Family Life and Investors Life leased approximately 7,700 square feet of space in an office building in Seattle, Washington, which served as the statutory home office of the insurance companies. In addition, the insurance companies leased 22,100 square feet of warehouse space in Tukwila, Washington. The leases for each of these facilities expired on November 30, 2003, and were extended on a month-to-month basis, pending completion of the regulatory approval of the redomestication of the insurance companies from Washington to Texas. The lease for office space in Seattle was terminated on March 31, 2004. The lease for the warehouse space was terminated on February 29, 2004. For 2004, the combined monthly rental expense for these facilities was $24,891.
A subsidiary of FIC leased a building located at 40 Parker Road, Elizabeth, New Jersey. This building contains approximately 41,400 square feet of office space. The lease, which was entered into in December 1985 and expired in December 2005, called for an annual rental of $798,456 effective January 1, 2004; the actual rental charge for 2004 was $736,961. The lease provided that all costs including, but not limited to, those for maintenance, repairs, insurance and taxes be borne by FIC; these costs amounted to $331,685, $316,392, and $306,505 in 2004, 2003 and 2002, respectively. FIC subleased this space to third parties,
The financial data in this Annual Report on Form 10-K for the years 2003, 2002, 2001, and 2000, and for the four quarters of 2003, have been restated from amounts previously reported in the company’s Annual Report on Form 10-K for the fiscal year 2003 because of the correction of accounting errors. All information presented in “Item 6 - Selected Financial Data” and in this “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects this restatement. A discussion of the restatement is also provided in “Note 2 - Restatement of Previously Issued Financial Statements” in the accompanying consolidated financial statements.
Financial Industries Corporation (“FIC” or the “Company”) is a holding company engaged through its subsidiaries in the business of marketing, underwriting and servicing life insurance and annuity products in 49 states, the District of Columbia and the U.S. Virgin Islands. Like other financial intermediaries, FIC earns income principally based on the “spread” between what it pays its customers (death benefits, interest on funds on deposit) and what it earns on the money (premiums, policy and annuity deposits) its customers place in its care. Its long-term viability, profitability, and growth depend on FIC’s ability to manage both sides of this spread (investment of assets and pricing of liabilities), to keep its operating expenses reasonable, and to attract a sufficient volume of new deposits (by selling new insurance policies and annuities) to more than replace the inevitable withdrawal (through deaths, policy cancellations, and annuity contract surrenders) of funds currently in its keeping.
At the end of 2004, the equity of FIC’s shareholders totaled $87.5 million, down from $104.3 million at the end of 2003. This $16.8 million decline in shareholders’ equity primarily reflects the Company’s net loss for the year and increases in the
FIC incurred a net loss of $14.3 million in 2004. In addition to the impact of lower interest rates on its investment income, this loss reflected a decline in premium revenues, increases in policyholder benefits and amortization of deferred policy acquisition costs and significant auditing, accounting, consulting and legal fees associated with the 2003 restatement process of the consolidated financial statements. These items were partially offset by realized gains on investments, lower interest expense on contractholder deposit funds, and lower amortization of present value of future profits of acquired business.
As explained in the accompanying consolidated financial statements (see Note 2 on Restatement of Previously Issued Financial Statements and Item 6, Selected Financial Data), FIC’s consolidated financial statements for 2003 and prior periods have been restated. The comments in this discussion and analysis of the financial condition and results of operations relate to the restated balances.
Introduction. In this Form 10-K, the Company has restated its consolidated financial statements, for the correction of accounting errors, for the years 2003, 2002, 2001 and 2000, that were previously reported in its Annual Report on Form 10-K for the year ended December 31, 2003. All information presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the restatement.
In the course of the Company’s work on its insurance company subsidiaries’ 2004 statutory financial statements the Company identified significant adjustments relating to 2003 and other prior periods. The Company initially announced these findings in its Form 12b-25 filing for the year ended December 31, 2005, and that the Company was analyzing the possible impact of these adjustments on the consolidated financial statements included in its 2003 Form 10-K.
Restatement. The aggregate effect of the restatement for accounting errors decreased the opening balance of shareholders' equity at January 1, 2002 (for the effect on shareholders' equity of the correction of accounting errors occurring in years prior to 2002) and the shareholders' equity at December 31, 2002 and 2003, respectively, by $2.1 million, $4.6 million and $4.8 million, as follows:
Policy liabilities and Contractholder Deposit Funds - Following the filing of its 2003 Form 10-K, the Company engaged a new actuarial consulting firm to assist with the Company’s actuarial functions and the actuarial processes affecting financial statement preparation. The Company, along with the new firm, performed various reviews of the actuarial policy reserving process. Through this review, errors in the Company’s 2003 and prior year consolidated financial statements were identified relating to policy liabilities and contractholder deposit funds as described below.
Another significant adjustment related to contractholder deposit funds for annuity policies. Several annuity policies were misidentified in prior years as variable annuities and excluded from policy liabilities. Upon additional review, these policies have been appropriately identified as general account policies and included in the Company’s contractholder deposit fund liabilities.
As a result, corrected calculations and reserving processes for these policies were performed and the liability balances were increased for these corrections totaling $6.5 million, specifically, contractholder deposit funds totaling $4.8 million and future policy benefits totaling $1.7 million.
Various other errors were identified resulting in corrections primarily related to paid-up insurance coverages, manual policy processing, and accumulation of GAAP policy reserves and related reinsurance reserve credits. These resulted in an increase to reinsurance receivables of $291,000, with a reduction in future policy benefits of $17,000.
Other Miscellaneous - The Company recorded the following additional restatement adjustments:
Correct agent advances for calculation errors in amounts collected by the Company, increasing accounts receivable $33,000
Reduction of accrued interest on bond for which interest received was held in suspense totaling $52,000
Reduction of accounts receivable for straight-line treatment of rental income totaling $86,000
Correction of agent commission liability of $255,000 and allowance for agents’ balances of $157,000 due to errors in programming of the Company’s commission rate structure totaling $98,000
Reclassifications of certain balance sheet and statement of operations items which were improperly classified,
In addition to the above restatements, the statement of cash flows for the year ended December 31, 2003 was also affected by the following items:
Adjustment to issuance of treasury stock of $127,000 due to issuance of treasury stock to 401(k) participants, reclassifying change to other.
$236,000 increase from change in net unrealized losses on investments in fixed maturities available for sale
At the end of 2004, FIC had $880.9 million of assets under its direct management, exclusive of separate account assets. In broad terms, these funds were invested as follows:
Total managed assets declined during 2004 by 5.1%. The decline was primarily due to reductions in the Company’s investment securities portfolio, deferred policy acquisition costs, and present value of future profits of acquired business. The level of these reductions was significantly impacted by the net run-off of the Company’s annuity and life insurance business in-force.
The Company, working with Conning, also revised the investment policies of its insurance subsidiaries. The new policies reiterate compliance with legal requirements of state insurance laws and regulations that are applicable to the Company’s insurance company subsidiaries. They also emphasize sensitivity to the way that FIC’s liabilities are likely to change over time and with changes in general interest rate levels. In practical terms, this means that the Company now focuses almost all of its investment in investment-grade securities, keeping the schedule of anticipated asset maturities in line with its projected cash needs. It also means that the Company attempts to keep the duration of its investment assets (a measure of the sensitivity of their value to changes in interest rates) in line with the duration of the Company’s liabilities.
Conning commenced the realignment of the Company’s life insurance subsidiaries’ portfolios in accordance with these new policies in the fourth quarter of 2003. As part of this realignment, Conning identified eight securities purchased earlier in 2003
An allocation by security type of the Company’s investments in fixed maturities as of December 31, 2004 and 2003, is detailed below.
FIC’s equity securities consist primarily of its investment in the investment funds underlying the separate accounts business of Investors Life Insurance Company of North America (“Investors Life”). As of December 31, 2004, the market value of FIC’s equity securities was $8.5 million, compared to $7.9 million at December 31, 2003. The increase is related to an increase in the value of the funds underlying the separate accounts.
FIC’s real estate investment is primarily related to the development of the River Place Pointe project (“River Place Pointe”) by Investors Life. At December 31, 2004, FIC’s investment totaled $90.1 million in this 600,000 sq. ft., seven-building office complex on 48 acres in Austin, Texas. (For a more detailed description of the River Place Pointe project, see Item 2 -Properties.) FIC and its insurance company subsidiaries occupy one of the seven buildings. Four of the other buildings were substantially leased, but two buildings (approximately 34% of the total space in the project) remained vacant as of December 31, 2004. The project was sold in June 2005, in a cash transaction, for $103 million. The Company realized a gain of $10.1
For prior year comparative purposes, the changes for in-force from 2002 to 2003 for policies, traditional life insurance, universal life insurance, and annuity funds on deposit were -8.4%, -11.2%, -7.7%, and 12.1%, respectively. As noted elsewhere in this report, the Company’s management views this continued net run-off in the Company’s business as detrimental to its long-term prospects and is taking steps designed to reverse this run-off.
The ILCO pension plan has an accumulated benefit obligation projected at year-end 2004 totaling $17.9 million in comparison to the fair value of plan assets of $17.6 million. The difference in these amounts reflects a minimum liability of approximately $300,000. However, because the funding position of the plan reflects a prepaid pension expense of $3.1 million at December 31, 2004, the Company was required to record the additional pre-tax liability of $3.4 million to reflect the net minimum liability of $300,000. The effects of recording the additional liability are included as a component of other comprehensive income.
The entire principal amount of the 2003 Notes and any accrued but unpaid interest may become immediately due and payable upon an event of default, which includes: (1) failure to pay interest within 30 days of any due date; (2) failure to pay principal when due; (3) the bankruptcy or insolvency of FIC; or (4) the merger of FIC or sale of all or substantially all of its assets unless the successor entity to a merger is a United States corporation (or a foreign corporation that agrees to be bound by certain tax provisions). The terms of the 2003 Notes also place certain limitations on the offer or sale of securities of FIC if it would render invalid the exemption of the notes issued in connection with the loan from the registration requirements of the Securities Act of 1933. Other terms and conditions of the $15 million borrowing are described in Note 7 in the accompanying consolidated financial statements. As of December 31, 2004, the Company is in compliance with all provisions of this agreement.
Financial intermediaries such as FIC depend on their capital to absorb short-term fluctuations in asset and liability values in their financial structures. They also count on capital to support the growth of the business. One typical measure of the strength of a financial holding company such as FIC is the simple ratio of its shareholders’ equity to its total assets. For FIC, excluding its separate account assets (which are not relevant for this purpose), at the end of 2004, this ratio was 9.9%, compared to 11.2% at the end of 2003. Management believes that its current capital is sufficient to meet the Company’s liabilities and to fund growth at currently planned levels.
FIC’s two insurance company subsidiaries are subject to regulation under state law. Among other requirements, these state laws and regulations impose capital adequacy requirements on insurance companies. Using a calculation that takes into account the quality, liquidity, maturities, and amounts of its assets and liabilities, each insurance company is required to calculate its “risk-based capital” (or “RBC”). The company’s total adjusted capital must exceed 200% of the authorized control level RBC to avoid supervisory activity by the insurance regulators. As of December 31, 2004, the total adjusted capital of FIC’s insurance subsidiaries, Family Life and Investors Life, was approximately 869% and 254% of its authorized control level risk-based capital, respectively. As of December 31, 2005, the RBC ratios for Family Life and Investors Life were 717% and 560%, respectively. The RBC ratio of Investors Life improved significantly as a result of the June 2005 sale of the River Place Pointe real estate investment. See Item 2 - Properties.
Investors Life continue to maintain capital and surplus positions which significantly exceed risk-based capital (“RBC”) and other regulatory requirements.
FIC incurred a net loss of $14.3 million in 2004. Comparing this result to the results in 2003 and 2002 is complicated by several factors:
significant and unusual expenses incurred during 2004 related to accounting and auditing fees, 2003 related to compensation expenses, and 2002 related to the merger of Intercontinental Life Corporation;
a loss from discontinued operations of $6.1 million on the sale of the New Era companies.
$3.6 million increase in the valuation allowance related to the realization of deferred tax assets from continuing operations.
Premium revenues reported for traditional life insurance products are recognized when due. Both renewal premiums and first-year premiums have declined from year to year throughout the period of 2002 through 2004, as shown in the following table.
The decline in UL premiums and annuity deposits in 2003 and 2004, shown in the prior table, reflects the factors noted earlier in this discussion: the net run-off of business from the Company’s existing book of business, and declining sales of new UL policies. Although the Company is focusing on reversing these trends on an overall basis, management has de-emphasized the sale of annuity and UL products in periods subsequent to 2003 due primarily to the current interest-rate environment and certain design features of FIC’s current annuity products.
For the year ended December 31, 2004, FIC had a $2.8 million net realized gain on investments, compared to a $0.4 million net realized loss in 2003, and a $2.8 million net realized loss in 2002. The net realized gain for 2004 includes $1.1 million in gains on sales of fixed maturity securities and $1.7 million in gains on sales of two of the Company’s real estate properties classified as available for sale. In 2003, eight bonds were classified as other than temporarily impaired, resulting in writedowns totaling approximately $5.2 million. These bonds were subsequently sold in the fourth quarter of 2003, resulting in a small additional loss subsequent to the writedowns. The Company also sold various bonds throughout 2003 for gains that largely offset the previously described writedowns, resulting in the $0.4 million net realized loss for the year. The Company identified one bond at December 31, 2002, that was considered to be other than temporarily impaired and reduced its carrying value by $463,000. This write-down adjustment, along with an impairment-related reduction of $2.5 million in the carrying value of its equity securities, contributed $3.0 million to the net realized loss in 2002.
Amortization of deferred policy acquisition costs (DAC) decreased from $11.0 million in 2002 to $9.8 million in 2003 but increased again to $10.5 million in 2004. These expenses represent the amortization of the costs of producing new business, which consist primarily of agents’ commissions and certain policy issuance and underwriting costs. DAC is amortized over the premium-paying period of the policies in proportion to estimated annual premium revenue for traditional life insurance business. For interest sensitive products, these costs are amortized in relation to the estimated annual gross profits of the policies. The level of policy lapses and surrenders can also have a significant impact on the amount of amortization in any reporting period. The amortization decrease from 2002 to 2003 is primarily due to reductions in credited rates on interest sensitive products which then restored expectations of some future margins allowing reduced amortization. During 2003 this was partially offset by the impact of increased lapses on traditional products which led to increased amortization. The amortization in 2004 is reflective of continued pressure on estimated future margins, due to the low market interest rate environment and its impact on the Company’s interest spread as previously described.
Operating expenses for 2004 were $34.2 million, as compared to $41.5 million in 2003 and $34.6 million in 2002. In each year, operating expenses were impacted by several significant and unusual items which are described below.
During 2004, the Company took significant steps to reduce the level of general operating expenses. Subsequent to the changes in the Board and management in late 2003 and early 2004 as previously described, a comprehensive review of the Company’s staffing and operational structure was performed. This review identified numerous opportunities in these areas for reductions in the Company’s cost structure, given the current levels of sales and business in-force. Accordingly, significant reductions in staffing levels were achieved in late 2003 and during 2004. The Company also closed its Seattle branch office and records storage facility, upgraded various operating and accounting systems, and restructured employee benefit programs.
Although many cost reduction steps were implemented in 2004, the savings were largely offset by the extraordinary auditing, actuarial, accounting and other consulting, and legal expenses associated with the reexamination of the Company’s financial accounts and restatement of prior years’ consolidated financial statements. Significant legal fees were also incurred in 2004 related to litigation matters as previously described in Item 3 - Legal Proceedings. A comparison of these expenses for 2004 and prior years is provided below:
The significant level of these fees has continued into 2005 and 2006 due to the late filing of the Company’s 2003 and 2004 Forms 10-K. Such fees are accrued and reported in the year the services are performed. Subsequent to the filing of the 2003 Form 10-K, the Company began work on its 2004 financial statement reporting requirements. This includes the completion of the 2004 statutory financial statements and related audits for the Company’s insurance subsidiaries and the 2004 consolidated financial statements and related audit as included in this 2004 Form 10-K filing. As this work and the related audits were ultimately completed in 2006, the related fees incurred continue to remain at higher than normal levels. The Company expects such fees to continue at similar levels throughout 2006 at which time the Company anticipates its financial filings will be substantially current and the level of fees may drop to lower levels in 2007. Fees incurred in 2005 and through June 30, 2006, for audit, actuarial, accounting and legal fees totaled approximately $7.3 million and $5.0 million, respectively.
Also to be considered in the analysis of these expenses is that following the filing of the 2003 Form 10-K, the Company engaged Deloitte & Touche LLP as its new independent registered public accounting firm and engaged Allen Bailey & Associates, Inc. as its new actuarial consulting firm. Both firms were also engaged to work on the 2004 and 2005 statutory financial statements for the Company’s insurance subsidiaries, as well as the 2004 and 2005 consolidated financial statements. This change in auditors and actuaries, the first by the Company in many years, required additional work by both internal and external accounting and actuarial personnel.
The provision for federal income taxes on loss from continuing operations, before cumulative effect of change in accounting principles, reflects tax benefits totaling $2.2 million, $3.5 million and $3.5 million for the years 2004, 2003 and 2002. These tax amounts equate to effective tax benefit rates of (13.1%), (16.8%), and (28.1%) for the years ended December 31, 2004, 2003, and 2002, respectively. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company is due to the establishment of a valuation allowance and increases to this allowance for deferred tax assets. Under SFAS No. 109, the Company has established a valuation allowance when, based on the weight of the available evidence, it is more likely than not that some portion of its deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the Company’s generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods. The Company’s deferred tax assets are primarily comprised of net operating losses of FIC and its non-life insurance wholly owned subsidiaries. These non-life net operating loss carry forwards totaled
principal payments each quarter of $1,536,927, commencing March 12, 2006, and ending with a final payment on June 12, 2008; and
The holding company’s other principal liquidity requirement is debt service on the $15 million of 2003 Notes that it issued in May 2003. (See “Financial Condition - Liabilities” earlier in this Item 7.) These notes require quarterly interest payments at a variable interest rate of the three-month LIBOR rate plus 4.2% (which yielded a rate of approximately 9.02% at April 1, 2006). The principal amount of the 2003 Notes must be repaid in a single payment in 2033.
In June 2004, FIC, with the approval of the Texas Department of Insurance, created FIC Insurance Services, L.P., a service company subsidiary, and transferred to it many of the administrative functions of the insurance companies. The new service company charges each insurance company a monthly service fee that is calculated using a formula based on policies under management, new policies issued, managed assets, and other factors. Profits earned by the service company are paid as dividends to the holding company, providing an additional source of liquidity at the holding company level.
In connection with sales of invested assets, on June 1, 2005, the Company sold its River Place Pointe office complex to a non-affiliated party in an all-cash transaction for a gross purchase price of $103 million. Under the terms of the sale agreement, the Company entered into a lease with the purchaser with respect to all of the space in Building One for a five-year term. The Company will realize a gain of $10.1 million on the sale, which includes both a current 2005 realized gain of $8.0 million and a deferred gain of $2.1 million to be recognized over the period from the sale date through March 31, 2008. Although this results in lower real estate income, the Company is able to reinvest these proceeds into more liquid investments, more closely related to the cash flow needs of its policyholder-related liabilities.
Long-term debt obligations represent notes payable totaling $15 million due 2033. Amounts differ from balances presented on the consolidated balance sheets due to the inclusion of projected interest to be paid at the variable interest rate of the three-month LIBOR rate plus 4.2%.
Policy liabilities represent estimated cash payments to be made to policyholders. Such cash outflows reflect adjustments for the estimated timing of mortality, morbidity, persistency, and other appropriate factors but are undiscounted with respect to interest. The liability amount in the consolidated financial statements reflects the discounting for interest, as well as the timing for other factors described above.
The decrease of $30.4 million in cash and cash equivalents during 2004 was primarily due to purchase of investments and cash used in financing activities to fund net cash outflows from contractholder deposits. The decrease of $80.7 million in cash and cash equivalents from 2002 to 2003 was largely due to purchases of long-term fixed maturity securities.
Also as previously described in this Item 7, during late 2003 and early 2004, the Company completed a realignment strategy of its investment portfolio. As of December 31, 2003, the Company’s combined cash, cash equivalents, and short-term investments totaled $82.4 million. With the low interest rate environment during 2004, the Company increased this level to $114.6 million at December 31, 2004 ($52.0 million in cash and cash equivalents and $62.5 million in short-term investments), in anticipation of an improved interest rate environment. It was also during this time that Conning and the Company completed more extensive asset/liability management and duration analysis which provided the information for more effective reinvestment of funds. As market interest rates began to rise subsequent to 2004, most of the cash and short-term investments were deployed in longer term fixed maturity securities during 2005 and the first quarter of 2006.
Contractholder fund withdrawals are a normal part of the run-off of any company's existing book of business. The increase in withdrawals in 2004 could be impacted by the low market interest rate environment and the Company's lowering of credited interest rates on certain annuity and universal life insurance products in response to lower investment rates. Total contractholder fund withdrawals for 2004, 2003, and 2002 totaled $70.5 million, $62.2 million, and $67.7 million, respectively.
Properties that are identified for sale and actively marketed by the Company are classified as real estate held for sale and are stated at the lower of cost less accumulated depreciation or net realizable value. No depreciation is recorded while the property is classified as held for sale. Net realizable value is determined by the Company based on the estimated selling price less direct costs of the sale.
Projections used to determine the rate of amortization of DAC and PVFP also require extensive assumptions about, among other things, interest margins, product loads, mortality rates, persistency rates, and maintenance expense levels. In setting the levels of DAC and PVFP amortization, important assumptions must also be made about the appropriate level at which blocks of policies will be aggregated for testing the acceptability of amortization schedules, and views vary widely on this topic. These assumptions involve judgment and are compared to actual experience on an ongoing basis. Significant changes in these assumptions can impact the carrying balance of DAC and PVFP and produce changes that must be reflected in the current period’s income as an unlocking adjustment. Loss recognition is evaluated periodically on an aggregate basis that combines deferred policy acquisition costs with the present value of future profits on acquired business.
FIC’s liability for future policy benefits accounted for 13.9% of its total liabilities at December 31, 2004, or 20.2% after excluding liabilities associated with separate accounts. These liabilities for future policy benefits, referred to as reserves, are estimated using actuarial methods based on assumptions about future receipts of premiums, interest yields, investment returns, expenses, mortality, morbidity, and persistency. These assumptions consider Company experience and industry standards. The assumptions vary by plan, age at issue, year of issue, and duration. They include estimates, shaped by judgment and experience, and have a substantial impact on the reported financial condition of the Company. Differences between actual experience and assumptions used in the pricing of these policies and in the establishment of liabilities may result in variability of net income in amounts which may be material.
The Company computes deferred income taxes utilizing the asset and liability method. Under this method, balance sheet amounts for deferred income taxes are computed based on the tax effect of the differences between the financial reporting and federal income tax bases of assets and liabilities using the tax rates which are expected to be in effect when these differences are anticipated to reverse. Deferred income tax assets are subject to ongoing evaluation of whether such assets will be realized. Realization of deferred tax assets is dependent upon the Company's generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods. If future taxable income is not expected, the Company establishes a valuation allowance, when based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.
For a further discussion of accounting policies, see Note 1 to the accompanying consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” This Statement changes the requirements for the accounting for and reporting of a change in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.
In September 2005, the American Institute of Certified Public Accountants (“AICPA”), issued Statement of Position (“SOP”) 05-01, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” The SOP 05-01 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“SFAS”) 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and For Realized Gains and Losses from the Sale of Investments.” The SOP 05-01 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. The SOP 05-01 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company has not completed an assessment of the estimated impact of SOP 05-01 on its consolidated financial statements.
benefit plans on their balance sheets. The effective date of the recognition and disclosure provisions for calendar-year public companies is for calendar years ending after December 15, 2006. The Company is currently evaluating the impact of this new standard but it is not expected to have a significant effect on the consolidated financial statements for the year ending December 31, 2006.
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, dated October 27, 2006.