Total annuity considerations and life insurance premiums increased to approximately $23.6 million in fiscal 1997 from approximately $12.7 million in fiscal 1996, an increase of approximately 86.0%. Of this amount, annuity considerations increased to approximately $19.7 million in fiscal 1997 from approximately $8.5 million in fiscal 1996, an increase of approximately $11.2 million.
Net investment income totaled approximately $187.2 million in fiscal 1998, as compared to approximately $191.8 million in fiscal 1997 and approximately $186.2 million in fiscal 1996. This represents approximately a 2.4% decrease comparing fiscal 1998 to fiscal 1997 and approximately a 3.0% increase comparing fiscal 1997 to fiscal 1996. Investment income from "other invested assets" totaled approximately $26.4 million in fiscal 1998, $39.8 million in fiscal 1997 and $35.3 million in fiscal 1996. The decrease in investment income from "other invested assets" during 1998 compared with 1997 is attributable to losses of $18.0 million in certain investments in limited partnerships. In fiscal 1998, 1997 and 1996, 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, 1998, 1997 and 1996 was approximately 8.14%, 8.69% and 8.83%, respectively. For additional information, please refer to "Note 2 of the Notes to Consolidated Financial Statements."
Realized investment gains amounted to approximately $17.2 million in fiscal 1998, as compared to approximately $26.0 million of gains in fiscal 1997 and gains of approximately $20.0 million in fiscal 1996. Realized investment gains for the years ended December 31, 1998, 1997 and 1996 were partially offset by realized investment losses of approximately $8.3 million, $4.9 million and $1.9 million, respectively, attributable to writedowns of certain securities contained in the Company's investment portfolio. Realized investment gains result from sales of certain equities and convertible securities, and calls and sales of securities in the Company's investment portfolio. There can be no assurance that the Company's investment portfolio will yield comparable investment gains in future periods.
Interest credited and benefits to policyholders amounted to approximately $146.4 million in fiscal 1998 as compared to approximately $137.0 million in fiscal 1997 and approximately $124.3 million in fiscal 1996. This represents an increase of approximately 6.9% comparing fiscal 1998 to fiscal 1997 and approximately a 10.3% increase comparing fiscal 1997 to fiscal 1996. The increase in fiscal 1998 principally is attributable to a higher level of policyholder account balances as a result of the increase in annuity considerations received during the year.
The Insurance Company's average credited rates for reserves and account balances for the 12 months ended December 31, 1998, 1997 and 1996 were less than the Company's ratio of net investment income to mean assets for the same periods as noted above under "Net Investment Income." Although management does not currently expect material declines in the spread between the Company's average credited rate for reserves and account balances and the Company's ratio of net investment income to mean assets (the "Spread"), there can be no assurance that the Spread will not decline in future periods or that such decline will not have a material adverse effect on the Company's financial condition and results of operations. Depending, in part, upon competitive factors affecting the industry in general, and the Company in particular, the Company may, from time to time, adjust the average credited rates on certain of its products. There can be no assurance that the Company will reduce such rates or that any such reductions will broaden the Spread.
The change in the net DAC for fiscal 1998 resulted in a credit of approximately $2.4 million, as compared to a credit of approximately $2.9 million in fiscal 1997 and a charge of approximately $850 thousand in fiscal 1996. Such changes are due to the effect of revisions to estimated gross profits on unamortized deferred acquisition costs which are reflected in the year such estimated gross profits are revised.
Income tax expense (benefit) was approximately $22.5 million for fiscal 1998, as compared to approximately $29.3 million in fiscal 1997 and approximately $21.8 million in fiscal 1996. The decrease in income taxes in fiscal 1998 is primarily attributable to lower income from operations and realized capital gains during fiscal 1998.
For the reasons discussed above, the Company had net income of approximately $49.2 million in fiscal 1998, net income of approximately $61.3 million in fiscal 1997 and net income of approximately $54.5 million in fiscal 1996.
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. As a New York domiciled insurance company, the Insurance Company is subject to restrictions on the payment of dividends under New York law. New York law states that no domestic stock life insurance company shall distribute any dividend to its shareholders unless a notice of its intention to declare such dividend and the amount thereof shall have been filed with the Superintendent not less than 30 days in advance of such proposed declaration. The Superintendent may disapprove such distribution by giving written notice to such company within 30 days after such filing that he or she finds that the financial condition of the company does not warrant such distribution. The NYSDI has established informal guidelines for the Superintendent's findings which focus upon, among other things, the overall financial condition and profitability of the insurer under statutory accounting practices. During fiscal 1998, 1997, and 1996, the Insurance Company paid dividends of $49.4 million, $24.8 million and $15 million, respectively, to the Company.
The Company currently has one bank line of credit for $25 million of which $23 million was used at December 31, 1998. During the first two months of 1999, the Company repaid $12 million of the bank line of credit.
The Company filed a registration statement with the Securities and Exchange Commission covering up to $100 million aggregate principal amount of senior notes ("New Senior Notes"). The net proceeds from the sale of such offering will be used to retire existing indebtedness and for general corporate purposes. The Company completed the offering during February of 1999 and will redeem the Senior Notes on March 26, 1999.
The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety.
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 56.0%, 60.2%, and 64.2% of the Company's deferred annuity contracts in force (measured by reserves) as of December 31, 1998, 1997, and 1996 are surrenderable without charge. The decrease since December 31, 1996 is attributable to the increase in deferred annuity contracts inforce as a result of the increase in annuity considerations received.
Capital expenditures during fiscal 1998 were approximately $284,000. As of December 31, 1998, 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, 1998 and 1997, the carrying value of these securities was approximately $200.7 million and $164.6 million, respectively (representing approximately 7.7% and 6.4%, respectively of the Company's total assets and 38.4% and 32.8%, respectively of shareholders' equity).
As of December 31, 1998, approximately 9.8% 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 $77.2 million of additional capital to certain of these limited partnerships. However, management does not expect this entire amount to be called because certain of these limited partnerships are nearing the end of the period during which investors are required to make contributions. The Company may make selective investments in additional limited partnerships as opportunities arise. In general, risks associated with such limited partnerships include those related to their underlying investments (i.e., equity securities, debt securities and real estate), plus a level of illiquidity, which is mitigated by the ability of the Company to take annual distributions of partnership earnings. There can be no assurance that the Company will continue to achieve the same level of returns on its investments in limited partnerships as it has historically or that the Company will achieve any returns on such investments at all. Further, there can be no assurance that the Company will receive a return of all or any portion of its current or future capital investments in limited partnerships. The failure of the Company to receive the return of a material portion of its capital investments in limited partnerships, or to achieve historic levels of return on such investments, could have a material adverse effect on the Company's financial condition and results of operations.
The Company was informed by the Pennsylvania Insurance Commissioner that in response to the significant improvement in the invested assets of Fidelity, she reopened the process to select an equity investor for the recapitalization and rehabilitation of Fidelity.
insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's solvency. The amount of these assessments in prior years has not been material, however, the amount and timing of any future assessment on the Insurance Company under these laws cannot be reasonably estimated and are beyond the control of the Company and the Insurance Company. Recent failures of substantially larger insurance companies could result in future assessments in material amounts.
While the Company is not presently aware of any significant exposure that its systems will not be properly remediated on a timely basis, there can be no assurances that all year 2000 remediation processes will be completed and properly tested before the year 2000, or that contingency plans will sufficiently mitigate the risk of a year 2000 readiness problem. The failure of the systems of the Company or its significant vendors or business partners due to a year 2000 readiness problem could have a material adverse effect on the Company.
Management does not believe that inflation has had a material adverse effect on the Company's consolidated results of operations. The Company seeks to manage its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the market value of the Company's fixed maturity portfolio increases or decreases in an inverse relationship with fluctuations in interest rates, and the Company's net investment income increases or decreases in direct relationship with interest rate changes. For example, if interest rates decline, the Company's fixed maturity investments generally will increase in market value, while net investment income will decrease as fixed income investments mature or are sold and proceeds are reinvested at the declining rates, and vice versa. Management is aware that prevailing market interest rates frequently shift and, accordingly, the Company has adopted strategies which are designed to address either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company's average cost of funds would be expected to increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. Concurrently, the Company would attempt to place new funds in investments which were matched in duration to, and higher yielding than, the liabilities associated with such annuities. Management believes that liquidity necessary in such an interest rate environment to fund withdrawals, including surrenders, would be available through income, cash flow, the Company's cash reserves or from the sale of short-term investments. In a declining interest rate environment, the Company's cost of funds would be expected to decrease over time, reflecting lower interest crediting rates on its fixed annuities. Should increased liquidity be required for withdrawals in such an interest rate environment, management believes that the portion of the Company's investments which are designated as available for sale in the Company's consolidated balance sheet could be sold without materially adverse consequences in light of the general strengthening in market prices which would be expected in the fixed maturity security market.