The Company also leases 10,000 square feet in Cedar Park, Texas, to house the company’s printing operations and warehouse storage. The monthly rental for the Cedar Park facility is $9,123. The lease terms ends on February 28, 2007.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of FIC’s financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page.
Please refer to “Forward-Looking Statements” on page 2 of this Form 10-K
At the end of 2003, the equity of FIC’s shareholders was at $109.1 million, down from $140.0 million at the end of 2002. This $30.9 million decline in shareholders’ equity primarily reflects the Company’s net loss for the year and additional unrealized losses in its investment portfolio. FIC’s financial condition and prospects at the end of 2003 were marked most significantly by the impact of the continuing moderate run-off of contractholder deposit funds during the year, by cash demands and resources, and by changes in the management of its investment assets.
FIC’s mutual commitments with its life insurance policyholders and annuitants - they to pay premiums and make future deposits, FIC to pay annuities and death benefits - stretch far into the future. This means that FIC’s income statement and balance sheet must necessarily embody several significant estimates about future events. The rates at which its customers will actually become ill and die, or will withdraw their funds in response to interest rate changes or other factors, and the returns that FIC will be able to earn on its investments, must all be estimated far into the future in order to judge whether the Company is truly operating currently at a profit and whether its balance sheet is properly reflecting the current value of its assets and liabilities. Most of these estimates are embodied in balance sheet accounts such as deferred policy acquisition costs, the present value of future profits of acquired businesses, and policy liability reserves. The balance sheet of the Company presented with this report reflects the result of an extensive review and revision of these accounts and estimates by the Company’s management.
Introduction. The Company has restated its financial statements, for the correction of accounting errors, for the years 2002, 2001, 2000 and 1999, and for the first three quarters of 2003, as described in Notes 2 and 20 of the accompanying consolidated financial statements. All information presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the restatement.
As a result of the findings of the internal review, the Company concluded that the accounting for certain transactions required restatement or adjustment. FIC’s management and Audit Committee took a leadership role in assessing these issues and in directing the appropriate corrective action. Management and the Audit Committee made these assessments in consultation with our independent registered public accounting firm. In addition, independent legal counsel to the Audit Committee and a forensic accounting firm performed an investigation into certain accounting issues that arose in connection with the initial findings of the internal review. That further investigation concluded that while there were material weaknesses in our control environment, there was no evidence that the Company’s previous management intentionally used improper accounting practices to manipulate earnings or that there was any fraud or intentional misconduct on the part of FIC, our officers or our employees. Item 9A of this Annual Report on Form 10-K provides a description of actions taken to improve internal controls and procedures as implemented and directed by the Company’s current management and Audit Committee.
The Company’s approach to amortization of DAC and PVFP was a static methodology which did not adequately monitor actual experience and persistency of its business against original assumptions and estimates. As a result, amortization was not properly adjusted for deviations from original estimates based on actual and revised expected gross profits and persistency. The Company undertook a significant project reviewing numerous prior years of data and results to evaluate the appropriateness of capitalized acquisition costs and the performance of the related blocks of insurance business. This included analysis of actual performance and persistency of the business versus original estimates that were the basis for amortization. This work revealed significant differences in actual gross profits, persistency and other assumptions versus the original estimates that the Company used in its static amortization methodology. Additionally, the Company determined that certain capitalized costs for certain policy issue years were not recoverable and therefore were not eligible for deferral.
Policy Liabilities, Contractholder Deposit Funds, and Due and Deferred Premiums - The Company determined that the process for accumulating and recording liabilities for future policy benefits had not appropriately included all policy riders and manually administered policies. The Company also determined that the liability established for claims incurred but not reported was understated, certain liabilities had been inadvertently recorded twice through separate policy liability and claims calculations, certain claims liabilities previously closed should be restored, and statutory reported deferred premiums had not been properly eliminated for GAAP purposes.
Intercompany Accounts - The Company determined that the historical reconciliation process used to identify, record, and eliminate intercompany transactions did not appropriately consider all transactions and accounts. As a result, intercompany out-of-balance conditions unknowingly existed in 2003, 2002, 2001, and certain prior years and were not investigated in a timely manner.
Policy Loans - The Company determined that an aggregate approach used for the calculation of accrued interest income on certain groups of policy loans was not adequate and was not accurate or supportable at a detail policy level. Additionally, certain policy loans were in excess of the cash surrender values of the related policies and were not collectable. As a result, restatement adjustments were made to correct the carrying value of policy loans and the related accrued interest income.
Other Miscellaneous - The Company completed a comprehensive review of other asset and liability account balances. Certain balances were not fully supported by the underlying detail records or were in error as the result of the misapplication of appropriate accounting principles.
Income Taxes - Current and deferred Federal income tax provisions were recalculated to take into account the impact of the accounting errors as described herein, and to reflect the amount of taxes receivable from the IRS and the amount of deferred Federal income tax liability resultant from the utilization of the asset and liability method as restated. In addition to the tax impact on the restatement adjustments, the Company determined that after consideration of the tax impact on the restatement adjustments, based on the weight of the available evidence, a valuation allowance should be established in 2002 and 2003 for the portion of the deferred tax asset that met the “more likely than not” standard in SFAS No. 109 “Accounting for Income Taxes”.
During 2003, the equity of the shareholders of the Company (that is, the excess of the Company’s assets over its liabilities) declined by $30.9 million. The change in FIC’s financial condition reflected several important developments.
Additional changes to assets and liabilities resulting in a net decrease to shareholders’ equity totaling $8.4 million:
At the end of 2003, FIC had $927.8 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 2003 by 3.4%. Had the Company not borrowed $15 million in May 2003 (as discussed below), however, the decline would have been 5.0%.
During 2003, the Company reduced its investment in cash and short-term investments significantly, shifting funds to investments in debt instruments. A substantial portion of these funds, along with proceeds from maturing investments and sales, were reinvested during the first half of the year in assets (collateralized mortgage obligations (“CMOs”), asset-backed securities, and private placements) that the then-incumbent management of the Company expected would increase overall returns on invested assets. Following a review of the investment portfolios of the life insurance subsidiaries of the Company in September 2003, the Investment Committee of the Company's then newly elected Board of Directors recommended the engagement of a third-party investment manager to provide ongoing, professional management of the portfolios. In October 2003, the life insurance subsidiaries entered into investment management agreements with Conning. Under these agreements, Conning manages the investment security portfolios of the Company’s life insurance subsidiaries in accordance with investment policies set by the Company’s Board of Directors.
As noted elsewhere in this report, the Company’s management views this 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.
Investors Life had $358.3 million of separate account assets as of December 31, 2003 (not including the value of the Company’s own start-up investment in one of the accounts), as compared to $336.5 million at the end of 2002. These assets include (a) two variable annuity separate accounts that permit contractholders to allocate their contract values among a selection of third-party mutual funds and (b) $325.2 million held in custodian accounts in connection with investment annuity contracts. The investment annuity business is reinsured with Symetra Life Insurance Company (formerly Safeco Life Insurance Company), a third-party reinsurer, on a 90%/10% coinsurance basis, with Investors Life retaining 10% of such business. Since the reinsurance treaty is on a coinsurance basis, Investors Life is contingently liable to the policyholders in the event that the reinsurer is unable to fulfill its obligations under the treaty. Investors Life is not marketing new separate account annuity contracts.
The Company’s insurance-related liabilities (future policy benefits and contractholder deposit funds) were $756.0 million at December 31, 2003, as compared to $756.8 million at December 31, 2002. Contractholder deposit funds increased primarily because of sales of annuity contracts, while the decline in future policy benefits reflected the business run-off mentioned above.
the acquisition, in May 2001, of the remaining publicly held shares of InterContinental Life Corporation.
$5.2 million in charges related to other than temporary impairment of securities. This adjustment resulted from an analysis of the investment portfolio that was made by the Company with the assistance of the Company’s recently appointed investment manager, Conning Asset Management Company (“Conning”).
a loss from discontinued operations of $6.1 million on the sale of the New Era Companies.
$2.9 million of expense related to the settlement of the litigation between FIC and Roy F. Mitte (the former Chairman and Chief Executive Officer of the Company) and the Roy F. and Joann Cole Mitte Foundation.
$2.0 million of expenses for the estimated loss for 			the rental and operation of a leased office building through 			December 2005.
These items need to be taken into consideration in drawing comparisons between the operating results in 2003 and those in earlier years.
On May 18, 2001, FIC acquired the 51.9% ownership of InterContinental Life Corporation (“ILCO”), the parent of Investors Life, that it had not previously owned. (For a description of this transaction, see Item 6, Selected Financial Data.) As a consequence of this acquisition, the operating results of Investors Life for the period from May 18 through December 31, 2001, (and for subsequent years) are consolidated in the reported FIC results. For the period from January 1 through May 17, 2001, however, FIC’s net income includes only its equity interest in the net income of Investors Life, with such equity interest being based on FIC’s then-percentage ownership of Investors Life. This makes it difficult to draw comparisons between FIC’s 2001 operating results and those in 2002 and subsequent years. As a result, in the discussion that follows, we will focus principally on the comparison between 2002 and 2003.
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 2001 through 2003, as shown in the following table.
The consistent decline in renewal premiums reflects the run-off in the Company’s existing book of business, noted above. The decrease in first-year premiums is attributable to the decrease in the number and value of new policies that were issued in 2003 compared to 2002 and 2001. Management believes that the Company’s future profitability and growth will depend to a significant degree on its ability to reverse these trends through improved marketing and sale of new policies, and stronger conservation programs to retain business already on the books.
In accordance with GAAP, deposits received by FIC in connection with annuity contracts and premiums received for universal life (“UL”) insurance policies are reflected in FIC’s financial statements as increases in liabilities for contractholder deposit funds and not as revenues. Annual charges made against these deposits are reported as revenue. For the years 2001-2003, the table below shows the amounts of such annuity deposits, UL premiums, and charges.
Net investment income for the year ended December 31, 2003, was $35.5 million as compared to $38.1 million for the year ended December 31, 2002, and $29.0 million for the year ended December 31, 2001. The decrease in net investment income from 2002 to 2003 was primarily attributable to a decline in the income received from the Company’s interest-bearing investments, resulting in turn from lower interest rates during 2003. The Company’s holdings of interest-bearing investments (including cash and cash equivalents) also declined approximately 2.5% from 2002 to 2003 contributing to the lower net investment income. The increase in investment income in 2002 is primarily related to the May 2001 merger of ILCO into FIC. The increase related to the ILCO merger totaled approximately $10.9 million. Prior to May 2001, FIC owned approximately 48% of ILCO, with ILCO’s results being included in FIC’s results on the equity method of accounting. Following that merger, ILCO’s results are included on a consolidated basis with FIC.
Amortization of deferred policy acquisition costs (DAC) has increased from $8.9 million in 2001 to $11.0 million in 2002 and subsequently declined to $9.7 million in 2003. 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 increase from 2001 to 2002 is primarily due to reduction in earned interest rates and the resulting decrease in interest margins on interest sensitive products, which is then reflected in reduced expectations of future margins necessitating increased amortization. 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.
Operating expenses for 2003 were $41.8 million, as compared to $34.6 million in 2002 and $28.2 million in 2001. The operating expenses for 2001 include expenses of ILCO only for the period from May 18, 2001 to December 31, 2001. As noted above, operating expenses for 2003 included several significant unusual items totaling $5.1 million:
During 2004, the Company took steps it expects will reduce the level of general operating expenses. In addition to significant reductions in staff, the Company closed its Seattle branch office and records storage facility, upgraded various operating and accounting systems, and restructured employee benefit programs. The effect of these cost-reduction steps in 2004 will be offset, however, by the extraordinary accounting, actuarial, and consulting expenses associated with the reexamination of the Company’s financial accounts and restatement of prior years’ financial statements, which expenses (including those related to 2003 and prior years) amount to approximately $5.1 million in 2004 and approximately $1.8 million in the period from January through May 2005.
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations. FIC is an insurance holding company whose principal assets at and for the year ended December 31, 2003, consisted of its ownership interests in its insurance subsidiaries, Family Life Insurance Company and Investors Life Insurance Company. As a holding company, FIC’s ability to pay interest and principal on its debt, pay its expenses and pay dividends on its common stock depend substantially on its receipt of dividends or other cash flow from its subsidiaries.
At the holding company level, FIC’s principal current ongoing liquidity demands relate to the payment of principal and interest on its indebtedness. Of primary concern in this regard is the indebtedness created in connection with FIC’s acquisition of Family Life. As of December 31, 2003, Investors Life held $16.9 million of notes receivable from FIC (the “Affiliated Notes”) that represented the remaining indebtedness related to the Family Life acquisition. Although this intercompany indebtedness is eliminated on FIC’s consolidated balance sheet, it creates a debt service requirement at the holding company level. The Affiliated Notes, as of December 31, 2003, included the following provisions:
The balance due on the Affiliated Notes at March 31, 2004, was $15,369,310. In June 2004, with the approval of the Texas Department of Insurance, the Affiliated Notes were amended to provide for:
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 7.53% at June 30, 2005). The principal amount of the 2003 Notes must be repaid in a single payment in 2033.
Since FIC is not current in its filing of financial information with the SEC, nor will it become a current filer until late 2005 or early 2006 at the earliest, it does not have access to the public capital markets. Although FIC does not believe that it will need additional capital to fund its obligations through 2005, the unavailability of access to the public capital markets may adversely affect our ability to grow our business through acquisitions.
The ability of Family Life and Investors Life to pay dividends to FIC and meet these holding-company liquidity demands is subject to restrictions set forth in the insurance laws and regulations of Texas, its domiciliary state. Texas limits how and when Family Life and Investors Life can pay such dividends by (a) including the “greater of" standard for payment of dividends to shareholders and (b) requiring that prior notification of a proposed dividend be given to the Texas Department of Insurance. Under the “greater of" standard, an insurer may pay a dividend in an amount equal to the greater of: (i) 10% of the policyholder surplus or (ii) the insurer's net gain from operations for the previous year.
In June 2004, FIC, with the approval of the Texas Department of Insurance, created 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 will be paid as dividends to the holding company, providing an additional source of liquidity at the holding company level.
Liquidity considerations at FIC’s insurance subsidiaries are different in nature than for the holding company. Sources of cash for FIC’s insurance subsidiaries consist of premium payments and deposits from policyholders and annuity holders, charges on policies and contracts, investment income, and proceeds from the sale of investment assets. These funds are applied primarily to provide for the payment of claims under insurance and annuity policies, payment of policy withdrawals, surrenders and loans, operating expenses, taxes, investments in portfolio securities, and shareholder dividends.
A primary liquidity consideration with respect to life insurance and annuity products is the risk of early policyholder and contractholder withdrawal. Deposit fund liabilities for universal life and annuity products as of December 31, 2003, were $588.8 million, compared to $582.1 million at December 31, 2002. Individual life insurance policies are less susceptible to withdrawal than are annuity contracts because life insurance policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. At December 31, 2003, the bulk of the liabilities for contractholder deposit funds on FIC’s balance sheet, $408.1 million, represented insurance products, as compared to only $180.7 million of annuity product liabilities.
Since each insurance company holds large portfolios of highly liquid publicly traded debt securities, raising cash through asset sales is available should other sources of liquidity fail to provide cash as needed. In this regard, however, the insurance companies must be concerned about such sales at inopportune times, when adverse movements in interest rates may have depressed the market price of securities so that sales would result in the realization of significant losses. To guard against such an outcome, FIC’s management monitors benefits paid and surrenders of insurance products to provide projections of future cash requirements. Also as part of this monitoring process, FIC performs cash flow testing of assets and liabilities at each year-end to evaluate the match between the planned maturities of the insurance company assets and the likely liquidity needs of the companies over time. Such cash-flow testing, prescribed by insurance laws and regulations, models the likely performance of assets and liabilities over time, using a wide variety of future interest rate scenarios.
The decrease of $2.8 million in cash provided by operating activities in 2003 compared to 2002 was primarily attributable to a decrease in premium income and an increase in operating expenses.
Accounting for Premiums on Universal Life Policies and for Annuity Deposits
The Company monitors the performance of its real estate properties on an ongoing basis and identifies properties it intends to hold for investment and properties it intends to sell. Properties held for investment are classified as invested real estate and are stated at cost less accumulated depreciation. Depreciation is provided using straight-line methods over estimated useful lives of 5 to 40 years, or for leasehold improvements the minimum lease term if shorter. Real estate income is reported net of expenses incurred to operate the properties and depreciation expenses. The Company reviews its invested real estate properties on an on-going basis for impairment using a probability-weighted estimation of the expected net undiscounted future cash flows. If the expected net undiscounted future cash flows are less than the net book value of the property, the excess of the net book value over the Company’s estimate of fair value of the asset is recognized as a realized loss in the consolidated statement of operations and the new cost basis is depreciated over the property’s remaining life.
The costs of acquiring new business, including certain costs of issuing policies and certain other variable selling expenses (principally commissions), are included in deferred policy acquisition costs (“DAC”). DAC is capitalized and then amortized to reflect an appropriate expense in relation to the projected stream of profits (for universal life and annuity products) or to the premium revenue stream (for traditional life products). Similarly, when existing blocks of business are acquired, an intangible capital asset (termed “present value of future profits of acquired business” or “PVFP”) reflecting the costs of acquiring the business is created and then amortized over what is judged to be an appropriate term relative to the expected revenues and profitability of the block.
For a further discussion of accounting standards, see Note 1 to the accompanying consolidated financial statements.
The reader should carefully consider the following risks, as well as the other information contained in this Form 10-K. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. In that case, the value of our common stock could decline substantially. You should also refer to the other information set forth in this Form 10-K, including our consolidated financial statements and related notes.
FIC is a holding company and relies on dividends from its insurance subsidiaries; state insurance laws may restrict the ability of these subsidiaries to pay dividends.
Applicable state insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval. The ability of Family Life and Investors Life to pay shareholder dividends is subject to restrictions set forth in the insurance laws and regulations of Texas, their domiciliary state since March 2004. Under current Texas law, any proposed payment of an “extraordinary dividend” requires a 30-day prior notice to the Texas Insurance Commissioner, during which period the Commissioner can approve the dividend, disapprove the dividend, or fail to comment on the notice, in which case the dividend is deemed approved at the end of the 30-day period. An “extraordinary dividend” is a distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31st or (ii) the statutory net gain from operations for the preceding calendar year. Payment of a regular dividend requires that the insurer's earned surplus after dividends or distributions must be reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs. Prior to the transfer of the domicile of Family Life and Investors Life from Washington to Texas, the provisions of the Washington Insurance Code applied to the payment of dividends from the insurance subsidiaries to FIC. The provisions of the Washington Insurance Code applicable to the payment of dividends and extraordinary dividends by an insurance company are substantially similar to the provisions of Texas law described above. In 2003, Family Life and Investors Life did not make any dividend payments to FIC. Family Life had earned surplus of $2.2 million and ($1.3) million at December 31, 2003, and December 31, 2004, respectively, and a net gain from operations of $2.3 million for 2003 and a net loss from operations of $1.6 million for 2004. Investors Life had earned surplus of $27.2 million and $18.4 million at December 31, 2003, and December 31, 2004, respectively, and a net loss from operations of $0.8 million and $2.2 million for 2003 and 2004, respectively.
There are many life and health insurance companies in the United States. Agents placing insurance business with our insurance subsidiaries are compensated on a commission basis. However, some companies may pay higher commissions and charge lower premium rates and many companies have more substantial resources than we do. In addition, consolidations of insurance and banking institutions, which are permitted under federal legislation, may adversely affect the ability of our insurance subsidiaries to expand their customer referral relationships with mortgage lending and servicing institutions. The principal cost and competitive factors that affect the ability of our insurance subsidiaries to sell their insurance products on a profitable basis are:
the extent of individual policyholders services required to service each product category;
In certain circumstances, regulatory authorities may place our insurance subsidiaries under regulatory control.
Our insurance subsidiaries are subject to risk-based capital requirements imposed by the National Association of Insurance Commissioners. These requirements were imposed to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with asset quality, mortality and morbidity, asset and liability matching, and other business factors.
Specifically, if the applicable life insurance company’s total adjusted capital is less than 100% but greater than or equal to 70% of its authorized control-level risk-based capital, as each of these terms are defined in the risk-based capital requirements, the appropriate state regulatory authority may take any action it deems necessary, including placing the insurance company under regulatory control. In addition, if the insurance company’s total adjusted capital is less than 70% of its authorized control-level risk-based capital, the appropriate state regulatory authority is mandated to place the insurance company under its control.
Our insurance subsidiaries may be required to pay assessments to fund policyholder losses or liabilities; this may have a material adverse effect on our results of operations.
The solvency or guaranty laws of most states in which our insurance companies conduct business may require the Company to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future premium taxes. We cannot estimate the likelihood and amount of future assessments. Any future assessments may have a material adverse effect on our results of operations.
FIC’s insurance subsidiaries are subject to regulation and supervision by the states in which they are licensed to do business. This regulation is designed primarily to protect policy owners. Although the extent of regulation varies by state, state insurance departments have broad administrative powers relating to the granting and revocation of licenses to transact business, licensing of agents, the regulation of trade practices and premium rates, the approval of form and content of financial statements and the type and character of investments.
These laws and regulations require our insurance subsidiaries to maintain certain minimum surplus levels and to file detailed periodic reports with the supervisory agencies in each of the states in which they do business, and their business and accounts are subject to examination by these agencies at any time. The insurance laws and regulations of the domiciliary state of our insurance subsidiaries require that these subsidiaries be examined at specified intervals.
The enactment of federal privacy legislation, such as the Gramm-Leach-Bliley Act (as it relates to the use of medical and financial information by insurers) may result in additional regulatory compliance costs, limit the ability of our insurance subsidiaries to market their products or otherwise constrain the nature and scope of our operations.
Changes to the Internal Revenue Code could have a material adverse effect on our results of operations.
Changes in interest rates affect many aspects of our business and can significantly affect our profitability. In periods of increasing interest rates, withdrawals of life insurance policies and fixed annuity contracts, including policy loans and surrenders, and transfers to separate account variable options may increase as policyholders choose to forego insurance protection and seek higher investment returns. Obtaining cash to satisfy these obligations may require us to liquidate fixed income investment assets at a time when the market prices for those assets are depressed because interest rates have increased. This may result in realized investment losses. Regardless of whether we realize an investment loss, these cash payments would result in a decrease in total invested assets and may result in a decrease in net income. Policy surrender charges may offset or minimize the negative effect to net income in the period of the surrender. Premature withdrawals may also cause us to accelerate amortization of policy acquisition costs, which would also reduce our net income.
The price of shares of our common stock can fluctuate as a result of a variety of factors, many of which are beyond our control.
The factors which can cause the price of shares of our common stock to fluctuate include, among others:
changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
announcements by third parties of significant claims or proceedings against us;
State insurance laws may discourage takeover attempts that could be beneficial to us and our shareholders.
Our reserves established for future policy benefits and claims may prove inadequate, requiring us to increase liabilities.
A downgrade in the financial strength ratings of our insurance subsidiaries may increase policy surrenders and withdrawals, reduce new sales and adversely affect relationships with our sales force.
Financial strength ratings are important factors in establishing the competitive position of insurance companies. A rating downgrade, or the potential for such a downgrade, of either of our insurance subsidiaries could, among other things:
We may require additional capital in the future that may not be available or only available on unfavorable terms.
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, dated July 			29, 2005.
Consolidated Balance Sheet as of December 31, 2003 and Restated Consolidated Balance Sheet as of December 31, 2002.