Following is a discussion and analysis of the consolidated 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 consolidated financial statements beginning on page. See also “Item 1 - Description of Business-Exploration of Strategic Alternatives.”
The most significant of the errors related to a unique block of life insurance policies. This block of policies consisted of several different policy types including hybrid fixed premium universal life policies and fixed premium interest sensitive whole life policies. These are relatively complex products that were not properly administered in some cases and, therefore, reserves were not recorded to cover all of the policy options. This block also required manual policy reserve calculations in many instances. Upon additional review of this block of business, errors in the reserving calculations were identified along with the determination that a significant number of policies had not been included in the reserving process.
Establish sales tax accrual on actuarial consulting fees, increasing other liabilities $79,000
During 2004, the equity of the shareholders of the Company (that is, the excess of the Company’s assets over its liabilities) declined by $16.8 million. The predominant change in FIC’s financial condition is reflected in the net loss for the year of $14.3 million, as discussed in more detail below.
The Company’s insurance-related liabilities (future policy benefits and contractholder deposit funds) were $732.3 million at December 31, 2004, as compared to $763.1 million at December 31, 2003. The decrease in contractholder deposit funds and future policy benefits reflects the business run-off as previously described above. Additionally, annuity deposits received in 2004 totaling $5.8 million were significantly lower than the $22.9 million received in 2003. The decrease in annuity deposits is directly related to the Company’s decision in 2004 to temporarily discontinue the sale of fixed annuity products. Certain design features of the Company’s annuity products, coupled with competition in the annuity market and a low interest rate market environment led to this decision. The Company expects to evaluate a possible re-entry into the annuity market in the future but does not expect a current change in strategy in 2006.
State regulators also use NAIC IRIS ratios to monitor capital adequacy requirements. The NAIC ratios cover 12 categories of financial data with defined “usual” ranges for each such category. The ratios are intended to provide insurance regulators with “early warnings” as to when a given company might warrant special attention. An insurance company may fall outside of the usual range for one or more ratios, and such variances may result from specific transactions that are, by themselves, immaterial or eliminated at the consolidation level. In certain states, insurers with more than three IRIS ratios outside of the NAIC usual ranges may be subject to increased regulatory oversight. For 2004, each of the Company’s insurance subsidiaries had six IRIS ratios outside of the usual ranges. However, for 2005, Family Life had five ratios and Investors Life had two ratios which were outside the usual ranges. For Family Life, the ratios outside the usual ranges were primarily related to changes in capital and surplus, net income, investment income, and non-admitted assets. For Investors Life, the ratios outside the usual ranges were primarily related to investment income and changes in premium. Despite the IRIS ratio results for 2005, both Family Life and
varying federal income tax effects primarily from the establishment of and changes in a valuation allowance for deferred taxes.
$3.3 million increase in the valuation allowance related to the realization of deferred tax assets from continuing operations.
$0.4 million paid to William P. Tedrow in connection with the New Era acquisition in June 2003 (see Registrant’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2003 for a further description of this payment); and
Net cash provided by operating activities totaled $5.5 million, $5.8 million, and $10.5 million for the years ended December 31, 2004, 2003, and 2002, respectively. The slight decrease in cash from operating activities in 2004 was significantly impacted by lower operating expenses as well as cash flow from the Company's trading securities. However, these positive cash flows were offset by lower premiums on traditional insurance products and lower net investment income. The decrease of $4.7 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.
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions. FIN 48 will be applied prospectively and will be effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 and does not expect adoption to have a material impact on the Company’s consolidated financial statements.