We own six office buildings in Lancaster, South Carolina, where most of our operations are located. We also own an office building in Fort Mill, South Carolina. Our owned properties had an aggregate book value of approximately $6.8 million as of December 31, 2004. We lease offices in Greenville, South Carolina, where a processing center of our third-party administration business is located; Fort Myers, Florida, where our long-term care insurance sales office is located; Irvine, California, where a regional sales office and offices for a senior sales manager are located; Boston, Massachusetts, where a regional sales office and offices for a senior sales manager are located, and Celina, Ohio and Chester, South Carolina, where regional sales offices are located. We also lease work space used as regional sales offices in Chicago, Illinois; New York, New York; Tampa, Florida; Atlanta, Georgia; Dallas, Texas; and Cleveland, Ohio.
• Some life and health insurance companies have recently suffered significant reductions in capital and will have to improve their capital adequacy ratios to support their business or divest a portion of their business. We expect these trends to have a positive impact on our competitive position in the industry as carriers become more disciplined with product pricing and/or exit markets or product lines in which we will compete.
Loss recognition testing of our policy benefit reserves is performed annually. This testing involves a comparison of our actual net liability position (all liabilities less DAC) to the present value of future liabilities calculated using then-current assumptions. These assumptions are based on our best estimate of future experience. To the extent a premium deficiency exists, it would be recognized immediately by a charge to the statement of operations and a corresponding reduction in DAC. Any additional deficiency would be recognized as a premium deficiency reserve. Historically, loss recognition testing has not resulted in an adjustment to DAC or reserves. These adjustments would occur only if economic, mortality and/or morbidity conditions significantly deviated from the underlying assumptions.
Claim reserves, unlike policy reserves, are subject to revision as current claims experience emerges and projections of future factors affecting claims experience change. In a reporting period, actual experience may deviate from the long-term assumptions used to determine the claim reserves. We review annually emerging experience on investment returns and rates of recovery to attempt to ensure that our claim reserves make adequate and reasonable provision for future benefits and expenses.
Under our assumptions as of December 31, 2004, we estimate that the amortization of VOBA, for the next five years will be as follows:
against earnings in the proper period. Our investment portfolio is managed by external asset management firms, with the exception of certain invested assets that are managed internally. Our methodology used to identify potential impairments requires judgment by us in conjunction with our investment managers.
• Benefits to premiums ratio: Benefits to premiums ratio equals policyholder benefits divided by net premiums. In general, an increase in the ratio indicates a decrease in underwriting margins of the relevant business segment. Conversely, a decrease in the ratio generally indicates an increase in underwriting margins for the relevant business segment. Our management believes that this ratio is more meaningful in evaluating the changes in underwriting margins on our products from period to period than comparing absolute dollar changes in premiums and reserves because growth in net premiums produces corresponding increases in reserves.
Year Ended December 31, 2004, Compared to Year Ended December 31, 2003
Worksite net new premiums increased $3.1 million, or 25.8%, due to increased sales volumes.
Our predecessor deferred first year commissions and general insurance expenses associated with the acquisition of new business. The total deferrals of policy acquisition costs were $14.5 million and $16.5 million in 2003 and 2002, respectively. The decrease in deferrals was primarily due to the decrease in net new long-term care premiums in the senior market.
Kanawha, the primary operating subsidiary of KMG America, is licensed to issue life and accident and health insurance. Kanawha is domiciled in South Carolina. Kanawha has one wholly owned subsidiary, Kanawha HealthCare Solutions, Inc., a third-party administrator with operations in Lancaster and Greenville, South Carolina.
In December 2004, the FASB enacted SFAS No. 123 (revised 2004) (“FAS 123 (revised 2004)”), Share-Based Payment, which replaces SFAS No. 123 (“FAS 123”), Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. FAS 123 (revised 2004) requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the Company’s consolidated statements of operations. The accounting provisions of FAS 123 (revised 2004) are effective for reporting periods beginning after June 15, 2005. The Company is required to adopt FAS 123 (revised 2004) in the second quarter of 2005.
experience of similar types of loans, the Company’s loan loss experience, the amount of past due and non-performing loans and current and anticipated economic and interest rate conditions. Evaluation of these factors involves subjective estimates and judgments that may change. Additions to the allowance are provided through a charge to earnings. There was no balance in the allowance account at December 31, 2004. There were no additions to the allowance for the years ended December 31, 2002, 2003 and 2004.
The interest rate used in 2003 and 2004 to amortize value of business acquired was approximately 7.0%. Periodically, the Company performs tests to determine whether the value of business acquired remains recoverable from future premiums on the acquired business. No write-offs were incurred in 2002, 2003 or 2004 from impairments as a result of such recoverability tests. The interest rate assumption used to amortize the value of business acquired was reset upon the closing of the Kanawha acquisition and the rate was approximately 6.0% at December 31, 2004. Under the Company’s assumptions as of December 31, 2004, the Company estimated that the amortization of value of business acquired for the next five years will be as follows:
The Company’s defined benefit retirement plan complies with three principal standards: the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), which, in conjunction with the Internal Revenue Code, determines legal minimum and maximum deductible funding requirements; FAS 87; and Statement of Financial Accounting Standards No. 132, Employers’ Disclosures About Pensions and Other Postretirement Benefits, as revised, which establish rules for financial reporting. The measurement date for the Company’s defined benefit plan is December 31.
The fair values of the Company’s insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
The Company has five reportable segments that are differentiated by their respective methods of distribution and the nature of the related products: worksite insurance business, senior market insurance business, third party administration business, acquired business and corporate and other. Management makes decisions