During 2002 and 2001, we wrote-off $4.2 million and $6.7 million, respectively, of deferred acquisition costs associated with certain of our major medical business due to the continuing unprofitability of terminated blocks of business.
as a result of significant changes in the insurance market have impacted our insurance coverages. We have renewed most of our insurance policies for 2004, although with increased exposure to losses. Other policies are up for renewal in mid-2004. We may not be successful in obtaining coverage on terms favorable to us or at all.
- a 34.0% decrease in major medical certificates in force from 127,463 at December 31, 2002 to 84,167 at December 31, 2003 due to exiting certain unprofitable states and higher lapsation rates. Rate increases implemented in excess of claim trend on certain unprofitable blocks caused higher lapsation rates in 2003.
Net investment income was $25.1 million for 2003 compared to $24.3 million for 2002, an increase of 3.4%. The decline in the overall portfolio yield of 0.65% was offset by the increase in average invested assets due to the investment of most of the proceeds from the sale of Pyramid Life on March 31, 2003 and the assumption of a related block of life business with approximately $12.1 million in invested assets. The book yield of our investment portfolio at December 31, 2003 was 5.39%, which produces an annualized income stream of approximately $25.7 million.
Interest expense and financing costs decreased to $2.0 million in 2002 compared to $4.7 million in 2001 as a result of a decrease in outstanding debt and declining interest rates.
Inadequate Pricing Risk is the risk that the premium charged for insurance and insurance related products is insufficient to cover the costs associated with the distribution of such products, including benefits, claims and losses, settlement expenses, acquisition expenses, and other corporate expenses. We utilize a variety of actuarial and qualitative methods to set such pricing levels. Any negative fluctuation in our estimates of the effect of continued medical inflation and high benefit utilization could have a material adverse impact on our results of operations.
Investment Impairment Risk is the risk that all amounts due (both principal and interest) on our fixed maturity investments will not be collected according to the security's contractual terms. We attempt to minimize this risk by adhering to a conservative investment strategy. With the exception of short-term investments and securities on deposit with various state regulators, investment responsibilities have been delegated to external investment managers within the investment parameters established by the Company.
DECEMBER 31, 2003 AND 2002 (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Effective January 1, 2002, we adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). This Statement superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions of Accounting Principles Board Opinion (APB Opinion) No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This Statement also amended Accounting Research Bulletin No. 51, Consolidated Financial Statements.
Comprehensive income in 2003, 2002 and 2001 includes a change in unrealized gains or losses on available-for-sale securities, in addition to reported net income as prescribed by SFAS No. 130, Reporting Comprehensive Income. See Note S. Comprehensive Income for further information.
Fee and other income consist of monthly collection, management, and administrative fees, and are recognized when the services are performed.
In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1). SOP 03-1 addresses a number of topics, the most significant of which is the accounting for contracts with guaranteed minimum death benefits. SOP 03-1 requires companies to evaluate the significance of guaranteed minimum death benefits to determine whether the contract should be accounted for as an investment or insurance contract. If the contract is determined to be an insurance contract, companies are required to establish a reserve to recognize a portion of the assessment (revenue) that compensates the insurance company for benefits to be provided in future periods. SOP 03-1 also provides guidance on separate account presentation, interest in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation, return based on a contractually referenced pool of assets or index, annuitization options and sales inducements to contract holders. The effective date of SOP 03-1 is for fiscal years beginning after December 15, 2003, with earlier adoption encouraged. If adopted early, the provisions of SOP 03-1 must be applied as of the beginning of the fiscal year. We do not expect the adoption of SOP 03-1 to have a material effect on our consolidated results of operations, cash flows or financial position.
- repurchase our convertible voting preferred stock for $5.0 million (see Note Q. Preferred Shares for further information);
At December 31, 2003, the Company held no unrated bonds and 4.0% of fixed maturity investments were in less-than-investment grade securities. Corporate bonds representing approximately 1.0% of fixed maturities were downgraded by rating agencies. Approximately 3.0% of the portfolio was invested in BB rated subordinated non-agency residential and commercial mortgage-backed securities. These securities include jumbo residential mortgages and commercial mortgages with strong prepayment protection. The Company performs periodic evaluations of the relative credit standings of the issuers of the bonds held in the Company's portfolio. The Company considers these evaluations in its overall investment strategy.
The changes in the carrying amount of licenses for the year ended December 31, 2003, were as follows:
The Company has authorized 1,900,000 Non-Voting Preferred Shares, $.001 par value. The Company has never issued any Non-Voting Preferred Shares. However, the Board of Directors is authorized at any time to provide for the issuance of, such shares in one or more series, and to determine the designations, preferences, limitations and other rights of the shares issued, including but not limited to the dividend rate, liquidation preference, redemption rights and price, sinking fund requirements, conversion rights and restrictions on the issuance of such shares. However, our credit agreement prohibits the payment of dividends on preferred stock. Holders of non-voting preferred shares shall have no voting rights except as required by law.
CERES GROUP, INC. AND SUBSIDIARIES REINSURANCE (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------