A portion of the costs of acquiring new business, such as commissions, certain internal expenses related to our policy issuance and underwriting departments and some variable selling expenses are capitalized. The resulting deferred acquisition costs asset is amortized over future periods based on our expectations as to the emergence of future gross profits from the underlying contracts. These costs are dependent on the structure, size and type of business written. For certain products, we may retrospectively adjust our amortization when we revise our estimate of current or future gross profits to be realized. The effects of this adjustment are reflected in earnings in the period in which we revise our estimate. Acquisition costs also include collateral financing and letter of credit costs.
Our results of operations for the years ended December 31, 2002 to 2004 do not include the results of the acquisition of the ING individual life reinsurance business, which was completed on December 31, 2004. Our results of operations for the year ended December 31, 2002 does not include the results of operations of Scottish Re Life Corporation, which we acquired on December 22, 2003. The results for the year ended December 31, 2003 include net income of $1.2 million in respect of the results of Scottish Re Life Corporation for the period from December 22, 2003 to December 31, 2003.
Fee income during the year ended December 31, 2004 increased to $7.9 million from $4.1 million in 2003 principally because of the acquisition of Scottish Re Life Corporation.
Interest expense in 2003 was in respect of trust preferred securities issued during 2003.
During the year ended December 31, 2004 acquisition costs and other insurance expenses decreased by $12.8 million or 43% to $17.3 million from $30.1 million in 2003. Acquisition costs for a portfolio acquired in late 2002 are $2.3 million lower due to the run off nature of the portfolio. Acquisition costs include the amortization of the present value of in-force business. This was $1.8 million lower in 2004 compared to 2003 primarily due to the sale of the unit linked business in 2003. In the current year we recognized profit commission income of $1.8 million arising from a run off book of business. Acquisition costs in 2004 also include $2.4 million relating to our share of two Lloyd's of London life syndicates.
Operating expenses increased by $4.8 million to $11.5 million in 2003 from $6.6 million in 2002. The increase was principally in respect of increased personnel costs. The number of employees in our Life Reinsurance International Segment grew from 48 at December 31, 2002 to 62 at December 31, 2003. This growth resulted in additional costs for office running expenses. In 2003, we also experienced increased costs for our defined benefit pension plan.
The composition by category of securities that have an unrealized loss at December 31, 2004 and December 31, 2003 are presented in the tables below.
At December 31, 2004, there were 647 securities with unrealized loss positions with no security having an unrealized loss greater than $0.9 million. At December 31, 2003, there were 409 securities with unrealized loss positions with 2 securities having an unrealized loss greater than $1.0 million. The increase in the number of securities with unrealized losses is primarily attributable to increases in interest rates.
Funds withheld at interest arise on contracts written under modified coinsurance agreements and funds withheld coinsurance agreements. In substance, these agreements are identical to coinsurance treaties except that the ceding company retains control of and title to the assets. The deposits paid to the ceding company by the underlying policyholders are held in a segregated portfolio and managed by the ceding company or by investment managers appointed by the ceding company. These treaties transfer a quota share of the risks. The funds withheld at interest represent our share of the ceding companies' statutory reserves. The cash flows exchanged with each monthly settlement are netted and include, among other items, our quota share of investment income on our proportionate share of the portfolio, realized losses, realized gains (amortized to reflect the statutory rules relating to interest maintenance reserve), interest credited and expense allowances.
The increase in capitalization is due to the net income for the year ended December 31, 2004 of $71.4 million, the issuance of ordinary shares, warrants and notes to the Cypress Entities, totaling $168.3 million, the issuance of trust preferred debt of $82.0 million, the issuance of share capital to employees on the exercise of options of $8.3 million and an increase in other comprehensive income of $13.5 million offset by dividends paid of $7.1 million. Other comprehensive income consists of the unrealized appreciation on investments and the cumulative translation adjustment arising from the translation of Scottish Re Holdings Limited's balance sheet at exchange rates as of December 31, 2004.
On July 23, 2003, we completed a public offering of 9,200,000 ordinary shares (which included an over-allotment option of 1,200,000 ordinary shares) at an offering price of $20.75 per share in which we raised aggregate net proceeds of $180.1 million. The gross proceeds of this offering were $190.9 million. We used $30.0 million of these proceeds to repurchase 1,525,000 ordinary shares from Pacific Life at a purchase price of $19.66 per share.
The annual interest rate on the Orkney Notes will equal the 3-month London Interbank Offered Rate, plus a spread. Such interest will be payable quarterly in arrears on each February 11, May 11, August 11, and November 11 (each an "Orkney Scheduled Payment Date"), for each period beginning on (and including) February 11, 2005, and each succeeding Orkney Scheduled Payment Date, and ending on (but excluding) the next succeeding Orkney Scheduled Payment Date.
o the security interest in the Orkney Collateral ceases to be a perfected security interest, other than as any act or omission on the part of MBIA Insurance Corporation;
If an event of default occurs and is continuing, the entire principal thereof and interest accrued thereon may be declared to be due and payable immediately.
Our business is capital and collateral intensive. We expect that our cash and investments, together with cash generated from our businesses, will be sufficient to meet our current liquidity and letter of credit needs. However, if our business continues to grow significantly, we will need to raise additional capital.