Credit risk, meaning uncertainties associated with the continued ability of an obligor to make timely payments of principal and interest.
The fixed maturity portion of the portfolio consists of publicly traded and privately placed debt securities. SLNY diversifies its fixed maturities by industry sectors, government (domestic and foreign), and mortgaged-back and asset-backed securities. Asset-backed securities include structured equipment and receivable investments. The following provides the composition of SLNY's fixed maturity portfolio by sector and the unrealized gains and losses contained therein as of December 31 (in 000's):
The Utilities sector includes regulated electric and gas utilities, regulated interstate pipelines, merchant energy companies and independent power projects. Lingering issues from the California energy crisis, the late 2001 Enron bankruptcy, Federal Energy Regulatory Commission and Securities and Exchange Commission investigations, accounting restatements, accounting rule changes and shareholder litigation continue to impact credit quality in the sector, although less so than in 2002. In 2003, there were a number of bankruptcy filings by sector participants. However, recovery rates in these bankruptcies were unusually high, reflecting strong underlying asset values in the sector. In addition, certain high profile refinancings improved sector liquidity and, in general, prices of power sector bonds also improved. SLNY's portfolio is diversified to include many regulated utilities, interstate pipelines and utility holding companies. In cases where the portfolio's utility holdings have been negatively impacted, ongoing analysis of both firm-specific asset values and projected industry economics continue to support the Company's holdings in this sector. SLNY expects the sector to benefit in the intermediate term from a continued focus on balance sheet repair, including reduced capital expenditure, reduced dividends, asset sales and equity issuance. Progress in sector restructuring supports SLNY's present intent to hold its positions until maturity or recovery.
The amortized cost and fair value of SLNY's fixed maturities were as follows (in 000's):
SLNY has discontinued the accrual of income on several of its holdings for issuers that are in default. The termination of accrual accounting on these holdings reduced income by $198,000, $98,000 and $75,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
SLNY has an agreement with an unrelated company whereby the unrelated company reinsures the morbidity risks of SLNY's group long-term disability contracts. Under this agreement, certain long-term disability benefits are reinsured on a yearly renewable term basis. The agreement provides that the unrelated company will reinsure amounts above $4,000 per claim per month for long-term disability contracts ceded by SLNY.
SLNY participates in a 401(K) plan sponsored by Sun Life U.S. for which substantially all employees of at least age 21 are eligible at date of hire. Under the plan, employer contributions are matched up to a specified amount of the employee's contributions to the plan. The SLNY portion of this employer contribution was $23,000, $15,700 and $6,200 for the years ended December 31, 2003, 2002 and 2001, respectively.
Unfavorable economic conditions may contribute to an increase in the number of insurance companies that are under regulatory supervision. This may result in an increase in mandatory assessments by state guaranty funds, or voluntary payments by solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states.