required levels.
Certain partnership investments provide for commitments of future capital, loans or guarantees. We have obligations to make future capital contributions to various partnerships of up to $0.5 million at December 31, 2004. We also have commitments to extend credit for mortgages totaling $36.6 million at December 31, 2004. In addition, at December 31, 2004, we had loan guarantees which totaled $1.5 million. ALIC and its joint venture partner are contingently liable in the event AVLIC cannot meet its obligations. At December 31, 2004, AVLIC had statutory assets of $2,441.6 million, liabilities of $2,331.4 million and surplus of $110.2 million.
contingent assets and liabilities. The valuation of financial instruments, accounting for derivatives and amortization of DAC and VOBA are considered our critical accounting policies due to their subjective nature and significance to the financial statements.
Securities in our portfolio with a carrying value of approximately $1,820 million and $1,605 million at December 31, 2004 and 2003, respectively, do not have readily determinable market prices. Valuation techniques vary by security type and availability of market data. Fair values for securities which do not have a readily available market price are determined by: 1) a matrix process that uses a current market spread added to an applicable treasury rate to discount expected future cash flows applicable to the coupon rate, credit quality, industry sector and term of the investment; 2) independent third party sources or recent transactions in similar securities, or 3) internally prepared valuations incorporating standard valuation techniques. Certain market conditions that could impact the valuation of securities include credit ratings, business climate, economic environment, industry trends, and regulatory and legal risks/events, among others. All such investments are classified as available-for-sale. Our ability to liquidate our positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and we may not be able to dispose of these investments in a timely manner. Although we believe our estimates reasonably reflect the fair value of those securities, our key assumptions about the risk-free interest rates, risk premiums, performance of underlying collateral (if any), and other factors may not be realized in the event of an actual sale.
Securities are also reviewed to identify potential impairments. In determining if and when a decline in market value below amortized cost is other-than-temporary (referred to as OTTI), we evaluate the market conditions, offering prices, trends of earnings, price multiples and other key measures for our investments in marketable equity securities and debt instruments. For fixed maturity securities, our intent and ability to hold securities is also considered. When such a decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period net income to the extent of the decline. For additional information regarding our evaluation of OTTI, see the section titled “Investments - Impairment.”
Our derivative instruments are not subject to a multiple or use of leverage on the underlying price index. We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate or equity hedges as the counterparties are established, well-capitalized financial institutions. Information about the fair values, notional amounts, and contractual terms of these instruments can be found in note 4 to our consolidated financial statements and the section titled “Quantitative and Qualitative Disclosures About Market Risk.”
Investment strategies have been established based on the specific characteristics of each product line. The portfolio investment strategies establish asset duration, quality and other guidelines. Analytical systems are utilized to establish an optimal asset mix for each line of business. We seek to manage the asset/liability mismatch and the associated interest rate risk through active management of the investment portfolio. Financial, actuarial, investment, product development and product marketing professionals work together throughout the product development, introduction and management phases to jointly develop and implement product features, initial and renewal crediting strategies, and investment strategies based on extensive modeling of a variety of factors under a number of interest rate scenarios.
The following table summarizes invested assets by asset category as of December 31, 2004 and 2003:
The fixed maturity securities portfolio consists primarily of investment grade corporate fixed maturity securities, high-quality mortgage-backed securities (MBS) and United States government and agency obligations. As of December 31, 2004, fixed maturity securities were $17,364.8 million, or 90.5% of the carrying value of invested assets with public and private fixed maturity securities constituting $15,147.6 million, or 87.2%, and $2,217.2 million, or 12.8%, respectively, of total fixed maturity securities, respectively.
The following table summarizes the composition of the fixed maturity securities by category as of December 31, 2004 and 2003:
The portfolio of investment grade fixed maturity securities is diversified by number and type of issuers. As of December 31, 2004, investment grade fixed maturity securities included the securities of 903 issuers, with 2,656 different issues of securities. No non-government/agency issuer represents more than 1% of investment grade fixed maturity securities.
As of December 31, 2004, 83.5% of total invested assets were investment grade fixed maturity securities. The following table sets forth the credit quality, by NAIC designation and Standard & Poor’s rating equivalents, of fixed maturity securities as of December 31, 2004:
The following table summarizes fixed maturity securities by Standard & Poor’s or equivalent rating, including unrealized losses, at December 31, 2004:
Interest rate swaps and options are primarily used to reduce exposure to changes in interest rates and to manage duration mismatches. Call options are primarily used to hedge equity indexed products. Credit default swaps are coupled with a bond to synthetically create an investment cheaper than the equivalent instrument traded in the cash market. Although we are subject to the risk that counterparties will fail to perform, credit standings of counterparties are monitored regularly. We only enter into transactions with counterparties rated at least “AA” or for which a collateral agreement is in place. We are also subject to the risk associated with changes in the value of contracts. However, such adverse changes in value generally are offset by changes in the value of the items being hedged. The notional principal amounts of the swaps and options, which represent the extent of our involvement in such contracts but not the risk of loss, at December 31, 2004, amounted to $4,097.6 million. The interest rate swaps had a carrying value of a net receivable position of $0.4 million at December 31, 2004. The credit default swaps had a carrying value of a net receivable position of $0.5 million at December 31, 2004. The carrying value of options amounted to $160.0 million at December 31, 2004. For each of these derivatives, the carrying value is equal to fair value as of December 31, 2004. The derivatives are reflected as other investments on the consolidated financial statements. The net amount payable or receivable from interest rate and credit default swaps are accrued as an adjustment to interest income. Effective October 1, 2003, we adopted DIG Issue B36. See note 4 to the consolidated financial statements for further discussion of the impact of adopting DIG B36.
As previously discussed in Liquidity and Capital Resources, we participate in a securities lending program and also securities borrowing arrangements.
We held $486.1 million of policy loans on individual insurance products as of December 31, 2004. Policy loans are permitted to the extent of a policy’s contractual limits and are fully collateralized by policy cash values. As of December 31, 2004, we held equity securities of $92.5 million of which the largest holding was Federal Home Loan Bank common stock totaling $62.4 million.
We held $377.2 million of other invested assets (including short-term investments) on December 31, 2004. Other invested assets consist primarily of our Ameritas Joint Venture investment, various other joint ventures and limited partnership investments and derivatives.
Industry characteristics and trends, company to industry profile, quality of management
Ability and intent to retain the investment to maturity or for a sufficient period of time for it to recover
When actively traded market prices are not available, fair values are determined using present value or other standard valuation techniques such as earnings multiples and asset valuations. The fair value determinations are made at a specific point in time based on then available market information and judgments about the financial instruments. Factors considered in determining fair value include: coupon rate, term, collateral (if any), industry sector outlook, credit rating, expectations regarding going concern status, timing and amounts of expected future cash flows among other factors.
The following table lists material investment impairments exceeding $3 million in 2004, 2003 and 2002. The write-downs occurred due to creditor and/or issue specific circumstances.
Negative industry trends with analysis done on an issue-by-issue basis concluding no impact on other material investments other than those written down
The following table provides a summary of unrealized losses for fixed maturity securities which identifies the length of time the securities have continually been in an unrealized loss position as of December 31, 2004 and 2003:
There are no securities that were in more than a 50% loss position at December 31, 2004.
There are no securities that were in more than a 50% loss position at December 31, 2003.
There were no individual material securities with unrealized losses exceeding $3 million at December 31, 2004. The following table identifies the type, carrying value and unrealized loss of individual material securities with unrealized losses exceeding $3 million at December 31, 2003:
In addition to the above listing, at December 31, 2004 and 2003, securities with a market value of $482.0 million and $500.7 million and unrealized loss position of $9.0 million and $45.4 million, respectively, were principal protected. These securities included underlying holdings that provided for a return of principal through maturity of zero coupon bonds from a highly rated issuer or a principal guarantee from a highly rated company. These securities along with the securities in the above listing of unrealized losses did not meet the criteria as described in our other-than-temporary process for impairment determination. As a result, there was no realized loss for these securities. Unrealized gains or losses may not represent future gains or losses that will
The following table presents, for securities sold during 2004, 2003 and 2002, the amount of material losses exceeding $3 million recorded and the fair value at the sales date:
The decision to sell certain securities within the overall context of our portfolio management strategies can result in losses as previously shown. This may include required exposure reductions due to internal credit limits, total rate of return strategies, capital reserve objectives, asset allocation decisions and hedging activities. However, no decisions have been made as of December 31, 2004, which result in material losses.
We have developed an asset/liability management approach with separate investment portfolios for major product lines such as traditional life, universal life, equity indexed life, traditional annuities, equity indexed annuities, variable annuities and funding agreements. Investment strategies have been established based on the specific characteristics of each product line. The portfolio investment strategies establish asset duration, quality and other guidelines. Analytical systems are utilized to establish an optimal asset mix for each line of business. We seek to manage the asset/liability mismatch and the associated interest rate risk through active management of the investment portfolio. Financial, actuarial, investment, product development and product marketing professionals work together throughout the product development, introduction and management phases to jointly develop and implement product features, initial and renewal crediting strategies, and
investment strategies based on extensive modeling of a variety of factors under a number of interest rate scenarios.
Effective January 1, 2004, the Company adopted Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Insurance Contracts and for Separate Accounts,” (SOP 03-1) issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. The adoption of SOP 03-1 resulted in establishing additional policy reserve liabilities for fees charged for insurance benefit features which are assessed in a manner that is expected to result in profits in earlier years and losses in subsequent years. The total effect of adopting SOP 03-1 (including reinsurance recoverables) as of January 1, 2004, amounted to a decrease of $0.8 million ($0.5 million after-tax) in net income which has been reflected as a cumulative effect of a change in accounting. The basic and diluted earnings per common share for the change in accounting amounted to $0.01 for 2004.
In September 2004, the EITF reached a final consensus on Issue 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” (EITF 04-8). EITF 04-8 requires that contingently convertible debt be included in diluted earnings per share, if dilutive, regardless of whether the market price trigger has been met. The EITF is effective for periods ending after December 15, 2004 with the determination of the dilutive effect upon adoption to be based on the form of the instrument as it existed at the end of the quarter of adoption. This EITF applied to our OCEANs. During the fourth quarter of 2004, we exchanged the OCEANs which changed the security’s conversion provisions. Previously, the OCEANs were to all be converted to shares of our common stock; however, the exchanged OCEANs provide for cash to be paid equal to the accreted principal value and shares of our common stock issued for the conversion value in excess of the accreted principal amount. We applied the restatement provisions of EITF 04-8 based on the new form of the exchanged OCEANs which resulted in no change in previously reported diluted earnings per share for 2002 or 2003.
In December 2004, the FASB issued a revision to SFAS 123, “Share-Based Payment,” (SFAS 123R) which is a revision of SFAS 123, “Accounting for Stock-Based Compensation,” (SFAS 123). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on fair values. Pro forma disclosure of fair value information is no longer an alternative. The statement is effective in the first interim or annual period beginning after June 15, 2005. Adoption is to be made using either the modified prospective method or the modified retrospective method. The modified prospective method recognizes cost based on the requirements for all share-based payments granted after the effective date and for awards granted prior to the effective date that remain unvested prior to the effective date. The modified retrospective method includes the requirements of the modified prospective method but also permits restatement of financial statements based on pro forma amounts previously recognized under SFAS 123. Restatement can either be for all prior periods presented or prior interim periods of the year of adoption. Early adoption is permitted. We continue to evaluate the impacts and timing of adopting SFAS 123R. We currently disclose the pro forma impacts of recognizing fair value as permitted by SFAS 123 in note 1 to the consolidated financial statements. That disclosure reflects our estimate of 2004 expense for share-based payments of approximately $4.0 million (after-tax).