or asbestos-related liabilities were neither clearly defined nor specifically excluded. The reserves carried for such claims, including incurred but not reported claims (IBNR), are based upon known facts and current law. However, significant uncertainty exists as, among other things, there are inconsistent court resolutions with respect to underlying policy intent and coverage, an increasing number of new claims and uncertainties as to the allocation of responsibility for clean up costs of hazardous waste dump sites. The government's refusal to release parties from liability and the possibility of dramatic changes from the Congressional re-evaluation of Superfund add to this uncertainty. Additional liabilities which cannot be currently measured may emerge in the future and this emergence may have a material adverse effect on future earnings. TRH believes that these claims reserves, as well as all other claims reserves carried at December 31, 1997, are adequate.
As a holding company, the Company's assets consist primarily of the stock of TRC and the Company's future cash flows depend on the availability of dividends or other statutorily permissible payments from TRC and its wholly-owned operating subsidiaries, TRZ and Putnam. (See Note 10 of Notes to Consolidated Financial Statements for a discussion of restrictions on dividend payment.) During 1997, the Company received cash dividends of $14.2 million from TRC. Sources of funds for the operating subsidiaries consist primarily of premiums, reinsurance recoverables, investment income and proceeds from sales, redemptions and the maturing of investments. Funds are applied primarily to payments of claims, ceded reinsurance premiums, insurance operating expenses, income taxes and investments in fixed income and equity securities. Premiums are generally received substantially in advance of related claims
TRH's stockholders' equity increased to $1.36 billion at December 31, 1997, an increase of $219.4 million over year-end 1996. The net increase was comprised principally of net income of $185.5 million and a net increase in unrealized appreciation of investments, net of deferred income taxes, of $56.6 million, which consists of increases of $47.6 million from equities and $9.0 million from bonds available for sale.
In accordance with the standard, TRH will adopt SFAS No. 130 in the first quarter of 1998. Reclassification of prior period financial statements provided for comparative purposes is required.
Unpaid losses and loss adjustment expenses include certain amounts for the reinsurance of risks related to environmental impairment and asbestos-related illnesses. The majority of TRH's environmental and asbestos-related liabilities arise from contracts entered into after 1984. These obligations generally arose from contracts underwritten specifically as environmental or asbestos-related coverages rather than from standard general liability coverages where the environmental or asbestos-related liabilities were neither clearly defined nor specifically excluded. The reserves carried at December 31, 1997 for such claims, including IBNR, are based upon known facts and current law. However, significant uncertainty exists as, among other things, there are inconsistent court resolutions with respect to underlying policy intent and coverage, an increasing number of new claims and uncertainties as to the allocation of responsibility for clean up costs of hazardous waste dump sites. The government's refusal to release parties from liability and the possibility of dramatic changes from the Congressional re-evaluation of Superfund add to this uncertainty. Additional liabilities which cannot be currently measured may emerge in the future and this emergence may have a material adverse effect on future earnings.
The weighted average fair value of each option grant is estimated on the date of grant using the "Binomial Option Price Model" with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively: expected volatility of 15.0%, 22.5% and 22.5%; risk-free interest rates of 5.8%, 6.2% and 5.6%; and expected lives of six years for each grant. An increasing dividend schedule is used in the binomial model based on historical experience.