In the following discussion, segment operating income is defined as income before income tax excluding net realized investment gains and losses and related amortization of deferred policy acquisition costs (DAC), and the cumulative effect of change in accounting principle. Periodic settlements of interest rate swaps associated with corporate debt and certain investments are included in realized gains and losses but are considered part of segment operating income because the swaps are used to mitigate risk in items affecting segment operating income. Management believes that segment operating income provides relevant and useful information to investors, as it represents the basis on which the performance of the Company’s business is internally assessed. Although the items excluded from segment operating income may be significant components in understanding and assessing the Company’s overall financial performance, management believes that segment operating income enhances an investor’s understanding of the Company’s results of operations. Note that the Company’s segment operating income measures may not be comparable to similarly titled measures reported by other companies.
Average Account Values Universal life $3,637,027 $3,149,430 $2,642,438 15.5 19.2 Variable universal life 190,522 137,380 112,913 38.7 21.7 _____________________________________________ $3,827,549 $3,286,810 $2,755,351 16.5 19.3 _____________________________________________
Benefits and settlement expenses were higher in 2003 due to growth in life insurance in-force and less favorable mortality experience, offset by lower crediting rates on UL products. Mortality for the year was $6.7 million less favorable versus 2002. Amortization of DAC (excluding the effect of reinsurance recoveries) was 8.4% higher in 2003. The increase in amortization is the result of the growth of life insurance in-force offset somewhat by favorable unlocking on UL products.
Net premiums and policy fees declined by 4.5% and 4.7%, respectively, in 2004 and 2003 due to the continued runoff from acquired blocks of business. Net investment income was also lower in 2004 and 2003, caused by the runoff of business and lower overall earned rates. The segment has continued to review credited rates on UL and annuity business to minimize the impact of lower earned rates on interest spreads.
Sales GIC $ 59,000 $ 275,000 $ 266,500 (78.5)% 3.2% GFA - Direct Institutional 67,020 377,900 125,000 (82.3) 202.3 GFA - Non-Registered Notes 0 505,000 763,400 n/a (33.8) GFA - Registered Notes - Institutional 925,000 450,000 0 105.6 n/a GFA - Registered Notes - Retail 531,560 0 0 n/a n/a _________________________________________ $1,582,580 $1,607,900 $1,154,900 (1.6) 39.2 _________________________________________
INCOME (LOSS) BEFORE INCOME TAX $ 19,079 $ 20,193 $ (14,847) (5.5) n/a __________________________________________
Estimated % Market Amortized % Amortized Unrealized % Unrealized Market Value Value Cost Cost Loss Loss ________________________________________________________________________________________________________________________ (in thousands) Agency mortgages $ 724,792 33.6% $ 728,875 32.9% $ (4,083) 7.9% Banking 128,935 6.0 130,435 5.9 (1,500) 2.9 Basic industrial 68,785 3.2 71,027 3.2 (2,242) 4.3 Brokerage 52,505 2.4 53,002 2.4 (497) 1.0 Communications 73,254 3.4 75,907 3.4 (2,653) 5.1 Consumer-cyclical 43,813 2.0 44,490 2.0 (677) 1.3 Consumer-noncyclical 50,980 2.4 52,545 2.4 (1,565) 3.0 Electric 270,567 12.5 280,627 12.7 (10,060) 19.4 Energy 66,987 3.1 69,454 3.1 (2,467) 4.8 Finance companies 23,328 1.1 23,617 1.1 (289) 0.6 Insurance 102,710 4.8 105,137 4.8 (2,427) 4.7 Municipal agencies 72 0.0 72 0.0 (0) 0.0 Natural gas 114,441 5.3 116,696 5.3 (2,255) 4.3 Non-agency mortgages 277,212 12.8 291,369 13.2 (14,157) 27.3 Other finance 37,728 1.7 42,558 1.9 (4,830) 9.3 Other industrial 34,513 1.6 34,781 1.6 (268) 0.5 Other utility 21 0.0 44 0.0 (23) 0.0 Real estate 50 0.0 50 0.0 (0) 0.0 Technology 11,199 0.5 11,480 0.5 (281) 0.6 Transportation 53,857 2.5 55,147 2.5 (1,290) 2.5 U.S. Government 24,662 1.1 24,929 1.1 (267) 0.5 ________________________________________________________________________________________________________________________ Total $2,160,411 100.0% $2,212,242 100.0% $(51,831) 100.0% ________________________________________________________________________________________________________________________
Fair Value Resulting From Notional Fair Value at an Immediate +/-1% Change Amount December 31 in Interest Rates +1% -1% ___________________________________________________________________________________________ (in millions) Options Puts $1,300.0 $ 0.5 $ 1.2 $ 0.0 Fixed to floating Swaps 593.7 30.2 5.9 54.4 Floating to fixed Swaps 460.1 (31.9) (24.7) (38.0) Floating to floating Swaps 800.0 0.0 0.0 0.0 ___________________________________________________________________________________________ $3,153.8 $ (1.2) $(17.6) $ 16.4 ___________________________________________________________________________________________ Options Puts $1,190.0 $ 0.5 $ 18.3 $ 0.0 Futures 499.0 (6.0) 47.8 (57.4) Fixed to floating Swaps 550.8 15.4 (14.3) 33.1 Floating to fixed Swaps 651.2 (13.4) 10.1 (38.7) Floating to floating Swaps 800.0 0.0 0.0 0.0 ___________________________________________________________________________________________ $3,691.0 $ (3.5) $ 61.9 $(63.0) ___________________________________________________________________________________________
In the conduct of business, the Company makes certain assumptions regarding the mortality, persistency, expenses and interest rates, or other factors appropriate to the type of business it expects to experience in future periods. These assumptions are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, future earnings, and various components of the Company’s balance sheet. The Company’s actual experience, as well as changes in estimates, are used to prepare the Company’s statements of income.
Other types of regulation that could affect the Company and its subsidiaries include insurance company investment laws and regulations, state statutory accounting practices, anti-trust laws, minimum solvency requirements, state securities laws, federal privacy laws, federal money laundering and anti-terrorism laws, and because the Company owns and operates real property state, federal, and local environmental laws. The Company cannot predict what form any future changes in these or other areas of regulation affecting the insurance industry might take or what effect, if any, such proposals might have on the Company if enacted into law.
Per share information (diluted): Cumulative effect of change in accounting principle, net of tax $(0.14) $(0.08) $(0.22) Net income 0.78 (0.08) (0.70)
The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors’ and officers’ liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, the Company must obtain the letter of credit upon which directors may draw for defense or settlement of any claim relating to performance of their duties as directors. The Company has similar agreements with certain of its officers providing up to $10 million in indemnification that are not secured by the obligation to obtain a letter of credit.
2004 2003 ______________________________________________________________ Carrying Fair Values Carrying Fair Value Amounts Amounts ________________________________________________________________________________________________________________ Assets (see Notes 1 and 2): Investments: Fixed maturities $14,412,605 $14,412,605 $13,355,911 $13,355,911 Equity securities 58,941 58,941 46,731 46,731 Mortgage loans on real estate 3,005,418 3,173,656 2,733,722 2,958,052 Short-term investments 1,059,557 1,059,557 519,419 519,419 Cash 130,596 130,596 136,698 136,698 Liabilities (see Notes 1 and 4): Stable value product account balances 5,562,997 5,589,665 4,676,531 4,736,681 Annuity account balances 3,463,477 3,454,065 3,480,577 3,475,167 Debt: Bank borrowings 0 0 25,000 25,000 Senior and Medium-Term Notes 444,551 431,288 429,415 419,825 Subordinated debt securities 324,743 336,454 221,650 234,526 Other (see Note 1): Derivative financial instruments 192,342 192,342 153,219 153,219 ________________________________________________________________________________________________________________