We defer significant portions of expense charge revenues on certain UL products as unearned revenue reserves, included within other policy liabilities in our consolidated balance sheets, and amortize them into income over time using the same assumptions we use for DAC and VOBA. Unearned revenue reserves on UL products were $478.0 at December 31, 2005, including $58.7 for
Realized investment gains, net of taxes, were $7.2 and $26.5 in 2005 and 2004 versus realized investment losses, net of taxes, of ($30.9) in 2003. The decline in realized investment gains in 2005 relative to 2004 was primarily due to significantly lower stock gains, partially offset by lower bond impairments, the latter largely attributable to continued improvement in the corporate credit environment. The net investment losses in 2003 were primarily the result of other-than-temporary bond impairments.
On April 1, 2004, JPCC acquired the assets and an FCC license to broadcast an FM radio station in San Diego, CA for $18.
At December 31, 2005 and 2004, we had reinsurance receivables of $784 and $828 and policy loans of $58 and $61 which are related to the businesses of JP Financial that are coinsured with Household International (HI) affiliates. HI has provided payment, performance and capital maintenance guarantees with respect to the balances receivable. We regularly evaluate the financial condition of our reinsurers and monitor concentrations of credit risk related to reinsurance activities. We have not suffered any significant credit losses from reinsurance activities in the last three years.
Limiting our bond exposure to any one creditor is another way we manage credit risk. The following table lists our ten largest exposures to an individual creditor in our bond portfolio as of December 31, 2005. As noted above, the carrying values in the following tables are stated at fair value for AFS securities and amortized cost for HTM securities.
Mortgage-backed securities (including Commercial Mortgage-backed Securities) at December 31, 2005 and 2004, all of which are included in debt securities available-for-sale, were as follows:
The table reflects the effect of the interest rate scenarios on one year’s reportable segment results, excluding the impact of potential unlockings that are illustrated in a sensitivity analysis within the Critical Accounting Policies and Estimates section. A spike in interest rates of 300 basis points that lasts for three years would produce a significantly larger estimated loss in the second and third years, as policyholders would potentially seek more attractive rates elsewhere. Correspondingly, a 100 basis point decrease would cause a significantly larger estimated loss in the second and third years, as minimum rate guarantees would prohibit us from lowering crediting rates on most products.
The details of realized investment gains (losses), including other-than-temporary impairments, follow:
At December 31, 2005 and 2004, the recorded investment in mortgage loans that were considered to be potentially impaired was $42 and $50. Delinquent loans outstanding as of December 31, 2005 and 2004 totaled $0 and $6. The related allowance for credit losses on all mortgage loans was $16 and $22 at December 31, 2005 and 2004. The average recorded investment in potentially impaired loans was $46, $56 and $64 during the years ended December 31, 2005, 2004 and 2003, on which interest income of $4, $1 and $6 was recognized.
The Company uses interest rate swaps to convert floating rate investments to fixed rate investments. Interest is exchanged periodically on the notional value with the Company receiving the fixed rate and paying various short-term LIBOR rates on a net exchange basis. For the years ended December 31, 2005, 2004 and 2003 the ineffective portion of the Company’s cash flow hedging instruments, which is recognized in realized investment gains, was not significant. At December 31, 2005 and 2004 the maximum term of interest rate swaps that hedged floating rate investments was ten years.
At December 31, 2005 and 2004 the amount of SOP 03-1 policy liabilities included within other policy liabilities on the consolidated balance sheets were $90 and $42.
The Company has entered into a bank credit agreement for unsecured revolving credit, under which the Company has the option to borrow at various interest rates. The current agreement, as amended on May 7, 2004, aggregates $348, which is available until May 2007. This credit agreement principally supports the issuance of commercial paper. As of December 31, 2005, outstanding commercial paper had various maturities, with none in excess of 120 days. The Company can issue commercial paper with maturities of up to 270 days. In the event the Company is not able to remarket commercial paper at maturity, the Company has sufficient liquidity, consisting of the bank credit agreement, liquid assets, such as equity securities, and other resources to retire these obligations. The weighted-average interest rates for commercial paper borrowings outstanding of $260 and $188 at December 31, 2005 and 2004 were 4.31% and 2.30%.
All employee stock options outstanding as of December 31, 2005 will vest upon closing of the proposed merger with LNC.
Under the Non-Employee Directors’ Stock Option Plans, 844,152 shares of the Company’s common stock are reserved for issuance pursuant to outstanding or future awards as of December 31, 2005. Nonqualified stock options are automatically awarded, at market prices on specified award dates. The options vest over a period of one to three years, and terminate ten years from the date of award, but are subject to earlier vesting or termination under certain circumstances. The current plan will terminate as to further option awards on March 31, 2008, unless terminated earlier by the Board.
Fair values were estimated at grant date using a Black-Scholes option pricing model with the following weighted-average assumptions for 2005, 2004 and 2003: risk-free interest rates of 3.9%, 3.8% and 3.7%; volatility factors of the expected market price of the Company’s common stock of 0.21, 0.22 and 0.24; and a weighted-average expected life of the options of 7.8 years, 7.4 years and 7.2 years for 2005, 2004 and 2003. An expected dividend yield of 3.28%, 2.95% and 2.57% was assumed for grants made in 2005, 2004 and 2003.
The insurance statutes of the states of domicile limit the amount of dividends that the life insurance subsidiaries may pay annually without first obtaining regulatory approval. The limitations are based on a combination of statutory net gain from operations for the preceding year, 10% of statutory surplus at the end of the preceding year, and dividends and distributions made within the preceding twelve months. Depending on the timing of payments, approximately $387 of dividends could be paid to the ultimate parent by the life insurance subsidiaries in 2006 without regulatory approval.
The Company uses a December 31 measurement date for its pension and post-retirement plans. Past service costs and unrecognized gains and losses are amortized over the average remaining service period of employees expected to receive benefits under the plan.
Estimated contributions to pension plans during 2006 are $0 for qualified plans and $3 to $7 for nonqualified plans.