life insurance, equity-indexed and interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted when the Life Companies revise their estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
Effective May 1, 2001, we entered into a coinsurance agreement with NTL whereby we assumed 90% of NTL’s traditional life, universal life and annuity business in force. In addition, we agreed to assume 50% of NTL’s traditional life, universal life and annuity business issued on an ongoing basis. Assets acquired on May 1, 2001 in connection with this transaction totaled $337.2 million. Collected premiums assumed as a result of this agreement totaled $20.8 million for 2002 compared to $13.3 million for 2001.
Other income and other expenses include revenues and expenses, respectively, relating primarily to our non-insurance operations. These operations include management, advisory, marketing and distribution services and leasing activities. Fluctuations in these financial statement line items are generally attributable to fluctuations in the level of these services provided during the periods.
Pre-tax operating income for the traditional annuity segment increased 43.8% in 2002 to $29.4 million and 30.0% in 2001 to $20.5 million. Pre-tax operating income and the volume of revenues, benefits and expenses increased in 2002 primarily due to the inclusion of a full year of NTL and American Equity business and increases in sales from our core distribution agency force. Also contributing to the increase in pre-tax operating income in 2002 was the acceleration of net discount accretion on mortgage and asset-backed securities as noted in the investment income discussion above. The increase in 2001 is due to the addition of Kansas Farm Bureau Life, NTL and American Equity business and an increase in bond call and prepayment fee income. Annuity premiums collected from American Equity and NTL business totaled $842.7 million in 2002 and $281.8 million in 2001. Direct annuity premiums collected increased 85.2% in 2002 to $198.0 million. Annuity premiums received as a result of the Kansas Farm Bureau Life acquisition totaled $48.6 million in 2001. As noted in the policy benefits discussion above, we decreased crediting rates by a total of 40 basis points on our primary annuity contract on various dates in
At December 31, 2002, no securities from the same issuer had an aggregate unrealized loss in excess of $3.4 million.
concentration of our mortgage loan portfolio at December 31, 2002 include: Pacific (27.7%), which includes California; and West South Central (16.7%), which includes Oklahoma and Texas. Mortgage loans on real estate are also diversified by collateral type with office buildings (38.8%), retail facilities (30.3%) and industrial facilities (26.4%) representing the largest holdings at December 31, 2002.
Parent company cash inflows from operations consists primarily of (i) dividends from subsidiaries, if declared and paid, (ii) fees which it charges the various subsidiaries and affiliates for management of their operations, (iii) expense reimbursements from subsidiaries and affiliates and (iv) tax settlements between the parent company and its subsidiaries. Cash outflows are principally for salaries and other expenses related to providing these management services, dividends on outstanding stock and interest on our holding company debt issued to a subsidiary. In addition, our parent company will on occasion enter into capital transactions such as the acquisition of our common stock.
We paid cash dividends on our common and preferred stock totaling $12.6 million in 2002, $12.5 million in 2001 and $11.0 million in 2000. Interest payments on the parent company’s 5% Subordinated Deferrable Interest Notes (the Notes), relating to the company-obligated mandatorily redeemable preferred stock of subsidiary trust, totaled $5.0 million in 2002, 2001 and 2000. It is anticipated that cash dividend requirements for 2003 will be $0.10 per quarter per common and Series C preferred share and $0.0075 per quarter per Series B preferred share, or approximately $12.7 million. In addition, interest payments on the Notes are estimated to be $5.0 million for 2003.
During 2002, we announced that effective January 1, 2003 we will expense the cost of stock options in accordance with Statement of Financial Accounting Standards (Statement) No. 123, “Accounting for Stock-Based Compensation.” Under Statement No. 123, compensation expense is recognized as stock options vest in an amount equal to the estimated fair value of the options on the date of grant. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Statement No. 148 amends Statement No. 123 by requiring more prominent and frequent disclosures regarding the effects of stock-based compensation and provides for different transition methods in the adoption of Statement No. 123. Historically we have applied Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” to stock option grants, which generally has resulted in no compensation expense being recognized. We anticipate using the prospective method in the adoption of Statement No. 123. Under the prospective method, expense will be recognized for those options granted, modified or settled after the date of adoption. Assuming our historical level of stock option issuance and similar option terms, we estimate that expensing stock options in 2003 will reduce net income by approximately $0.2 million ($0.01 per common share). The impact of adoption will increase over the five year vesting period of the underlying options as options issued before the date of adopting Statement No. 123 will continue to be accounted for under APB No. 25. See the “Stock-Based Compensation” section of this note and Note 8, “Retirement and Compensation Plans,” for more information on stock options.
For our direct business, interest crediting rates for interest sensitive products ranged from 3.00% to 6.25% in 2002, from 3.35% to 6.90% in 2001 and from 4.00% to 6.50% in 2000. For interest sensitive products assumed from American Equity and NTL, interest crediting rates ranged from 3.50% to 12.00% in 2002 and from 4.80% to 12.00% in 2001. A portion of the interest assumed from American Equity ($19.1 million in 2002 and $5.2 million in 2001) represents an additional interest credit on first-year premiums, payable until the first contract anniversary date (first-year bonus interest). These amounts have been deferred as policy acquisition costs.
We have a common stock investment in American Equity’s parent, American Equity Investment Life Holding Company, valued at $26.9 million at December 31, 2002 and $26.7 million at December 31, 2001. American Equity underwrites and markets life insurance and annuity products throughout the United States. The investment is accounted for using the equity method and is included in the securities and indebtedness of related parties line on the consolidated balance sheets. Due to the timing of the availability of financial information, during 2000 we switched from recording our share of American Equity’s results from a current basis to one quarter in arrears. The financial information presented is as of or for the twelve months ended September 30, 2002 and 2001 and the nine months ended September 30, 2000. The impact of this change on our financial statements was not material. The carrying value of our common stock investment in American Equity Investment Life Holding Company includes goodwill totaling $4.7 million in 2002 and 2001. In addition to the common stock investment, we also own $2.3 million in preferred stock issued by American Equity.
We lease our home office properties under a 15-year operating lease from a wholly-owned subsidiary of the Iowa Farm Bureau Federation. Future remaining minimum lease payments under this lease as of December 31, 2002 are as follows: 2003 - $2.3 million; 2004 - $2.4 million; 2005 - $2.4 million; 2006 - $2.4 million; 2007 - $2.4 million and thereafter, through 2013 - $14.0 million. Rent expense for the lease totaled $3.0 million in 2002 and 2001 and $3.1 million in 2000. These amounts are net of $1.4 million in 2002, 2001 and 2000 in amortization of a deferred gain on the exchange of our home office properties for common stock in 1998. The remaining unamortized deferred gain totaled $14.3 million at December 31, 2002 and $15.7 million at December 31, 2001.
Net income (loss) of the Life Companies, as determined in accordance with statutory accounting practices, was $24.9 million in 2002, ($8.8) million in 2001 and $28.9 million in 2000. The net loss for 2001 is primarily attributable to the payment of ceding commissions on the NTL and American Equity coinsurance transactions. Statutory net gain from operations for the Life Companies, which excludes realized gains and losses, totaled $48.4 million in 2002, $5.7 million in 2001 and $49.8 million in 2000. Statutory capital and surplus, after appropriate elimination of intercompany accounts, totaled $391.8 million at December 31, 2002 and $378.2 million at December 31, 2001.