a 28.4% growth over 1996. Several years of price declines and increased competition resulted in a decrease in net income from 1996. Factors affecting our 1997 results include:
CLAIM AND CLAIM SETTLEMENT EXPENSES - Claim expenses refer to amounts that we paid or expect to pay to claimants for events that have occurred. The costs of investigating, resolving and processing these claims are referred to as claim settlement expenses. We record these expenses, net of amounts recoverable under reinsurance contracts, to claim and claim settlement expenses in the Consolidated Statements of Income.
- Many state legislatures where we provide coverage have reduced benefits that injured employees are paid, resulting in lower loss costs of workers' compensation insurance and decreased corresponding premiums to the policyholder;
- Premiums ceded will increase due to reducing our selected retention level in Minnesota from approximately $1.1 million to $280,000. This reduction will result in additional excess of loss policy cost.
- expenses incurred for expansion in Michigan and Massachusetts in 1997, Missouri in 1996 and Colorado in 1995, not offset by revenues from premiums in force in those states;
The following loss reserve development table sets forth the change, over time, of reserves established for claim and claim settlement expenses at the end of the last six years. The following loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both current and prior years (000's):
Our primary sources of cash from operations are premiums collected and investment income. Our investment portfolio is also a source of liquidity, through the sale of readily marketable fixed maturity investments, as well as longer-term investments that have appreciated in value. Our primary cash requirements consist of payments for (i) claim and claim settlement expenses, (ii) policy acquisition costs, (iii) general and administrative expenses, (iv) capital expenditures, (v) income taxes, and (vi) debt service or principal repayment on our outstanding Senior Notes. We generate positive net cash from operations due, in part, to timing differences between the receipt of premiums and the payment of claim and claim settlement expenses. Cash generated is either invested in short-term cash and cash equivalents or longer term available-for-sale securities pending future payments for such expenses as indemnity, medical benefits and other operating expenses. Cash and cash equivalents consist primarily of U. S. government securities acquired under repurchase agreements with maturities of 90 days or less, with the remaining balances in cash and a money market fund that invests in short-term government securities.
AVAILABLE-FOR-SALE INVESTMENTS: We intend to hold our available-for-sale investments to maturity, but may sell before maturity in response to changes in interest rates, prepayment risk and funding sources or terms, or to address liquidity needs. Our available-for-sale investments are carried at fair value with unrealized gains or losses, net of deferred taxes, reported as a separate component of shareholders' equity.
Based on borrowing rates currently available us for loans with similar terms and average maturities (prime at December 31, 1997 and 1996 was 8.50% and 8.25%, respectively), the fair value of notes payable was approximately $5,116,000 and $7,254,000 at December 31, 1997 and 1996, respectively.
The weighted average remaining contractual life for these outstanding and exercisable options is 5.9 years. Each of the non-qualified options expires ten years from the date of grant subject to early termination when the optionee leaves our employment.
In March 1997, we contributed 13,205 shares to the plan for fiscal 1996 at a fair value of $8.75 per share. In January 1996, we contributed 12,196 shares to the plan for fiscal 1995 at a fair value of $19.33 per share. Compensation expense recognized under the plan for 1996 and 1995 was $116,000 and $236,000, respectively. No expense was recorded in 1997.