Mercer Insurance Company also owns a 32,000 square foot office facility in Lock Haven, Pennsylvania. Mercer Insurance Company sub-leases a portion of this facility. Recent renovations to this facility were completed in December 2002 at a cost of $2.1 million.
Unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in Stockholders’ Equity as a component of comprehensive income and, accordingly, have no effect on net income. A decline in fair value of an investment below its cost that is deemed other than temporary is charged to earnings as a realized loss. We monitor our investment portfolio and review investments that have experienced a decline in fair value below cost to evaluate whether the decline is other than temporary. These evaluations involve judgment and consider the magnitude and reasons for a decline and the prospects for the fair value to recover in the near term. In the years ended December 31, 2003 and 2002, we recorded a pre-tax charge to earnings of $454,000, and $647,000, respectively. These charges are primarily with respect to equity securities that we determined were other than temporarily impaired. Adverse investment market conditions, or poor operating performance or other adversity encountered by companies whose stock or fixed maturity securities we own, could result in impairment charges in the future.
The following table summarizes the length of time equity securities with unrealized losses at December 31, 2002 were in an unrealized loss position:
For the year ended December 31, 2002, the realized investment losses of $220,000 were comprised of gains of $703,000 offset by other than temporary writedowns of $647,000 and losses from the sale of securities of $276,000. The losses from the sale of securities were comprised of $8,000 from the sale of bonds and $268,000 from the sale of equities. The following table summarizes the period of time that equity securities sold at a loss during the year ended December 31, 2002, were in a continuous unrealized loss position:
Federal income tax expense was $1.2 million in 2002, an effective rate of 32.7%, compared to $1.3 million, an effective rate of 27.2%, in 2001. The increase in the effective tax rate during 2002 is attributable to less tax-exempt investment income as well as an increase in certain expenses not deductible for income tax purposes.
There are eleven equity securities that are in an unrealized loss position at December 31, 2003. Ten of these securities have been in an unrealized loss position for less than six months. The other equity security has been in an unrealized loss position for less than twelve months. The Group believes these declines are temporary.
Prior to the acquisition of the remaining 51% in FHC, the Group consolidated FHC as it had a controlling interest in the subsidiary as evidenced by the following: MIC had control of the Board of Directors of FHC (seven of nine board members of FHC were on the board of MIC), MIC had common management with FHC and the ability to direct the policies and management that guide the ongoing activities and all substantive decision making of FHC, and MIC had the option to purchase the remaining stock of FHC. In addition, FHC and MIC entered into a reinsurance pooling agreement in connection with the acquisition whereby 100% of the direct business of FHC is ceded to MIC. MIC then retrocedes a percentage of the combined business to FHC. The effect of this agreement subsequent to the acquisition is eliminated in consolidation. The Group’s investment in FHC including common stock, options to purchase common equity, and preferred stock has been eliminated in consolidation. The minority interest in subsidiary of $3,112 shown on the consolidated balance sheet as of December 31, 2002, represents the interests, including redeemable preferred stock, held in FHC by parties other than MIC.