It is possible that the amounts we recover under reinsurance contracts could be materially less than the amounts we have recorded, which may result in a material adverse impact on our financial condition and results of operations. Some reinsurers may dispute our claims under reinsurance contracts, including our calculation of amounts recoverable.
patterns; (3) estimates of trends in claims severity and frequency; (4) estimates of salvage and subrogation; and (5) other factors.
For the year ended December 31, 2002, policy acquisition expenses increased by $18.7 million (up 34.1%) to $73.5 million from $54.8 million for the same period of the prior year. In 2002, policy acquisition expenses related to our activities in Texas increased to $22.4 million from $.6 million in 2001. Operating expenses increased by $8.8 million, or 27.2%, to $41.2 million from $32.4 million, primarily as a result of our growth in Texas.
In an effort to restore American Founders’ surplus to an acceptable level, we increased a third party reinsurer’s coinsurance participation in substantially all of American Founders’ business from 35% to 62.5%, effective October 1, 2002. At December 31, 2002, American Founders had statutory capital of $30.6 million compared with $35 million at December 31, 2001. While this increased reinsurance positively impacted American Founders’ statutory capital at year end, it negatively impacted financial results for the fourth quarter, as the decline in policyholders benefits was more than offset by the decline in premium and investment income. The effect of this increased cession of premiums, investment income and policyholder benefits will affect the financial results for the complete year in 2003, and we expect income from our existing business in this segment to decrease slightly in 2003.
In June 2000, we entered the life and annuity business through an investment in American Founders Financial Corporation, a holding company for two life insurance companies domiciled in Texas. At December 31, 2001, American Founders had approximately $2.5 billion (face value) of life and annuity products in force.
The initial adoption and application of the provisions of SFAS No. 142 did not result in the recognition of impairment losses for goodwill pursuant to a transitional impairment test. However, in the fourth quarter of 2002, we wrote off $9.1 million of goodwill associated with our discontinued health insurance ($7.9 million) and consulting ($1.2 million) business lines. The results for these lines, including the impairment charge for goodwill, are classified in discontinued operations in our Consolidated Financial Statements (see Note R for further discussion). With respect to remaining goodwill in our continuing operations, we determined that, as of December 31, 2002, there was no impairment.
Vesta vs. New Cap Re is an arbitration against an Australian reinsurer, to collect reinsurance recoverables pursuant to two accident year excess of loss ratio reinsurance agreements. In the arbitration,
Vesta engages in reinsurance agreements as part of our overall underwriting and risk management strategy. Our reinsurance ceded programs include coverages which limit the amount of individual claims to a fixed amount or percentage and which limit the amount of claims related to catastrophes.
During the year ended December 31, 2000, we exchanged 1.2 million shares of common stock for $8 million face amount of Deferrable Capital Securities. The resulting after-tax gain of $1.3 million was recorded directly to retained earnings in accordance with EITF 86-32, “Early Extinguishment of a Subsidiaries Mandatorily Redeemable Preferred Stock.” During the year ended December 31, 2001, we exchanged 966 thousand shares of common stock for $10 million face amount of Deferrable Capital Securities. The resulting after tax gain of $1.9 million was recorded directly to retained earnings in accordance with EITF 86-32. During the year ended December 31, 2002, we exchanged 69 thousand shares of common stock for $805 thousand face amount of Deferrable Capital Securities. The resulting after-tax gain of $209 thousand was recorded directly to retained earnings in accordance with EITF 86-32. The after-tax gains from these transactions have been included in the respective computations of income available to common shareholders and related earnings per share computations in accordance with EITF Topic No. D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.”