RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 Pretax income rose 38% to $792.4 million for the year ended December 31, 2004. The increase primarily reflects increased net investment income, mortality and expense risk and other fees, net realized gain on investments, lower interest credited to account values and lower amortization of DAC, partially offset by higher other insurance and operating expenses.
Investments primarily include corporate debt securities and mortgage and other asset-backed securities. At December 31, 2005, IDS Life's corporate debt securities comprise a diverse portfolio with the largest concentrations, accounting for approximately 68% of the portfolio, in the following industries: banking and finance, utilities, and communications and media. Investments also include $4.0 billion and $4.3 billion of mortgage loans on real estate, policy loans and other investments at December 31, 2005 and 2004, respectively. Investments are principally funded by sales of insurance and annuities and by reinvested income. Maturities of these investment securities are largely matched with the expected future payments of insurance and annuity obligations.
Investments include $2.1 billion and $2.2 billion of below investment grade securities (excluding net unrealized appreciation and depreciation) at December 31, 2005 and 2004, respectively. These investments represent 7% and 8% of IDS Life's investment portfolio at December 31, 2005 and 2004, respectively.
Finally, although IDS Life currently bears all risk related to GMDB, GMIB and GMAB, IDS Life hedges its GMWB risk using structured option contracts which are designed to mitigate economic risk and its exposure to income statement volatility. Such annuities, which were first introduced in 2004, typically have account values that are based on an underlying portfolio of mutual funds which fluctuate based on equity market performance. The GMWB guarantees that over a period no shorter than 14 years the client can withdraw an amount equal to what has been paid into the contract, regardless of the performance of the underlying funds. This option is an embedded derivative that is accounted for at fair value, with changes in fair value recorded through earnings. To economically hedge these changes in market value, IDS Life may pursue a portfolio of equity future contracts constructed to offset a portion of the changes in the option mark-to-market.
The negative effect on IDS Life's pretax earnings of a 10% decline in equity markets would be approximately $51.3 million and $38.8 million based on annuity and insurance business in force and index options as of December 31, 2005 and 2004, respectively.
IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS As described previously, various aspects of IDS Life's business are impacted by equity market levels and other market-based events. Several areas in particular involve DAC and deferred sales inducements, recognition of GMDB, GMWB, GMIB and GMAB, asset management fees, and mortality and expense risk and other fees. The direction and magnitude of the changes in equity markets can increase or decrease amortization of DAC and deferred sales inducement costs, incurred amounts under GMDB, GMWB, GMIB and GMAB and asset management fees and mortality and expense risk and other fees and correspondingly affect results of operations in any particular period.