Certain costs related to the sale of new business are deferred as "deferred policy acquisition costs" ("DAC") and amortized into expenses in proportion to the recognition of earned revenues. Costs deferred include principally commissions, certain expenses of the policy issue and underwriting departments and certain variable sales expenses. Under certain circumstances, DAC will be expensed earlier than originally estimated, including those circumstances where the policy terminations are higher than originally estimated with respect to certain annuity products. Most of the Company´s annuity products have surrender charges which are designed to discourage and mitigate the effect of early terminations.
Total annuity considerations and life insurance premiums increased to approximately $62.6 million in fiscal 2000 from approximately $58.9 million in fiscal 1999, an increase of approximately 6.3%. Of this amount, annuity considerations increased to approximately $55.2 million in fiscal 2000 from approximately $54.4 million in fiscal 1999, an increase of approximately $871 thousand. In accordance with GAAP, sales of single premium deferred annuities are not reported as annuity considerations, but rather as additions to policyholder account balances. Sales of single premium annuities were approximately $350.4 million, $186.1 million and $135.2 million in fiscal 2000, 1999 and 1998, respectively. Management believes that the increase in annuity considerations is due to the successful expansion of our Marketing Department. Beginning in 1996, the Company added regional sales directors in various states. These regional sales directors have added new general agents, which have generated sales.
Net investment income totaled approximately $225.2 million in fiscal 2000, as compared to approximately $208.1 million in fiscal 1999 and approximately $187.2 million in fiscal 1998. This represents approximately an 8.2% increase comparing fiscal 2000 to fiscal 1999 and approximately an 11.2% increase comparing fiscal 1999 to fiscal 1998. Investment income from "other invested assets" totaled approximately $36.8 million in fiscal 2000, $30.4 million in fiscal 1999 and $26.4 million in fiscal 1998. In fiscal 2000, 1999 and 1998, the Insurance Company participated in "dollar roll" transactions (i.e., the sale of a mortgage-backed security and a simultaneous agreement to purchase a similar security at a later date at a lower price) to enhance investment income. The proceeds from the sale are invested in short-term securities at a positive spread until the settlement date of the similar security. During this period, the holding institution receives all income and prepayments for the security. The Company´s ratio of net investment income to average cash and invested assets less net investment income for the years ended December 31, 2000, 1999 and 1998 was approximately 9.21%, 9.06% and 8.14%, respectively. For additional information, please refer to "Note 2 of the Notes to Consolidated Financial Statements."
Interest credited and benefits to policyholders amounted to approximately $197.8 million in fiscal 2000 as compared to approximately $181.1 million in fiscal 1999 and approximately $146.4 million in fiscal 1998. This represents an increase of approximately 9.2% comparing fiscal 2000 to fiscal 1999 and approximately a 23.7% increase comparing fiscal 1999 to fiscal 1998. These increases principally are attributable to a higher level of policyholder account balances as a result of the increase in annuity considerations received during the respective years.
General expenses, taxes and commissions to agents totaled approximately $29.9 million in fiscal 2000 as compared to approximately $23.7 million in fiscal 1999 and approximately $19.3 million in fiscal 1998. This represents an increase of approximately 26.2% comparing fiscal 2000 to fiscal 1999 and an increase of approximately 22.7% comparing fiscal 1999 to fiscal 1998. The increase in fiscal 2000 compared to fiscal 1999 principally is attributable to higher costs associated with higher commissions and selling expenses incurred associated with the higher level of sales of single premium annuities. The increase in fiscal 1999 compared to fiscal 1998 principally is attributable to higher commissions and selling expenses incurred associated with the higher level of sales of single premium annuities
For the reasons discussed above, income before income taxes amounted to approximately $58.0 million in fiscal 2000, as compared to approximately $69.5 million in fiscal 1999 and approximately $71.1 million in fiscal 1998.
The Insurance Company is subject to various regulatory restrictions on the maximum amount of payments, including loans or cash advances, that it may make to the Company without obtaining prior regulatory approval. Under the New York Insurance Law, the Insurance Company is permitted without prior insurance regulatory clearance to pay a stockholder dividend to the Company as long as the aggregate amount of all such dividends in any calendar year does not exceed the lesser of (i) 10% of its surplus as of the immediately preceding calendar year and (ii) its net gain from operations for the immediately preceding calendar year (excluding realized capital gains). The Insurance Company will be permitted to pay a stockholder dividend to the Company in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the Superintendent and the Superintendent does not disapprove the distribution. Under the New York Insurance Law, the Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders. The NYSDI has established informal guidelines for such determinations. The guidelines, among other things, focus on the insurer's overall financial condition and profitability under statutory accounting practices. Management of the Company cannot provide assurance that the Insurance Company will have statutory earnings to support payment of dividends to the Company in an amount sufficient to fund its cash requirements and pay cash dividends or that the Superintendent will not disapprove any dividends that the Insurance Company must submit for the Superintendent's consideration. The Company's other insurance subsidiary is also subject to restrictions on the payment of dividends to their respective parent companies. During fiscal 2000, 1999 and 1998, the Insurance Company paid dividends of $49.6 million, $28.4 million and $49.4 million, respectively, to the Company.
Net cash provided by the Company´s operating activities (reflecting principally: (i) premiums and contract charges collected less (ii) benefits paid on life insurance and annuity products plus (iii) income collected on invested assets less (iv) commissions and other general expenses paid) was approximately $71.6 million, $69.3 million and $37.0 million in fiscal 2000, 1999 and 1998, respectively. Net cash used in the Company´s investing activities (principally reflecting investments purchased less investments called, redeemed or sold) was approximately $288.5 million, $172.2 million and $27.2 million in fiscal 2000, 1999 and 1998, respectively.
Given the Insurance Company´s historic cash flow and current financial results, management believes that, for the next twelve months and for the reasonably foreseeable future, the Insurance Company´s cash flow from operating activities will provide sufficient liquidity for the operations of the Insurance Company, as well as provide sufficient funds to the Company, so that the Company will be able to make dividend payments, as described in "Item 5 - Market for the Registrant´s Common Equity and Related Shareholder Matters," satisfy its debt service obligations and pay its other operating expenses.
The Company´s deferred annuity products are designed to encourage persistency by incorporating surrender charges. An annuitant may not terminate or withdraw substantial funds for a period of generally seven years without incurring significant penalties in the form of surrender charges. Approximately 42.0%, 50.9% and 56.0% of the Company´s deferred annuity contracts in force (measured by reserves) as of December 31, 2000, 1999, and 1998 are surrenderable without charge. The decrease since December 31, 1998 is attributable to the increase in deferred annuity contracts inforce as a result of the increase in annuity considerations received.
The market value of the Company´s fixed maturity portfolio changes as interest rates change. In general, rate decreases cause asset prices to rise, while rate increases cause asset prices to fall. Interest rate sensitivity can be modeled using the fixed maturitys effective duration and convexity to estimate price change for a given rate change. To model such changes, both spreads and yield curve slope are held constant while the portfolio is subjected to a hypothetical instantaneous rate change. Actual results may differ from the hypothetical change in market rates assumed in this disclosure since the model does not reflect the results of any actions that would be taken by the Company to mitigate such hypothetical loss in market value.
invests a portion of its total assets in short-term investments (approximately 8.77%, 8.14% and 8.74% as of December 31, 2000, 1999 and 1998, respectively). The weighted average duration of the Company´s bond portfolio was approximately five and three quarter years as of December 31, 2000. The Company´s fixed maturity investments are all classified as available for sale and include those securities available to be sold in response to, among other things, changes in market interest rates, changes in the security´s prepayment risk, the Company´s need for liquidity and other similar factors.
These investments are carried at estimated market value, and unrealized gains (losses), net of federal income taxes and deferred policy acquisition costs, if any, are charged directly to shareholders´ equity, unless a decline in market value is considered to be other than temporary, in which event the Company recognizes a loss. Equity securities include common stocks and non-redeemable preferred stocks and are carried at market, with the related unrealized gains and losses, net of federal income taxes, if any, charged or credited directly to shareholders´ equity, unless a decline in market value is considered to be other than temporary, in which event the Company recognizes a loss.
Capital expenditures during fiscal 2000 were approximately $32,000. As of December 31, 2000, the Company had no outstanding commitments for significant capital expenditures.
The Company maintains a portfolio which includes below investment grade securities which were purchased to achieve a more favorable investment yield, all of which are classified as available for sale and reported at estimated market value. As of December 31, 2000 and 1999, the carrying value of these securities was approximately $178.6 million and $187.7 million, respectively (representing approximately 6.0% and 7.1%, respectively, of the Company´s total assets and 38.1% and 46.2%, respectively, of shareholders´ equity).
In certain situations, the terms of some fixed maturity assets are restructured or modified. There were no restructured fixed maturities at December 31, 2000.
As of December 31, 2000, approximately 9.2% of the Company´s total invested assets were invested in limited partnerships. Pursuant to NYSDI regulations, the Company´s investments in equity securities, including limited partnership interests, may not exceed 20% of the Insurance Company´s invested assets. Investments in limited partnerships are included in the Company´s consolidated balance sheet under the heading "Other invested assets." See " Note 2 to the Notes to Consolidated Financial Statements." The Company is committed, if called upon during a specified period, to contribute an aggregate of approximately $54.5 million of additional capital to certain
As previously discussed, in fiscal 2000 and 1999 the Company participated in "dollar roll" repurchase agreement transactions. Amounts outstanding to repurchase securities under such agreements were approximately $233.2 million and $212.6 million at December 31, 2000 and 1999, respectively. The Company may engage in selected "dollar roll" transactions as market opportunities arise.
See "Item 1 - Business - Insurance Regulation" for a description of certain NAIC initiatives that also may impact the Company´s financial condition and results of operations.
Interest rate changes also may have temporary effects on the sale and profitability of the universal life and annuity products offered by the Company. For example, if interest rates rise, competing investments (such as annuity or life insurance products offered by the Company´s competitors, certificates of deposit, mutual funds and similar instruments) may become more attractive to potential purchasers of the Company´s products until the Company increases the rates credited to holders of its universal life and annuity products. In contrast, as interest rates fall, the Company attempts to lower its credited rates to compensate for the corresponding decline in its net investment income. As a result, changes in interest rates could materially adversely effect the financial condition and results of operations of the Company depending on the attractiveness of alternative investments available to the Company´s customers. In that regard, in the current interest rate
environment, the Company has attempted to maintain its credited rates at competitive levels which are designed to discourage surrenders and which may be considered attractive to purchasers of new annuity products. In addition, because the level of prevailing interest rates impacts the Company as well as its competition, management does not believe that the current interest rate environment has materially affected the Company´s competitive position vis a vis other life insurance companies that emphasize the sale of annuity products. Notwithstanding the foregoing, if interest rates continue at current levels or decline, there can be no assurance that this segment of the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales and thereby be materially adversely affected.
The Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the SEC. Forward-looking statements are statements not based n historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect", "anticipate", "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company´s beliefs concerning future levels of sales and redemptions of the Company´s products, investment spreads and yields, or the earnings and profitability of the Company´s activities.