The Company leases its principal executive office at 1105 North Market Street, Suite 1230, Wilmington, Delaware under an operating lease expiring in October 2003. RSLIC leases its administrative office at 2001 Market Street, Suite 1500, Philadelphia, Pennsylvania, under an operating lease expiring in June 2009. SNCC owns its home office building at 2043 Woodland Parkway, Suite 200, St. Louis, Missouri, which consists of approximately 58,000 square feet. DCM and FRSLIC lease their offices at 153 East 53rd Street, 49th Floor, New York, New York under an operating lease expiring in July 2008. Matrix leases its principal office at 4777 Hellyer Avenue, Suite 200, San
Jose, California under an operating lease expiring in December 2006. The Company also maintains sales and administrative offices throughout the country to provide nationwide sales support and service existing business.
The selected financial data below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes.
(2) In 2000, the Company recognized investment losses of $89.7 million, net of an income tax benefit of $48.3 million, primarily attributable to the liquidation of a substantial majority of the investments of its investment subsidiaries and the termination of U.S. Treasury futures and options contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note C to the Consolidated Financial Statements.
(3) Income from continuing operations excluding realized investment gains and losses and before interest and income tax expense and dividends on Capital Securities of Delphi Funding L.L.C.
(4) In 1999, the Company disposed of Unicover and recognized an after-tax loss of $13.8 million on the disposition. After-tax income from Unicover's operations totaled $13.2 million in 1998. See Note Q to the Consolidated Financial Statements. The Company discontinued its long-term care business and recorded a one-time after-tax charge of $5.8 million in 1996 attributable to this discontinuance. After-tax operating losses on this business were $0.8 in 1996.
(8) The interest coverage ratio is calculated by dividing income from continuing operations excluding realized investment gains and losses and before interest and income tax expense and dividends on the Capital Securities by interest expense (1996 excludes interest paid in connection with the settlement of prior-year federal income taxes).
Net Investment Income. Net investment income in 2000 increased $3.7 million to $184.6 million from $180.9 million in 1999. This increase primarily reflects an increase in average invested assets offset by a decrease in the weighted average annual yield on invested assets in 2000. The weighted average annual yield on invested assets was 7.3% on average invested assets of $2,522.1 million in 2000 and 7.4% on average invested assets of $2,445.4 million in 1999. In the fourth quarter of 2000, the Company liquidated a substantial majority of the investments of its investment subsidiaries and, in the first quarter of 2001, repaid in full the $150.0 million of outstanding borrowings under its $150.0 million revolving credit facility. As a result, the Company anticipates earning a lower level of investment income in 2001. See "Liquidity and Capital Resources - - General."
Interest Expense. Interest expense was $21.5 million in 2000 as compared to $18.2 million in 1999. This increase was primarily due to increases in the weighted average outstanding borrowings and the weighted average borrowing rate under the $150.0 million revolving credit facility, partially offset by a decrease in the average principal amount of the SIG Senior Notes due to the scheduled partial principal repayment on the notes in 2000. During the first quarter of 2001, the Company repaid in full the $150.0 million of outstanding borrowings under its $150.0 million revolving credit facility. As a result, the Company anticipates a lower level of interest expense in 2001.
Income Tax (Benefit) Expense. The income tax benefit was $4.9 million in 2000 as compared to income tax expense of $30.9 million in 1999. The income tax benefit in 2000 was attributable to the recognition of investment losses. The Company's effective tax rate excluding net realized investment losses was 31.9% in 2000 and 31.5% in 1999.
Premium and Fee Income. Premium and fee income in 1999 was $485.3 million as compared to $426.9 million in 1998, an increase of 14%. Premiums from non-core group employee benefit products increased to $110.4 million in 1999 from $89.6 million in 1998 due to a higher level of premium from LPTs, which are episodic in nature. Premiums from core group employee benefit products increased 9% to $357.5 million in 1999 from $326.8 million in 1998. This growth reflects high levels of new business production and normal growth in employment and salary levels for the Company's existing customer base. Excess workers' compensation premiums for 1999 were in line with 1998 levels reflecting improvements in the pricing environment in this market sector. Deposits from the Company's asset accumulation products, including the Company's MVA annuity products, were $77.8 million in 1999 as compared to $46.3 million in 1998. Deposits for these products, which are long-term in nature, are not recorded as premiums; instead, the deposits are recorded as a liability. The increase in annuity deposits in 1999 is principally the result of an increase in the number of networks of independent agents distributing the Company's annuity products, as well as enhancements made to the Company's products to improve their competitive position in the marketplace and a more favorable environment for fixed annuity sales due to increases in interest rates during 1999.
Net Investment Income. Net investment income in 1999 was $180.9 million as compared to $168.7 million in 1998, an increase of 7%. This increase primarily reflects an increase in the weighted average annual yield on invested assets. The weighted average annual yield on invested assets was 7.4% on average invested assets of $2,445.4 million in 1999 and 6.5% on average invested assets of $2,577.5 million in 1998.
Benefits and Expenses. Policyholder benefits and expenses were $521.2 million in 1999 as compared to $470.6 million in 1998, an increase of 11%. This increase primarily reflects the increase in premiums from the Company's non-core group employee benefit products discussed above. The combined ratio (loss ratio plus expense ratio) for the Company's group employee benefits segment decreased from 96.5% in 1998 to 95.2% in 1999. This decrease was primarily attributable to changes in the Company's product mix. Benefits and interest credited on asset accumulation products decreased by $2.5 million in 1999 principally due to a decrease in average funds under management from $628.7 million in 1998 to $622.9 million in 1999, partially offset by an increase in the weighted average annual crediting rate on asset accumulation products from 5.2% in 1998 to 5.3% in 1999.
Interest Expense. Interest expense was $18.2 million in 1999 as compared to $17.4 million in 1998. This increase was primarily due to an increase in average outstanding borrowings under the $150.0 million revolving credit facility, partially offset by a decline in the weighted average borrowing rate on this facility and a decrease in the average principal amount of the SIG Senior Notes due to the scheduled partial principal repayment on the notes in 1999.
Unicover's operations totaled $13.2 million in 1998, net of tax expense of $8.8 million. See Note Q to the Consolidated Financial Statements.
In June 2000, the Company entered into an additional revolving credit facility with a group of lenders. The amount of this facility was $80.0 million at December 31, 2000. This facility may be increased up to a total of $100.0 million at the Company's option if additional loan commitments are obtained. This facility, which expires in April 2003, is subject to certain restrictions and financial covenants, which are substantially identical to those contained in the Company's existing revolving credit facility. They include, among others, the maintenance of certain financial ratios, minimum statutory surplus requirements for RSLIC and SNCC, minimum consolidated equity requirements for the Company and certain investment and dividend and stock repurchase limitations. The Company did not have any outstanding borrowings under this facility at December 31, 2000. A shelf registration is also in effect under which up to $49.2 million in securities may be issued by the Company.
Other sources of liquidity at the holding company level include dividends paid from subsidiaries, primarily generated from operating cash flows and investments. During 2001, RSLIC will be permitted, without prior regulatory approval, to make dividend payments of $55.6 million. In addition, SNCC will be permitted, without regulatory or other approval, to make dividend payments of $22.2 million in 2001. Additional dividends may also be paid by RSLIC and SNCC with the requisite approvals. See "Business - Regulation." In general, dividends from the Company's non-insurance subsidiaries are not subject to regulatory or other restrictions.
The principal liquidity requirements of the Company's insurance subsidiaries are their contractual obligations to policyholders. The primary sources of funding for these obligations, in addition to operating earnings, are the marketable investments included in the investment portfolios of these subsidiaries. The Company believes that these sources of funding will be adequate for its insurance subsidiaries to satisfy on both a short-term and long-term basis these contractual obligations throughout their estimated or stated period.
At December 31, 2000, 23% of the Company's total invested assets were comprised of mortgage-backed securities, of which approximately 43% are guaranteed by U.S. Government sponsored entities as to the full amount of principal and interest and the remaining 57% consists of investments in trusts created by banks and finance and mortgage companies. Ninety-five percent of the Company's mortgage-backed securities portfolio, based on fair values, has been rated as investment grade by nationally recognized statistical rating organizations. Mortgage-backed securities subject the Company to a degree of interest rate risk, including prepayment and extension risk, which is generally a function of the sensitivity of each security's underlying collateral to prepayments under varying interest rate environments and the repayment priority of the securities in the particular securitization structure. The Company seeks to limit the extent of this risk by emphasizing the more predictable payment classes and securities with stable collateral.
related liabilities to seek to minimize the exposure to fluctuations in interest rates and by the periodic adjustment of the crediting rates on annuity products. In addition, the Company, at times, has utilized exchange-traded futures and option contracts to reduce the risk associated with changes in the value of its fixed maturity portfolio due to changes in the interest rate environment and to reduce the risk associated with changes in interest rates in connection with anticipated securities purchases. Generally, market prices of fixed maturity securities decline in an environment of increasing interest rates in a manner similar to that of U.S. Treasury securities. Therefore, in order to reduce the extent of this interest rate risk, the Company, at times, entered into option contracts and short U.S. Treasury futures, the value of which typically rises in such an environment. During 2000, market interest rates, particularly rates on U.S. Treasury securities, decreased, causing the value of these futures and option contracts to decline. As a result, the Company terminated all of these contracts in the fourth quarter of 2000 and recognized related losses of $58.5 million. The Company discontinued this strategy due to the continuing volatility in the relationship between yields on U.S. Treasury securities and yields on other categories of fixed income securities, as well as impending changes in the accounting rules applicable to futures and options contracts used for hedging purposes.
financial services and tax laws and regulations, and market pricing and competitive trends relating to insurance products and services, and those relating specifically to the Company's business, such as the level of its insurance premiums and fee income, the claims experience and other factors affecting the profitability of its insurance products, the performance of its investment portfolio and changes in the Company's investment strategy, acquisitions of companies or blocks of business, and ratings by major rating organizations of its insurance subsidiaries. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. The Company disclaims any obligation to update forward-looking information.
The information required by Item 8 is included in this Form 10-K beginning on page 25 of this Form 10-K.