On January 1, 2002 we adopted FAS 142. As a result, we recognized a non-cash goodwill impairment charge of $1,261 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Significant Accounting Standard Affecting Our Business.”
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this report. It contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings “- Risk Factors” and “Forward-Looking Statements.”
We pursue a differentiated strategy of building leading positions in specialized market segments for insurance products and related services in North America and selected other markets. We provide: creditor-placed homeowners insurance; manufactured housing homeowners insurance; debt protection administration; credit insurance; warranties and extended service contracts; individual health and small employer group health
Our expenses primarily consist of policyholder benefits, underwriting, general and administrative expenses, and distributions on preferred securities of subsidiary trusts.
Our profitability depends in large part on accurately predicting benefits, claims and other costs, including medical and dental costs. It also depends on our ability to manage future benefit and other costs through product design, underwriting criteria, utilization review or claims management and, in health and dental insurance, negotiation of favorable provider contracts. Changes in the composition of the kinds of work available in the economy, market conditions and numerous other factors may also materially adversely affect our ability to manage claim costs. As a result of one or more of these factors or other factors, claims could substantially exceed our expectations, which could have a material adverse effect on our business, results of operations and financial condition.
In 2004, we granted approximately 3.9 million stock appreciation rights to our employees and directors. For every dollar by which our stock price exceeds $22.00, we will recognize an expense of approximately $3 million.
At December 31, 2003, and December 31, 2004, we had $1,970 million and $996 million, respectively of debt and preferred stock. This has had an impact on our annual interest and dividend costs.
We will need to comply with certification requirements under Section 404 of the Sarbanes Oxley Act as of December 31, 2005, and we expect to incur increased expenses to comply with these requirements.
On May 3, 2004, we sold the assets of our WorkAbility division of CORE, Inc. (“CORE”). We recorded a pre-tax loss on the sale of $9 million, which was included in the Corporate and Other segment.
On June 28, 2002, we sold our 50% ownership in Neighborhood Health Partnership (“NHP”) to NHP Holding LLC. We recorded pre-tax gains on sale of $11 million, which was included in the Corporate and Other segment.
There are certain accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. In addition, if factors such as those described above or in “- Risk Factors” cause actual events to differ from the assumptions used in applying the accounting policies and calculating financial estimates, there could be a material adverse effect on our results of operations, financial condition and liquidity.
We believe the following critical accounting policies require significant estimates which, if such estimates are not materially correct, could affect the preparation of our consolidated financial statements. Also, see “- Reserves” for the sensitivity analysis of our significant critical accounting estimates.
Currently, our long duration contracts being sold are pre-funded funeral life insurance and investment-type annuities. For pre-funded funeral life insurance policies, any excess of the gross premium over the net premium is deferred and is recognized in income in a constant relationship with the insurance in force. For pre-funded funeral investment-type annuity contracts, revenues consist of charges assessed against policy balances.
Premiums for LTC insurance and traditional life insurance contracts within FFG are recognized as revenue when due from the policyholder. For universal life insurance and investment-type annuity contracts within FFG, revenues consist of charges assessed against policy balances. For the FFG and LTC businesses previously sold, all revenue is ceded to The Hartford and John Hancock, respectively.
For group disability, the case reserves and the IBNR are recorded at an amount equal to the net present value of the expected claims future payments. Group long-term disability and group term life waiver of premium reserves are discounted to the valuation date at the valuation interest rate. The valuation interest rate is reviewed quarterly by taking into consideration actual and expected earned rates on our asset portfolio, with adjustments for investment expenses and provisions for adverse deviation. Group long term disability and group term life reserve adequacy studies are performed annually, and morbidity and mortality assumptions are adjusted where appropriate.
Unearned premium reserves are maintained for the portion of the premiums on short duration contracts that is related to the unexpired period of the policy.
One of our subsidiaries, ARIC, participated in certain excess of loss reinsurance programs in the London market and, as a result, reinsured certain personal accident, ransom and kidnap insurance risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to other reinsurers (retrocessionaires). ARIC ceased reinsuring such business in 1997. However, certain risks continued beyond 1997 due to the nature of the reinsurance contracts written. ARIC and some of the other reinsurers involved in the programs are seeking to avoid certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Similarly, some of the retrocessionaires are seeking avoidance of certain treaties with ARIC and the other reinsurers and some reinsureds are seeking collection of disputed balances under some of the treaties. The disputes generally involve multiple layers of reinsurance, and allegations that the reinsurance programs involved interrelated claims “spirals” devised to disproportionately pass claims losses to higher-level reinsurance layers. Many of the companies involved in these programs, including ARIC, are currently involved in negotiations, arbitrations and/or litigation between multiple layers of retrocessionaires, reinsurers, ceding companies and intermediaries, including brokers, in an effort to resolve these disputes. Many of those disputes relating to the 1995 program year, including those involving ARIC, were settled on December 3, 2003. Loss accruals previously established relating to the 1995 program year were adequate. However, our exposure under the 1995 program year was less significant than the exposure remaining under the 1996 and 1997 program years. While the majority of the negotiations, arbitrations and/or litigations between the multiple layers of reinsurers, ceding companies and intermediaries are still ongoing, ARIC and an affiliated company, BICL did resolve disputes with two of its reinsurers in the 1996 and 1997 program years by means of a commutation agreement. As a result of the settlement, the two affiliated reinsurers paid ARIC and BICL $6 million and both parties agreed to release each other from any past, present or future obligations of any kind.
Future policy benefits and expense reserves for pre-funded funeral investment-type annuities, universal life insurance policies and investment-type annuity contracts that are no longer offered, and the variable life insurance and investment-type annuity contracts in FFG consist of policy account balances before applicable surrender charges and certain deferred policy initiation fees that are being recognized in income over the terms of the policies. Policy benefits charged to expense during the period include amounts paid in excess of policy account balances and interest credited to policy account balances.
Loss recognition testing is performed annually and reviewed quarterly. Such testing involves the use of best estimate assumptions including the anticipation of interest income to determine if anticipated future policy premiums are adequate to recover all DAC and related claims, benefits and expenses. To the extent a premium deficiency exists, it is recognized immediately by a charge to the statement of operations and a corresponding reduction in DAC. If the premium deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency.
Acquisition costs relating to group term life, group disability and group dental consist primarily of new business underwriting, field sales support, commissions to agents and brokers, and compensation to sales representatives. These acquisition costs are front-end loaded; thus they are deferred and amortized over the estimated terms of the underlying contracts.
Acquisition costs on individual medical contracts issued in most jurisdictions after 2002 and small group medical contracts consist primarily of commissions to agents and brokers and compensation to representatives. These contracts are considered short duration because the terms of the contract are not fixed at issue and they are not guaranteed renewable. As a result, these costs are not deferred but rather are recorded in the statement of operations in the period in which they are incurred.
Acquisition costs for pre-funded funeral life insurance policies and life insurance policies no longer offered are deferred and amortized in proportion to anticipated premiums over the premium-paying period.
majority of deferred policy issuance expenses are the costs of separately underwriting each individual medical contract.
Changes in individual security values are regularly monitored in order to identify potential problem credits. In addition, pursuant to our impairment process, each month the portfolio holdings are screened for securities whose market price is equal to 85% or less of their original purchase price. Management then makes their assessment as to which of these securities are other than temporarily impaired. Assessment factors include, but are not limited to, the financial condition and rating of the issuer, any collateral held and the length of time the market value of the security has been below cost. Each quarter the watchlist is discussed at a meeting attended by members of our investment, accounting and finance departments. At this meeting, any security whose price decrease is deemed to have been other than temporarily impaired is written down to its then current market level, with the amount of the writedown reflected in our statement of operations for that quarter. Previously impaired issues are also monitored monthly, with additional writedowns taken quarterly if necessary.
For a description of other accounting policies applicable to the periods covered by this report, see Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this report.
On January 1, 2002, we adopted FAS 142. As of our adoption of FAS 142, we ceased amortizing goodwill. In addition, we were required to subject our goodwill to an initial impairment test. As a result of FAS 142, we are required to conduct impairment testing on an annual basis and between annual tests if an event occurs or circumstances change indicating a possible goodwill impairment. In the absence of an impairment event, our net income will be higher as a result of not having to amortize goodwill.
principle as of January 1, 2002. The impairment charge had no impact on cash flows or the statutory-basis capital and surplus of our insurance subsidiaries. We performed a January 1, 2003 and 2004 impairment test during the six months ended June 30, 2003 and 2004 and concluded that goodwill was not further impaired. We also performed a January 1, 2005 impairment test during the three months ended March 31, 2005 and management believes that goodwill will not be impaired.
Includes amortization of DAC and VOBA and underwriting, general and administrative expenses.
The table above includes the cumulative effect of change in accounting principle in 2002. These items are only included in this Consolidated Overview. As a result, the tables presented under the segment discussions do not total to the same amounts shown on this consolidated overview table. See Note 21 of the Notes to Consolidated Financial Statements included elsewhere in this report.
Total revenues increased by $338 million, or 5%, from $7,066 million for the year ended December 31, 2003, to $7,404 million for the year ended December 31, 2004.
Net earned premiums and other considerations increased by $326 million, or 5%, from $6,157 million for the year ended December 31, 2003, to $6,483 million for the year ended December 31, 2004, primarily due to an increase of $87 million and $222 million in Assurant Solutions and Assurant Health, respectively. The increase in Assurant Solutions was primarily due to growth in the extended service contract, international, and creditor placed and voluntary homeowners businesses. This growth was offset by a decline in domestic credit insurance and our manufactured housing businesses. The increase in Assurant Health was primarily due to increased sales, which partially reflect the success of HSAs, and increased rates.
Amortization of deferred gains on disposal of businesses decreased by $10 million, or 15%, from $68 million for the year ended December 31, 2003, to $58 million for the year ended December 31, 2004. The decrease was consistent with the anticipated run-off of the business ceded to The Hartford in 2001 and John Hancock in 2000. See “Reinsurance.”
Distributions on preferred securities decreased by $111 million, or 98%, from $113 million for the year ended December 31, 2003 to $2 million for the year ended December 31, 2004. The decline was due to the early redemption of $1,250 million of preferred securities in December 2003 and $196 million of preferred securities in January 2004.
Income taxes increased by $111 million, or 150%, from $74 million for the year ended December 31, 2003, to $185 million for the year ended December 31, 2004. The effective tax rate for the year ended December 31, 2003 was 28.5% compared to 34.5% for the year ended December 31, 2004. In December 2004, pursuant to the American Jobs Creation Act (“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.
Total revenues increased by $534 million, or 8%, from $6,532 million for the year ended December 31, 2002, to $7,066 million for the year ended December 31, 2003.
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. Net realized gains (losses) on investments are comprised of both other-than-temporary impairments and realized capital gains (losses) on sales of securities. For the year ended December 31, 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 in excess of $10 million for the year ended December 31, 2003. Impairments on available for sale securities in excess of $10 million for the year ended December 31, 2002 consisted of an $18 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 in the Corporate and Other segment.
Gain on disposal of businesses decreased by $11 million, or 100%, from $11 million for the year ended December 31, 2002 to zero for the year ended December 31, 2003. There were no disposals in 2003. On June 28, 2002, we sold our investment in NHP, which resulted in pre-tax gains of $11 million.
Policyholder benefits increased by $222 million, or 6%, from $3,435 million for the year ended December 31, 2002, to $3,658 million for the year ended December 31, 2003. The increase was primarily due to increases of $144 million, $95 million and $8 million in Assurant Solutions, Assurant Health and Assurant PreNeed, respectively, with an offsetting decrease of $24 million in Assurant Employee Benefits. The increase in Assurant Solutions was primarily due to growth in specialty property products, primarily in creditor-placed and voluntary homeowners insurance lines of business. The increase in Assurant Health was primarily due to the increase in individual health insurance business, which was consistent with growth in this business.
Net income increased by $1,187 million, or 119%, from a loss of $1,001 million for the year ended December 31, 2002, to a profit of $186 million for the year ended December 31, 2003.
The table below presents information regarding Assurant Solutions’ segment results of operations:
Total revenues increased by $92 million, or 3%, from $2,678 million for the year ended December 31, 2003 to $2,770 million for the year ended December 31, 2004.
Net investment income decreased by $2 million, or 1%, from $187 million for the year ended December 31, 2003 to $185 million for the year ended December 31, 2004. The average portfolio yield decreased by 40 basis points from 5.18% for the year ended December 31, 2003, to 4.78% for the year ended December 31, 2004, due to the lower interest rate environment. The average invested assets increased by approximately 7% for the year ended December 31, 2004 compared to the year ended December 31, 2003.
Fees and other income increased by $7 million, or 5%, from $129 million for the year ended December 31, 2003 to $136 million for the year ended December 31, 2004, primarily due to an increase in fees related to growth in our extended service contracts and our debt deferment businesses. These increases were partially offset by two factors. The year ended December 31, 2003 included fee income of $6 million pertaining to certain non-profitable membership programs that were discontinued in the latter part of 2003 and in the first quarter of 2003 we recognized fees for a one-time project.
Policyholder benefits increased by $37 million, or 4%, from $899 million for the year ended December 31, 2003 to $936 million for the year ended December 31, 2004. The increase was primarily attributable to higher catastrophe losses, net of reinsurance, in 2004 from Hurricanes Charley, Frances, Ivan and Jeanne. We incurred losses, net of reinsurance, from catastrophes of $93 million and $30 million for the year ended December 31, 2004 and 2003, respectively. The higher catastrophe losses in 2004 were partially offset by improved loss experience, in our specialty property business absent the catastrophes.
Total revenues increased by $277 million, or 12%, from $2,401 million for the year ended December 31, 2002, to $2,678 million for the year ended December 31, 2003.
Net earned premiums and other considerations increased by $285 million, or 14%, from $2,077 million for the year ended December 31, 2002, to $2,362 million for the year ended December 31, 2003. This increase was primarily due to $181 million of additional net earned premiums and other considerations attributable to our special property products, primarily due to our creditor-placed and voluntary homeowners insurance and manufactured housing homeowners insurance lines of business generated from new clients and increased sales growth from our existing clients. Consumer protection products also contributed $104 million in net earned premiums and other considerations primarily from growth in our warranty and extended service contracts business.
Net investment income decreased by $18 million, or 9%, from $205 million for the year ended December 31, 2002, to $187 million for the year ended December 31, 2003. The average portfolio yield dropped 67 basis points from 5.85% for the year ended December 31, 2002, to 5.18% for the year ended December 31, 2003 due to the lower interest rate environment. The average allocated invested assets increased by approximately 3%.
Segment income after tax increased by $1 million, or 1%, from $132 million for the year ended December 31, 2002, to $133 million for the year ended December 31, 2003. Excluding the decrease in investment income of $13 million after-tax, segment income after tax increased by $14 million, or 11%.
The loss ratio is equal to policyholder benefits divided by net earned premiums and other considerations.
The expense ratio is equal to selling, underwriting and general expenses divided by net earned premiums and other considerations and fees and other income.
The combined ratio is equal to total benefits, losses and expenses divided by net earned premiums and other considerations and fees and other income.
Net investment income increased by $19 million, or 39%, from $49 million for the year ended December 31, 2003, to $68 million for the year ended December 31, 2004. The average portfolio yield decreased by 8 basis points from 5.55% for the year ended December 31, 2003, to 5.47% for the year ended December 31. 2004, due to the lower interest rate environment. The average invested assets increased by approximately 39% for the year ended December 31, 2004 compared to the year ended December 31, 2003.
Fees and other income increased by $6 million, or 18%, from $33 million for the year ended December 31, 2003, to $39 million for the year ended December 31, 2004, primarily due to additional insurance policy fees and higher fee-based product sales in individual markets, such as sales of our non-insurance health access discount cards.
Total benefits, losses and expenses increased by $192 million, or 10%, from $1,906 million for the year ended December 31, 2003, to $2,098 million for the year ended December 31, 2004.
Selling, underwriting and general expenses increased by $86 million, or 15%, from $589 million for the year ended December 31, 2003, to $675 million for the year ended December 31, 2004. The expense ratio increased by 80 basis points from 28.9% for the year ended December 31, 2003 to 29.7% for the year ended December 31, 2004. These increases were primarily related to increased commission expense on first year individual health insurance business and additional spending on initiatives to improve our product offerings, distribution, customer service, and infrastructure.
Segment income after tax increased by $37 million, or 31%, from $121 million for the year ended December 31, 2003 to $158 million for the year ended December 31, 2004.
Income taxes increased by $18 million, or 28%, from $64 million for the year ended December 31, 2003, to $82 million for the year ended December 31, 2004. This increase was primarily due to the increase in pre-tax income.
Total revenues increased by $179 million, or 9.0%, from $1,912 million for the year ended December 31, 2002, to $2,091 million for the year ended December 31, 2003.
Segment income after tax increased by $26 million, or 27%, from $95 million for the year ended December 31, 2002, to $121 million for the year ended December 31, 2003.
Income taxes increased by $15 million, or 31%, from $49 million for the year ended December 31, 2002, to $64 million for the year ended December 31, 2003. The increase was consistent with the 27% increase in segment income before income tax during the year ended December 31, 2003.
The premium persistency ratio is equal to the rate at which existing business for all issue years at the beginning of the period remains in force at the end of the period. The calculation for the year ended December 31, 2002 excludes DBD.
$45 million for the year ended December 31, 2004 compared to the comparable prior year period. The increase was primarily driven by an increase in business written through alternate distribution sources, as well as the transition of a block of business from administrative fee only business to fully insured business. The increase in group disability net earned premiums was partially offset by decreases in group dental and group life net earned premiums and other considerations. Group Dental net earned premiums and other considerations decreased by $18 million for the year ended December 31, 2004 compared to the comparable prior year period. We are maintaining pricing discipline in an increasingly competitive market, which has resulted in lower sales and renewals. Group life net earned premiums decreased by $6 million for the year ended December 31, 2004 compared to the comparable prior year period. The decrease was due to the non-renewal of certain unprofitable business during 2003. This resulted in an aggregate premium persistency of 81.1% for 2004, an increase of 120 basis points from 2003.
Total benefits, losses and expenses increased by $6 million, or less than 1%, from $1,354 million for the year ended December 31, 2003, to $1,360 million for the year ended December 31, 2004.
Policyholder benefits increased by $29 million, or 3%, from $921 million for the year ended December 31, 2003, to $950 million for the year ended December 31, 2004. The loss ratio increased by 110 basis points from 73.3% for the year ended December 31, 2003 to 74.4% for the year ended December 31, 2004. These year over year increases were primarily driven by a reduction in reserves in 2003. During the third quarter of 2003, we completed actuarial reserve adequacy studies for 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. Also contributing to the increase in 2004 was poor experience on a single large disability case and deterioration in group dental experience, partially offset by lower group disability incidence and improved group life mortality experience.
Income taxes for the years ended December 31, 2003 and 2004 were $34 million.
Net earned premiums and other considerations increased by $23 million, or 2%, from $1,233 million for the year ended December 31, 2002, to $1,256 million for the year ended December 31, 2003. The increase in disability net earned premium of $61 million was primarily due to additional disability reinsurance premiums assumed from DRMS. Partially offsetting this increase was a $23 million decrease in group life net earned premiums, due to the non-renewal of certain unprofitable business and less new business due to continued pricing discipline. In addition, dental net earned premiums decreased by $15 million, driven by lower sales and the non-renewal of a large account. This resulted in an aggregate premium persistency of 79.9% for 2003, which was unchanged from 2002.
Policyholder benefits decreased by $24 million, or 3%, from $945 million for the year ended December 31, 2002, to $921 million for the year ended December 31, 2003. The decrease was driven by favorable development in disability claims and lower claim volume due to the reduction in dental and group life net earned premiums. In addition, during the third quarter of 2003, we completed reserve studies for the group disability, group life, and group dental products, which concluded that, in the aggregate, these reserves were redundant. Adjustments were made to reserves to reflect current mortality and morbidity experience. In addition, the reserve discount rate on all claims was changed to reflect the continuing low interest rate environment. The net impact of these adjustments was a reduction in reserves of approximately $18 million. The benefits loss ratio improved from 76.6% in 2002 to 73.3% in 2003. Excluding the reserve release discussed above, the benefits loss ratio improvement was driven primarily by favorable disability experience.
Income tax expense increased by $3 million, or 10%, from $31 million for the year ended December 31, 2002 to $34 million for the year ended December 31, 2003. The increase was consistent with the 9% increase in segment income before tax.
Total revenues increased by $16 million, or 2%, from $723 million for the year ended December 31, 2003 to $739 million for the year ended December 31, 2004.
Net investment income increased by $18 million, or 10%, from $188 million for the year ended December 31, 2003, to $206 million for the year ended December 31, 2004. The average portfolio yield decreased 23 basis points from 6.57% for the year ended December 31, 2003 to 6.34% for the year ended December 31, 2004 due to the lower interest rate environment. The average invested assets increased by approximately 14% for the year ended December 31, 2004 from the year ended December 31, 2003.
Fees and other income increased by $2 million, or 40% from $5 million for the year ended December 31, 2003, to $7 million for the year ended December 31, 2004. The primary reason for this increase is $1 million of income related to a derivative instrument, the CPI cap.
Policyholder benefits increased by $10 million, or 2%, from $521 million for the year ended December 31, 2003, to $531 million for the year ended December 31, 2004. The increase was primarily due to a larger in force block of business as well as an increase of $5 million over 2003 related to higher customer utilization of an early pay off feature that allows conversions from limited pay policies to single-pay policies. These increases were partially offset by a reduction in growth rates on the discretionary growth business which reduced policyholder benefits by $5 million for the year ended December 31, 2004.
Selling, underwriting and general expenses increased by $10 million, or 7%, from $147 million for the year ended December 31, 2003 to $157 million for the year ended December 31, 2004 primarily due to higher amortized commissions and expenses incurred as a result of the change in mix of business to more single-pay sales.
Segment income after tax decreased by $2 million, or 6%, from $36 million for the year ended December 31, 2003, to $34 million for the year ended December 31, 2004.
Income taxes decreased by $2 million, or 11%, from $19 million for the year ended December 31, 2003, to $17 million for the year ended December 31, 2004. The decrease was primarily due to the decrease in pre-tax income.
Total revenues decreased by $4 million, or 1%, from $727 million for the year ended December 31, 2002, to $723 million for the year ended December 31, 2003.
Net earned premiums and other considerations decreased by $8 million, or 2%, from $538 million for the year ended December 31, 2002, to $530 million for the year ended December 31, 2003. The decrease was primarily due to a $10 million decline in our AMLIC channel which was caused by a 24% drop in new face sales from SCI, AMLIC’s principal customer.
Net investment income increased by $4 million, or 2%, from $184 million for the year ended December 31, 2002, to $188 million for the year ended December 31, 2003. A 8% increase in average invested assets was offset by a 34 basis point decrease in the annualized investment yield, which was 6.91% at December 31, 2002 compared to 6.57% at December 31, 2003. The increase in average invested assets was due to a larger in force block of business. The rate decline reduced net investment income by $10 million over the comparable prior year period. The decline in yields was due to the lower interest rate environment and the restructuring of the portfolio in 2002 to improve credit quality.
Total benefits, losses and expenses increased by $18 million, or 3%, from $650 million for the year ended December 31, 2002, to $668 million for the year ended December 31, 2003.
Policyholder benefits increased by $8 million, or 2%, from $513 million for the year ended December 31, 2002, to $521 million for the year ended December 31, 2003. This increase was due to the increase in business written and other factors. A portion of our pre-funded funeral insurance policies use a CPI rate credited on policies. The CPI rate increased from 1.97% in 2002 to 2.40% in 2003. This increased policyholder benefits by $2 million in 2003. In addition, benefit expense increased $4 million over 2002 levels related to higher customer utilization of an early pay off feature that allows conversions from limited pay policies to single-pay policies.
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 sales of the FFG and LTC businesses.
As of December 31, 2004, we had approximately $330 million (pre-tax) of deferred gains that had not yet been amortized. We expect to amortize deferred gains from dispositions through 2031. The deferred gains are being amortized in a pattern consistent with the expected future reduction of the in force blocks of business ceded to The Hartford and John Hancock. This reduction is expected to be more rapid in the first few years after sale and to be slower as the liabilities in the blocks decrease.
Total revenues decreased by $23 million, or 19%, from $124 million for the year ended December 31, 2003, to $101 million for the year ended December 31, 2004.
Fees and other income decreased by $9 million, or 82%, from $11 million for the year ended December 31, 2003, to $2 million for the year ended December 31, 2004 primarily due to a one-time adjustment recorded in the third quarter of 2003.
Selling, underwriting and general expenses increased by $8 million, or 12%, from $69 million for the year ended December 31, 2003, to $77 million for the year ended December 31, 2004. The increase was primarily due to $25 million of public company costs in 2004, including expenses related to our initial and secondary public stock offerings and additional costs related to Sarbanes-Oxley. In 2003, we incurred $14 million of public company costs, including expenses related to our initial public offering.
Segment loss after income tax improved by $137 million, or 83%, from $166 million for the year ended December 31, 2003, to $29 million for the year ended December 31, 2004.
Total revenues increased by $86 million, or 226%, from $38 million for the year ended December 31, 2002, to $124 million for the year ended December 31, 2003.
Net investment income increased by $3 million, or 8%, from $40 million for the year ended December 31, 2002, to $43 million for the year ended December 31, 2003.
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. This decrease was consistent with the run-off of the businesses ceded to The Hartford and John Hancock. See “- Reinsurance.”
Total benefits, losses and expenses increased by $216 million, or 125%, from $173 million for the year ended December 31, 2002, to $389 million for the year ended December 31, 2003.
Of our fixed maturity securities shown above, 67% and 70% (based on total fair value) were invested in securities rated “A” or better as of December 31, 2004 and December 31, 2003, respectively. As interest rates increase, the market value of fixed maturity securities decreases.
The following table provides the cumulative net unrealized gains (pre-tax) on fixed maturity securities and equity securities as of the dates indicated:
Net unrealized gains on fixed maturity securities increased by $94 million, or 23%, from December 31, 2002 to December 31, 2003. Net unrealized gains on equity securities decreased by $12 million, or 171%, from December 31, 2002, to December 31, 2003. The increase in net unrealized gains was primarily due to the decline in investment grade corporate securities yield spreads combined with an increase in treasury yields. Spreads on investment grade corporate securities fell by approximately 119 basis points while yields on 10-year treasury securities increased by 44 basis points between December 31, 2002 and December 31, 2003.
As part of our ongoing monitoring process, we regularly review our investment portfolio to ensure that investments that may be other than temporarily impaired are identified on a timely basis and that any impairment is charged against earnings in the proper period. We have reviewed these securities and concluded that there were no additional other than temporary impairments for the year ended December 31, 2004. Due to issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and their continued expectations to do so, as well as our evaluation of the fundamentals of the issuers’ financial condition, we believe that the prices of the securities in an unrealized loss position as of December 31, 2004 in the sectors discussed above were temporarily depressed primarily as a result of the prevailing level of interest rates at the time the securities were purchased.
The following table provides reserve information by our major lines of business for the years ended December 31, 2004 and 2003:
Reserves for future policy benefits are recorded as the present value of future benefits to policyholders and related expenses less the present value of future net premiums. Reserve assumptions are selected using best estimates for expected investment yield, inflation, mortality and withdrawal rates. These assumptions reflect current trends, are based on Company experience and include provision for possible unfavorable deviation. An unearned revenue reserve is also recorded which represents the balance of the excess of gross premiums over net premiums that is still to be recognized in future years’ income in a constant relationship to insurance in force.
Loss recognition testing is performed annually and reviewed quarterly. Such testing involves the use of best estimate assumptions to determine if the net liability position (all liabilities less DAC) exceeds the minimum liability needed. Any premium deficiency would first be addressed by removing the provision for adverse deviation. To the extent a premium deficiency still remains, it would be recognized immediately by a charge to the statement of operations and a corresponding reduction in DAC. Any additional deficiency would be recognized as a premium deficiency reserve.
Key sensitivities for group long-term disability claim reserves include the discount rate and claim termination rates. If the discount rate were reduced (or increased) by 100 basis points, reserves at December 31, 2004 would be approximately $50.0 million higher (or $47.7 million lower). If claim termination rates were 10% lower (or higher) than currently assumed, reserves at December 31, 2004 would be approximately $33.9 million higher (or $31.7 million lower).
The discount rate is also a key sensitivity for group term life waiver of premium reserves. If the discount rate were reduced (or increased) by 100 basis points, reserves at December 31, 2004 would be approximately $12.0 million higher (or $11.3 million lower).
As set forth in Note 16 of the Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002, Group Disability incurred losses related to prior years were approximately $12 million less, $53 million more, and $3 million less than the reserves that were previously estimated for the years ended December 31, 2003, 2002 and 2001, respectively. Group Disability reserves are long term in nature, and the reserves are estimated based on claims incurred in several prior years. The Group Disability reserve deficiency in 2003, and its related upward revision, reflects the result of reserve adequacy studies concluded in the third quarter of 2003. Based on results of those studies, reserves were increased by $44 million, almost all of which was attributable to a reduction in the discount rate to reflect current yields on invested assets. The Group Disability reserve redundancies in 2002 and 2004, which were less than 1% of prior-year reserves, arose as a result of our actual claim recovery rates exceeding those assumed in our beginning-of-year case reserves, after taking into account an offset of one less year of discounting reflected in the Company’s end-of-year case reserves. The difference in actual versus best estimate recovery rates reflects an experience gain, which is recognized in the period the gain is realized.
Group Term Life reserves were reduced in the third quarter of 2003 to reflect the results of reserve adequacy studies conducted. Based on the results of those studies, reserves were reduced by $59 million. The
change in estimate reflects an increase in the discount rate, lower mortality rates and higher recovery rates. These changes were made to reflect current yields on invested assets and recent mortality and recovery experience. Another portion of the Group Term Life reserve redundancies in all years described above was caused by actual mortality rates being lower than assumed in our beginning-of-year reserves and recovery rates being higher than assumed in our beginning-of-year wavier of premium reserves. The remaining redundancy was due to shorter-than-expected lags between incurred claim dates and paid claim dates. These adjustments were made to reflect current yields on invested assets, and recent mortality and recovery experience. These changes were offset by one less year of discounting reflected in the Company’s end-of-year waiver of premium reserves. The differences in actual versus best estimate mortality, recovery and paid claim lag rates reflect experience gains, which are recognized in the period the gains emerge.
As set forth in Note 16 of the Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002, actual losses incurred in our Medical business related to prior years were $50 million, $58 million, and $43 million less than previously estimated for the years ended December 31, 2003, 2002 and 2001, respectively. Due to the short-tail nature of this business, these developments related to claims incurred in the preceding year (i.e., in 2003, 2002 and 2001 respectively). The redundancies in our Medical line of business, and the related downward revisions in our Medical reserve estimates, were caused by our claims developing more favorably than expected. Our actual claims experience reflected lower medical provider utilization and lower medical inflation than assumed in our prior-year pricing and reserving processes. The differences in actual versus best estimate paid claim lag rates, medical provider utilization and medical inflation reflect experience gains, which are recognized in the period the gains emerge.
case reserves). We select loss development factors based on a review of historical averages, and we consider recent trends and business specific matters such as current claims payment practices.
Most of our credit insurance business is written on a retrospective commission basis, which permits Assurant Solutions to adjust commissions based on claims experience. Thus, any adjustment to prior years’ incurred claims in this line of business is largely offset by a change in contingent commissions which is included in the selling, underwriting and general expenses line in the results of operations.
We utilize ceded reinsurance for loss protection and capital management, business dispositions and, in Assurant Solutions, for client risk and profit sharing.
We have used reinsurance to exit certain businesses, such as the dispositions of FFG and LTC. Reinsurance was used in these cases to facilitate the transactions because the businesses shared legal entities with business segments that we retained. Assets backing liabilities ceded relating to these businesses are held in trusts, and the separate accounts relating to FFG are still reflected in our balance sheet.
of funds, trusts and letters of credit) as security under the reinsurance agreements. See “