We own seven properties, including five buildings that serve as headquarters locations for our operating business segments and two buildings that serve as operation centers for Assurant Solutions. Assurant Solutions has headquarters buildings located in Miami, Florida and Atlanta, Georgia. Assurant Solutions operation centers are located in Florence, South Carolina and Springfield, Ohio. Assurant Employee Benefits has a headquarters building in Kansas City, Missouri. Assurant Health has a headquarters building in Milwaukee, Wisconsin. Assurant PreNeed’s AMLIC channel has a headquarters building in Rapid City, South Dakota. We lease office space for various offices and service centers located throughout the United States and internationally, including our New York corporate office, Assurant PreNeed’s independent distribution headquarters in Atlanta and our data center in Woodbury, Minnesota. Our leases have terms ranging from month-to-month to twenty-five years. We believe that our owned and leased properties are adequate for our current business operations.
Total stockholders’ equity divided by the basic shares of common stock outstanding. At December 31, 2004 there were 139,766,177 shares of common stock outstanding. At December 31, 2003, 2002, 2001 and 2000, there were 109,222,276 shares of common stock outstanding.
insurance; group dental insurance; group disability insurance; group life insurance and pre-funded funeral insurance.
We report our results through five segments: Assurant Solutions, Assurant Health, Assurant Employee Benefits, Assurant PreNeed and Corporate and Other. The Corporate and Other segment includes activities of the holding company, financing expenses, net realized gains (losses) on investments, interest income earned from short-term investments held and interest income from excess surplus of insurance subsidiaries not allocated to other segments. The Corporate and Other segment also includes the amortization of deferred gains associated with the portions of the sales of FFG and LTC. FFG and LTC were sold through reinsurance agreements as described below.
Our profitability depends on the adequacy of our product pricing, underwriting and the accuracy of our methodology for the establishment of reserves for future policyholder benefits and claims, returns on invested assets and our ability to manage our expenses. As such, factors affecting these items may have a material adverse effect on our results of operations or financial condition.
In addition, Assurant PreNeed generally writes whole life insurance policies with increasing death benefits. As of December 31, 2004, approximately 83% of Assurant PreNeed’s in force insurance policy reserves relate to policies that provide for death benefit growth that is either pegged to changes in the CPI or determined periodically at the discretion of the Company. In extended periods of declining interest rates or high inflation, there may be compression in the spread between Assurant PreNeed’s death benefit growth rates
and its investment earnings. As a result, declining interest rates or high inflation rates may have a material adverse effect on our results of operations and our overall financial condition.
Selling, underwriting and general expenses consist primarily of commissions, premium taxes, licenses, fees, amortization of deferred acquisition costs (“DAC”) and value of businesses acquired (“VOBA”) and general operating expenses. For a description of DAC and VOBA, see Notes 2, 19 and 20 of the Notes to Consolidated Financial Statements included elsewhere in this report.
Our results of operations were affected by the following material dispositions, including:
Our short duration contracts are those on which we recognize revenue on a pro rata basis over the contract term. Our short duration contracts primarily include: group term life, group disability, group medical and group dental, property and warranty, credit life and disability and extended service contracts and individual medical contracts issued after 2002 in most jurisdictions.
For universal life insurance and investment-type annuity contracts sold by Assurant Solutions that are no longer offered, revenues consist of charges assessed against policy balances.
Reserves are established according to GAAP, using generally accepted actuarial methods and are based on a number of factors. These factors include experience derived from historical claim payments and actuarial assumptions to arrive at loss development factors. Such assumptions and other factors include trends, the incidence of incurred claims, the extent to which all claims have been reported and internal claims processing charges. The process used in computing reserves cannot be exact, particularly for liability coverages, since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liability and damage awards. The methods of making such estimates and establishing the related liabilities are periodically reviewed and updated.
Reserves, whether calculated under GAAP or SAP, do not represent an exact calculation of exposure, but instead represent our best estimates, generally involving actuarial projections at a given time, of what we expect the ultimate settlement and administration of a claim or group of claims will cost based on our assessment of facts and circumstances then known. The adequacy of reserves will be impacted by future trends in claims severity, frequency, judicial theories of liability and other factors. These variables are affected by both external and internal events, such as: changes in the economic cycle, changes in the social perception of the value of work, emerging medical perceptions regarding physiological or psychological causes of disability, emerging health issues and new methods of treatment or accommodation, inflation, judicial trends, legislative changes and claims handling procedures.
For short duration contracts, claims and benefits payable reserves are recorded when insured events occur. The liability is based on the expected ultimate cost of settling the claims. The claims and benefits payable reserves include (1) case reserves for known but unpaid claims as of the balance sheet date; (2) incurred but not reported (“IBNR”) reserves for claims where the insured event has occurred but has not been reported to us as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims.
We have exposure to asbestos, environmental and other general liability claims arising from our participation in various reinsurance pools from 1971 through 1983. This exposure arose from a short duration contract that we discontinued writing many years ago. We carried case reserves for these liabilities as recommended by the various pool managers and bulk reserves for IBNR of $50 million (before reinsurance) and $38.9 million (after reinsurance) in the aggregate at December 31, 2004. Any estimation of these liabilities is subject to greater than normal variation and uncertainty due to the general lack of sufficiently detailed data, reporting delays and absence of a generally accepted actuarial methodology for those exposures. There are significant unresolved industry legal issues, including such items as whether coverage exists and
what constitutes an occurrence. In addition, the determination of ultimate damages and the final allocation of losses to financially responsible parties are highly uncertain. However, based on information currently available, and after consideration of the reserves reflected in the financial statements, we believe that any changes in reserve estimates for these claims are not reasonably likely to be material. Asbestos, environmental and other general liability claim payments, net of reinsurance recoveries, were $2.3 million, $2.9 million and $1.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Based on information currently available, and after consideration of the reserves reflected in the financial statements, we believe that it is not reasonably likely that any liabilities we experience in connection with these programs would have a material adverse effect on our financial condition or results of operations. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable terms, makes it difficult to predict the outcomes with certainty.
Future policy benefits and expense reserves on LTC, life insurance policies and annuity contracts that are no longer offered, individual medical contracts sold prior to 2003 or issued in a limited number of jurisdictions and the traditional life insurance contracts within FFG are recorded at the present value of future benefits to be paid to policyholders and related expenses less the present value of the future net premiums. These amounts are estimated and include assumptions as to the expected investment yield, inflation, mortality, morbidity and withdrawal rates as well as other assumptions that are based on our experience. These assumptions reflect anticipated trends and include provisions for possible unfavorable deviations.
Acquisition costs relating to individual medical contracts issued prior to 2003 and in a limited numbers of juridictions are deferred and amortized over the estimated average terms of the underlying contracts. These acquisition costs relate to commissions and policy issuance expenses. Commissions represent the majority of deferred costs and result from commission schedules that pay significantly higher rates in the first year. The
We regularly monitor our investment portfolio to ensure that investments that may be other than temporarily impaired are identified in a timely fashion and properly valued and that any impairments are charged against earnings in the proper period. Our methodology to identify potential impairments requires professional judgment.
As a result of this initial impairment test, we recognized a non-cash goodwill impairment charge of $1,261 million. The impairment charge was recorded as a cumulative effect of a change in accounting
See “Recent Accounting Pronouncements” in Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this report for a description of additional recent accounting standards that are applicable to us.
Net investment income increased by $28 million, or 5%, from $607 million for the year ended December 31, 2003 to $635 million for the year ended December 31, 2004. The average portfolio yield decreased 16 basis points from 5.61% for the year ended December 31, 2003 to 5.45% for the year ended December 31, 2004. The decrease in the average portfolio yield was due to the lower interest rate environment. The average invested assets increased by approximately 8% for the year ended December 31, 2004 compared to the year ended December 31, 2003.
Net realized gains on investments improved by $22 million, or over 100%, from net realized gains of $2 million for the year ended December 31, 2003, to net realized gains of $24 million for the year ended December 31, 2004. Net realized gains on investments are comprised of both other-than-temporary impairments and realized gains (losses) on sales of securities. For the years ended December 31, 2003 and 2004, we had other-than-temporary impairments on fixed maturity and equity securities of $20 million and $0.6 million, respectively. The Company also recorded realized losses of $11 million and $4.2 million for the years ended December 31, 2003 and 2004, respectively, related to other investments. There were no individual impairments in excess of $10 million for the years ended December 31, 2003 and 2004.
On May 3, 2004 we sold our WorkAbility division and recorded a $9 million loss on disposal of this business in the second quarter of 2004.
Fees and other income decreased by $19 million, or 8%, from $232 million for the year ended December 31, 2003, to $213 million for the year ended December 31, 2004. The decrease was primarily due to decreases of $25 million and $9 million in Assurant Employee Benefits and Corporate and Other, respectively, offset by increases of $7 million and $6 million in Assurant Solutions and in Assurant Health, respectively. The decrease in Assurant Employee Benefits was primarily driven by lower fee income resulting from the sale of the WorkAbility division. The decrease in Corporate and Other was due to a one-time adjustment recorded in third quarter of 2003. The increase in Assurant Solutions was primarily due to an increase in fees related to growth in extended service contracts and debt deferment businesses. The increase in Assurant Health was primarily due to additional insurance policy fees and higher fee-based product sales in individual markets.
Total benefits, losses and expenses increased by $62 million, or 1%, from $6,806 million for the year ended December 31, 2003, to $6,868 million for the year ended December 31, 2004.
Policyholder benefits increased by $182 million, or 5%, from $3,658 million for the year ended December 31, 2003, to $3,840 million for the year ended December 31, 2004. The increase was primarily due to increases of $37 million, $106 million and $29 million in Assurant Solutions, Assurant Health and Assurant Employee Benefits, respectively. The increase in Assurant Solutions was primarily due to higher catastrophe
losses, net of reinsurance, in 2004 from Hurricanes Charley, Frances, Ivan and Jeanne. We incurred losses from catastrophes, net of reinsurance, of $93 million and $30 million for the years ended December 31, 2004 and 2003, respectively. This was partially offset by improved loss experience in our specialty property business absent the catastrophes. The increase in Assurant Health was consistent with the increase in net earned premiums and other considerations. The increase in Assurant Employee Benefits was primarily due to a reserve reduction in 2003. During the third quarter of 2003, we completed actuarial reserve adequacy studies for the group disability, group life and group dental products, which reflected that, in the aggregate, these reserves were redundant by $18 million. Therefore, we reduced reserves by $18 million in the third quarter of 2003 to reflect these estimates.
Selling, underwriting and general expenses increased by $142 million, or 5%, from $2,828 million for the year ended December 31, 2003, to $2,970 million for the year ended December 31, 2004. The increase was primarily due to increases of $61 million, $86 million, $10 million and $8 million in Assurant Solutions, Assurant Health, Assurant PreNeed and Corporate and Other, respectively, offset by a decrease in Assurant Employee Benefits of $23 million. The increase in Assurant Solutions was primarily due to an increase in extended service contract, international and creditor-placed homeowners businesses and Sarbanes-Oxley related expenses. The increase in Assurant Health was primarily due to increased commission expense associated with our individual health businesses. The decrease in Assurant Employee Benefits was primarily due to the sale of the WorkAbility division. The increase in Assurant PreNeed was primarily due to higher amortized commissions and expenses incurred as a result of the change in mix of business to more single-pay sales. The increase in Corporate and Other was primarily due to public company costs, including expenses related to our initial and secondary public stock offerings and additional costs related to Sarbanes-Oxley.
Net income increased by $165 million, or 89%, from $186 million for the year ended December 31, 2003 to $351 million for the year ended December 31, 2004.
Net earned premiums and other considerations increased by $476 million, or 8%, from $5,681 million for the year ended December 31, 2002, to $6,157 million for the year ended December 31, 2003. The increase in net earned premiums and other considerations was primarily due to increases of $285 million, $175 million, and $23 million in Assurant Solutions, Assurant Health, and Assurant Employee Benefits, respectively, with an offsetting decrease of $8 million in Assurant PreNeed. The increase in Assurant Solutions was due to growth in specialty property and consumer protection products. The increase in Assurant Health was primarily due to increases in individual health insurance business due to membership growth and premium rate increases.
Net investment income decreased by $25 million, or 4%, from $632 million for the year ended December 31, 2002, to $607 million for the year ended December 31, 2003. The decrease was primarily due to a decrease in investment yields driven by the lower interest rate environment. The yield on average invested assets was 5.61% for the year ended December 31, 2003, as compared to 6.27% for the year ended December 31, 2002.
Amortization of deferred gain on disposal of businesses decreased by $12 million, or 15%, from $80 million for the year ended December 31, 2002, to $68 million for the year ended December 31, 2003. The decrease was consistent with the run-off of the businesses ceded to The Hartford and John Hancock. See “- Reinsurance.”
Selling, underwriting and general expenses increased by $220 million, or 8%, from $2,609 million for the year ended December 31, 2002, to $2,828 million for the year ended December 31, 2003. The increase was
primarily due to increases of $141 million, $43 million and $11 million in Assurant Solutions, Assurant Health and Assurant Employee Benefits, respectively. The increase in Assurant Solutions was consistent with growth in the specialty property and consumer protection products business. The increase in Assurant Health was primarily due to increases in commissions, amortization of deferred policy acquisition costs and general expenses, which was consistent with the growth in business.
Distributions on preferred securities decreased by $5 million, or 4%, from $118 million for the year ended December 31, 2002 to $113 million for the year ended December 31, 2003. We redeemed $1,250 million of the preferred securities in mid-December 2003, resulting in lower expenses. We redeemed the remaining $196 million of preferred securities in early January 2004. As a result of the early extinguishment of all the preferred securities, we incurred $206 million in interest premiums on redemption for the year ended December 31, 2003 compared to zero in 2002.
Income taxes decreased by $36 million, or 33%, from $110 million for the year ended December 31, 2002, to $74 million for the year ended December 31, 2003. The effective tax rate for 2003 was 28.5% compared to 29.7% in 2002.
“Specialty Property Solutions” includes a variety of specialized property insurance programs that are coupled with differentiated administrative capabilities.
“Consumer Protection Solutions” includes an array of debt protection, administrative services, credit based programs and extended service contracts.
Net earned premiums and other considerations increased by $87 million, or 4% from $2,362 million for the year ended December 31, 2003 to $2,449 million for the year ended December 31, 2004. This increase was primarily due to an increase of $51 million in net earned premiums and other considerations from our consumer protection solutions products, primarily due to growth in our extended service contract and international businesses, partially offset by the decline of our domestic credit insurance business. Net earned premiums and other considerations from our specialty property solutions products increased by $36 million, primarily from growth in our creditor-placed and voluntary homeowners insurance product lines. This growth was partially offset by lower net earned premiums in our manufactured housing business, primarily due to the overall decline in manufactured housing sales.
Total benefits, losses and expenses increased by $98 million, or 4%, from $2,489 million for the year ended December 31, 2003 to $2,587 million for the year ended December 31, 2004.
Selling, underwriting and general expenses increased by $61 million, or 4%, from $1,590 million for the year ended December 31, 2003 to $1,651 million for the year ended December 31, 2004. Commissions, taxes, licenses and fees, of which amortization of DAC is a component, increased by $15 million, which is consistent with the change in the mix of business. General expenses increased by $46 million, primarily due to increased business from our extended service contracts, international, and creditor-placed homeowners insurance businesses. Additionally, in 2004 we incurred Sarbanes-Oxley related expenses and an increase in guaranty fund assessments attributable to the four hurricanes.
Segment income after tax decreased by $7 million, or 5%, from $133 million for the year ended December 31, 2003 to $126 million for the year ended December 31, 2004.
Income taxes increased by $1 million, or 2%, from $56 million for the year ended December 31, 2003 to $57 million for the year ended December 31, 2004. The change in income taxes is consistent with the change in pretax income and reflects a change in the mix of international and domestic taxable income.
Fees and other income increased by $10 million, or 8%, from $119 million for the year ended December 31, 2002, to $129 million for the year ended December 31, 2003, primarily due to the continuing transition of our credit insurance business to our debt protection administration business. We also recognized fees for a one time project in the first quarter of 2003 of $2.9 million.
Policyholder benefits increased by $144 million, or 19%, from $755 million for the year ended December 31, 2002, to $899 million for the year ended December 31, 2003. Our specialty property products accounted for $112 million of the increase primarily due to growth in our creditor-placed and voluntary homeowners insurance lines of business and approximately $18 million of the increase was attributable to various catastrophes ($30 million in 2003 compared to $12 million in 2002). Our consumer protection products also contributed $32 million of the increase primarily due to growth in our warranty and extended service contracts line of business.
Selling, underwriting and general expenses increased by $141 million, or 10%, from $1,449 million for the year ended December 31, 2002, to $1,590 million for the year ended December 31, 2003. Selling and underwriting expenses, of which amortization of DAC is a component, increased by $116 million, which consisted of $45 million primarily from our specialty property products due to growth in our creditor-placed and voluntary homeowners insurance and manufactured housing insurance lines. Also, $71 million of the increase was from our consumer protection products due to increased growth in our warranty and extended service contract lines of business. General expenses increased by $25 million, primarily from start up costs related to setting up new clients in the creditor-placed homeowners insurance area and increased business from our warranty and extended service contract products.
The table below presents information regarding Assurant Health’s segment results of operations:
Total revenues increased by $247 million, or 12%, from $2,091 million for the year ended December 31, 2003, to $2,338 million for the year ended December 31, 2004.
Policyholder benefits increased by $106 million, or 8%, from $1,317 million for the year ended December 31, 2003, to $1,423 million for the year ended December 31, 2004. The loss ratio improved 180 basis points from 65.6% for the year ended December 31, 2003 to 63.8% for the year ended December 31, 2004. This improvement was attributable to favorable loss experience predominantly on individual health insurance business, as well as a higher mix of individual health insurance business compared to small employer group health insurance business in 2004.
Net investment income decreased by $6 million, or 11%, from $55 million for the year ended December 31, 2002, to $49 million for the year ended December 31, 2003. There was a 88 basis point decrease in yield on the investment portfolio from 6.4% for the year ended December 31, 2002, to 5.55% for the year ended December 31, 2003, due to the lower interest rate environment. Offsetting the decrease in yield was a 4% increase in average invested assets for the year ended December 31, 2003, over the comparable prior year period.
Policyholder benefits increased by $95 million, or 8%, from $1,222 million for the year ended December 31, 2002, to $1,317 million for the year ended December 31, 2003. This increase was consistent with the increase in net earned premiums and other considerations. The loss ratio improved 100 basis points from 66.6% for the year ended December 31, 2002, to 65.6% for the year ended December 31, 2003, primarily due to our risk management activities.
Selling, underwriting and general expenses increased by $43 million, or 8%, from $546 million for the year ended December 31, 2002, to $589 million for the year ended December 31, 2003. Commissions increased by $33 million corresponding to an increase in first year net earned premiums over the prior year. Taxes, licenses and fees decreased by $6 million due to reduced premium tax rates on a portion of the medical premium. Amortization of deferred policy acquisition costs increased by $7 million due to higher sales of individual health insurance products beginning in 2000. General expenses increased by $9 million mainly due to additional spending to improve claims experience. The expense ratio improved 50 basis points from 29.4% for the year ended December 31, 2002, to 28.9% for the year ended December 31, 2003.
Total revenues increased by $6 million, or less than 1%, from $1,450 million for the year ended December 31, 2003, to $1,456 million for the year ended December 31, 2004.
Net investment income increased by $10 million, or 7%, from $140 million for the year ended December 31, 2003, to $150 million for the year ended December 31, 2004. The average portfolio yield declined 17 basis points from 6.39% for the year ended December 31, 2003, to 6.22% for the year ended December 31, 2004, due to the lower interest rate environment. The average invested assets increased by approximately 10% for the year ended December 31, 2004 compared to the year ended December, 2003.
Fees and other income decreased by $25 million, or 46%, from $54 million for the year ended December 31, 2003, to $29 million for the year ended December 31, 2004. The decrease was primarily due to lower fee income resulting from the sale of the WorkAbility division, as well as the transition of a block of business from administrative fee only business to fully insured business. See “- Corporate and Other.”
Selling, underwriting and general expenses decreased by $23 million or 5% from $433 million for the year ended December 31, 2003, to $410 million for the year ended December 31, 2004. The expense ratio decreased by 170 basis points from 33.1% for the year ended December 31, 2003, to 31.4% for the year ended December 31, 2004. The decrease was primarily driven by the sale of the WorkAbility division noted earlier, as well as the writedown of previously capitalized software in 2003, not incurred in 2004.
Segment income after tax for the years ended December 31, 2003 and 2004 was $62 million.
Total revenues decreased by $5 million, less than 1%, from $1,455 million for the year ended December 31, 2002, to $1,450 million for the year ended December 31, 2003.
Net investment income decreased by $8 million, or 5%, from $148 million for the year ended December 31, 2002, to $140 million for the year ended December 31, 2003. There was a 77 basis point decrease in yield on the investment portfolio from 7.16% for the year ended December 31, 2002 to 6.39% for the year ended December 31, 2003 due to the lower interest rate environment. Average invested assets increased by 6% from 2002 to 2003.
Fees and other income decreased by $20 million, or 27%, from $74 million for the year ended December 31, 2002, to $54 million for the year ended December 31, 2003. The decrease was primarily due to lower fee revenue from CORE due to the sale of PRA.
Total benefits, losses, and expenses decreased by $13 million, or 1%, from $1,367 million for the year ended December 31, 2002, to $1,354 million for the year ended December 31, 2003.
Segment income after tax increased by $5 million, or 9%, from $57 million for the year ended December 31, 2002 to $62 million for the year ended December 31, 2003.
The table below presents information regarding Assurant PreNeed’s segment results of operations:
Net earned premiums and other considerations decreased by $4 million, or less than 1%, from $530 million for the year ended December 31, 2003, to $526 million for the year ended December 31, 2004. The decrease was primarily due to a 3.6% decline in new sales as a result of our decision to make pricing changes on certain new business as well as a decrease in renewal premiums in the AMLIC channel. These were partially offset by the change in the mix of business from limited-pay to single-pay sales in the independent channel.
Selling, underwriting and general expenses increased by $10 million, or 7%, from $137 million for the year ended December 31, 2002, to $147 million for the year ended December 31, 2003. Amortization of DAC and VOBA expense increased $9 million for the year ended December 31, 2003, principally due to a larger in force block of business. Overall general operating expenses before deferral of costs declined $2 million over the comparable prior year period due to expense control. This reduction includes a $0.7 million charge associated with restructuring of the sales force in our independent division. Non deferrable general operating expenses were even with the prior year.
Segment income after tax decreased by $14 million, or 28%, from $50 million for the year ended December 31, 2002, to $36 million for the year ended December 31, 2003. This decrease was caused primarily by smaller spreads between investment income earned and the fixed benefits credited to policyholders, increased growth credited on the CPI block of business and higher utilization of the early pay off feature.
Net investment income decreased by $17 million, or 40%, from $43 million for the year ended December 31, 2003, to $26 million for the year ended December 31, 2004 mainly due to the lower interest rate environment and the decrease in average invested assets.
Net realized gains on investments improved by $22 million, or over 100%, from net realized gains of $2 million for the year ended December 31, 2003, to net realized gains of $24 million for the year ended December 31, 2004. Net realized gains on investments are comprised of both other-than-temporary impairments and realized gains (losses) on sales of securities. For the year ended December 31, 2003 and 2004, we had other-than-temporary impairments on fixed maturity and equity securities of $20 million and $0.6 million, respectively. The Company also recorded realized losses of $11 million and $4.2 million for the years ended December 31, 2003 and 2004, respectively, related to other investments. There were no individual impairments in excess of $10 million for the years ended December 31, 2004 and 2003.
Total benefits, losses and expenses decreased by $254 million, or 65%, from $389 million for the year ended December 31, 2003, to $135 million for the year ended December 31, 2004.
Interest expense increased by $55 million from $1 million for the year ended December 31, 2003, to $56 million for the year ended December 31, 2004. The increase was the result of the two senior notes that we issued in February 2004. See “- Liquidity and Capital Resources.”
In 2003, we incurred a $206 million interest charge due to the early redemption of $1,446 million of preferred securities.
Income tax benefit decreased by $94 million, or 95%, from an income tax benefit of $99 million for the year ended December 31, 2003, to an income tax benefit of $5 million for the year ended December 31, 2004. The change in the income tax benefit was consistent with the change in segment loss before income tax. Also, in December 2004, pursuant to the Jobs Act, we repatriated $110 million of capital from our Puerto Rico subsidiary and incurred approximately $19 million of tax expense. In accordance with proposed legislation, we anticipate that approximately $5 million of this expense will be recaptured as a tax benefit when the proposed legislation becomes enacted. In addition, during the fourth quarter of 2004, an analysis of our Federal Tax Liability resulted in a $10 million reduction of our tax liability.
Net realized gains (losses) on investments improved by $120 million, or 102%, from net realized losses of $118 million for the year ended December 31, 2002, to net realized gains of $2 million for the year ended December 31, 2003. In 2003, we had other than temporary impairments of $20 million as compared to $85 million for the year ended December 31, 2002. There were no individual impairments of available for sale securities in excess of $10 million in 2003. Impairments on available for sale securities in excess of $10 million in 2002 consisted of an $20 million writedown of fixed maturity investments in NRG Energy, a $12 million writedown of fixed maturity investments in AT&T Canada and an $11 million writedown of fixed maturity investments in MCI WorldCom. Excluding the effects of other-than-temporary impairments, we recorded an increase in net realized gains of $55 million.
Fees and other income decreased by $14 million, or 56%, from $25 million for the year ended December 31, 2002, to $11 million for the year ended December 31, 2003. The decrease was primarily due to $15 million of income recognized in 2002 associated with a settlement true-up of a 1999 sale of a small block of business to a third party and reversal of bad debt allowances due to successful collection of receivables that had been previously written off.
Selling, underwriting and general expenses increased by $14 million, or 25%, from $55 million for the year ended December 31, 2002, to $69 million for the year ended December 31, 2003. This increase was primarily due to $14 million of consulting and compensation expenses incurred in 2003, related to our initial public offering in February 2004.
Distributions on preferred securities decreased by $5 million, or 4%, from $118 million for the year ended December 31, 2002, to $113 million for the year ended December 31, 2003. We redeemed $1,250 million of our mandatorily redeemable preferred securities in mid-December 2003, resulting in lower expenses. We redeemed the remaining $196 million of mandatorily redeemable preferred securities in January 2004. As a result of the early extinguishment of all the mandatorily redeemable preferred securities we incurred $206 million of interest premiums for the year ended December 31, 2003 compared to zero recognized in 2002.
Segment loss after tax increased by $92 million, or 124%, from $74 million in 2002 to $166 million in 2003. This change was primarily due to the $206 million of interest premiums incurred related to early extinguishment of mandatorily redeemable preferred securities, partially offset by the favorable $120 million change in net realized capital gains (losses) on investments.
Net unrealized gains on fixed maturity securities decreased by $1 million, or less than 1%, from December 31, 2003 to December 31, 2004. Net unrealized gains on equity securities decreased by $5 million, or 26%, from December 31, 2003, to December 31, 2004. The decrease in net unrealized gains was primarily due to the net effect of the change in treasury yields. The 10-year treasury yield decreased 3 basis points between December 31, 2003 and December 31, 2004 and the 5-year treasury yield increased 36 basis points between December 31, 2003 and December 31, 2004.
We recorded $0.6 million, $20 million, and $85.3 million of pre-tax realized losses in 2004, 2003 and 2002, respectively, associated with other-than-temporary declines in value of available for sale securities. We also recorded $4.2 million, $11 million, and zero of pre-tax realized losses in 2004, 2003 and 2002, respectively, associated with other investments.
The investment category and duration of our gross unrealized losses on fixed maturities and equity securities at December 31, 2004 were as follows:
The total unrealized losses represent less than 1% of the aggregate fair value of the related securities. Approximately 77% of these unrealized losses have been in a continuous loss position for less than twelve months. The total unrealized losses are comprised of 474 individual securities with 92% of the individual securities having an unrealized loss of less than $0.1 million. The total unrealized losses on securities that were in a continuous unrealized loss position for longer than six months but less than 12 months was approximately $7.9 million, with no security with a book value of greater than $1.0 million having a market value below 86% of book value.
The following table presents reserve information as of the dates indicated:
Future policy benefits and expenses increased by $178 million, or 3%, from December 31, 2003 to December 31, 2004 and by $428 million, or 7%, from December 31, 2002 to December 31, 2003. The main contributing factor to these increases was growth in underlying business.
Unearned premiums increased by $220 million, or 7%, from December 31, 2003 to December 31, 2004 and decreased by $74 million, or 2%, from December 31, 2002 to December 31, 2003. The main contributing factor to the increase from December 31, 2003 to December 31, 2004 was new extended service contract business assumed in late 2003. The decrease from December 31, 2002 to December 31, 2003 was primarily driven by the run-off of our domestic credit insurance contracts, offset by growth in other short duration contracts.
Claims and benefits payable increased by $143 million, or 4%, from December 31, 2003 to December 31, 2004 and by $98 million, or 3%, from December 31, 2002 to December 31, 2003. The main contributing factor to these increases was growth in underlying business.
For a description of our reserving methodology, see Note 16 of the Notes to Consolidated Financial Statements included elsewhere in this report.
As set forth in Note 16 of the Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002, Group Term Life incurred losses related to prior years were approximately $36 million, $93 million, and $29 million less than the reserves that were previously estimated for the years ended December 31, 2003, 2002 and 2001, respectively. A significant portion of the Group Term Life reserve is related to waiver of premium reserves for disabled claimants. Group Term Life waiver of premium reserves are long-term in nature, and the reserves are estimated based on claims incurred in several prior years.
A key sensitivity is the loss development factors used. Loss development factors selected take into consideration claims processing levels, claims under case management, medical inflation, seasonal effects, medical provider discounts and product mix. A 1% reduction (or increase) to the loss development factors for the most recent four months would result in approximately $18 million higher (or $14 million lower) reserves at December 31, 2004. Our historical claims experience indicates that approximately 80% of medical claims are paid within four months of the incurred date.
Our Property and Warranty line of business includes creditor-placed homeowners, manufactured housing homeowners, credit property, credit unemployment and warranty insurance and some longer-tail coverages (e.g., asbestos, environmental, other general liability and personal accident). Our Property and Warranty loss reserves consist of case reserves and bulk reserves. Bulk reserves consist of IBNR and development on case reserves. The method we most often use in setting our Property and Warranty bulk reserves is the loss development method. Under this method, we estimate ultimate losses for each accident period by multiplying the current cumulative losses by the appropriate loss development factor. We then calculate the bulk reserve as the difference between the estimate of ultimate losses and the current case-incurred losses (paid losses plus
As set forth in Note 16 of the Notes to Consolidated Financial Statements for the periods ended December 31, 2004, 2003 and 2002, actual losses incurred in our property and warranty lines of business related to prior years were $25 million less, $13 million less, and $2 million more than previously estimated for the years ended December 31, 2003, 2002 and 2001, respectively. The Company’s property and warranty lines of business had a small deficiency in 2002 which was largely attributable to a shift in the mix of business away from the credit property and unemployment product lines. In addition, an increase in the claim frequency of unemployment contributed to additional development on the small deficiency experienced in 2002. In 2003, unemployment claim frequencies stabilized, contributing to a modest redundancy. In 2004, an improved economic environment led to lower unemployment levels, which meant that loss payments on existing claims as well as payments on new claims in our credit unemployment lines, were not as high as would have been expected. This, coupled with lower reserve levels as a result of reduced premium writings in this line, lead to a redundancy. These changes reflect experience gains and losses from actual claim frequencies differing from best estimate claim frequencies, and difference in actual versus best estimate paid claim lag rates. Such gains and losses are recognized in the periods they emerge.
Based on our December 31, 2004 results, we anticipate that we will receive approximately $34 million from reinsurers in respect of the 2004 Florida hurricanes. Our benefits, losses and expenses for the year ended December 31, 2004 reflect this anticipated recovery.
The reinsurance recoverable from The Hartford was $1,507 million and $1,537 million as of December 31, 2004 and 2003, respectively. The reinsurance recoverable from John Hancock was $882 million and $873 million as of December 31, 2004 and 2003, respectively. We would be responsible for administering this business and funding policyholder liabilities in the event of a default by reinsurers. In addition, under the reinsurance agreement, The Hartford is obligated to contribute funds to increase the value of the separate account assets relating to modified guaranteed annuity business sold if such value declines below the value of the associated liabilities. If The Hartford fails to fulfill these obligations, we will be obligated to make these payments.
A substantial portion of Assurant Solutions’ reinsurance activities are related to agreements to reinsure premiums and risk related to business generated by certain clients to the clients’ captive insurance companies or to reinsurance subsidiaries in which the clients have an ownership interest. Through these arrangements, our insurance subsidiaries share some of the premiums and risk related to client-generated business with these clients. When the reinsurance companies are not authorized to do business in our insurance subsidiary’s domiciliary state, our insurance subsidiary obtains collateral, such as a trust or a letter of credit, from the reinsurance company or its affiliate in an amount equal to the outstanding reserves to obtain full financial credit in the domiciliary state for the reinsurance. Our reinsurance agreements do not relieve us from our direct obligation to our insured. Thus, a credit exposure exists to the extent that any reinsurer is unable to meet the obligations assumed in the reinsurance agreements. To minimize our exposure to reinsurance insolvencies, we evaluate the financial condition of our reinsurers and hold substantial collateral (in the form