(1) Reflects the acquisitions of Matrix in 1998 and SNCC in 1996. See Note B to the Consolidated Financial Statements.
(9) Reflects the issuance of $100.0 million of Capital Securities by Delphi Funding L.L.C. (the "Capital Securities"). See Note J to the Consolidated Financial Statements.
(10) The debt to total capitalization ratio is calculated by dividing long-term debt by the sum of the Company's long-term debt, Capital Securities and shareholders' equity.
Premium and Fee Income. Premium and fee income in 2000 was $466.4 million as compared to $485.3 million in 1999. Premiums from non-core group employee benefit products decreased to $47.3 million in 2000 from $110.4 million in 1999 due to the Company's termination of its participations in the reinsurance pools in which it had historically participated and a lower level of premium from LPTs, which are episodic in nature. See "Business - Group Employee Benefit Products" and "Business - Reinsurance." The Company does not expect its withdrawals from these reinsurance pools to have a material impact on its financial results. Premiums from core group employee benefit products increased 12% to $400.4 million in 2000 from $357.5 million in 1999. This increase reflects strong production of new business and normal growth in employment and salary levels for the Company's existing customer base. Excess workers' compensation premiums increased 17% as compared to 1999. This increase reflects improvements in the pricing environment in this market sector and increased demand due to higher primary workers' compensation rates. There has also been disruption in the excess workers' compensation marketplace due to difficulties experienced by some competitors. This disruption has created opportunities for SNCC. Deposits from the Company's asset accumulation products, including the Company's MVA annuity products, increased 106% to $160.5 million in 2000 from $77.8 million in 1999. 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 2000 is principally the result of an increase in the number of networks of independent agents distributing the Company's expanded line of annuity products and a more favorable environment for fixed annuity sales. The Company is maintaining its disciplined approach in establishing crediting rates on its asset accumulation products. During the early part of 2001, market interest rates and the resulting interest rate spreads available to the Company on these products declined. Accordingly, the level of deposits achieved in 2000 may not be representative of the level of deposits attainable in 2001.
Net Realized Investment Losses. Net realized investment losses were $138.0 million in 2000 as compared to $25.7 million in 1999. The Company's investment strategy results in periodic sales of securities and the recognition of related investment gains and losses. In the fourth quarter of 2000, the Company implemented a strategic decision to liquidate a substantial majority of the investments of its investment subsidiaries, resulting in realized losses of $72.5 million. In addition, net investment losses realized in 2000 include $58.5 million of losses on closed U.S. Treasury futures and options contracts. See "Liquidity and Capital Resources - General," "Liquidity and Capital Resources - Asset/Liability Management and Market Risk" and Note C to the Consolidated Financial Statements.
Net Realized Investment (Losses) Gains. Net realized investment losses were $25.7 million in 1999 as compared to net realized investment gains of $8.1 million in 1998. The Company's investment strategy results in periodic sales of securities and the recognition of related investment gains and losses.
Income Tax Expense. The Company's effective tax rate excluding realized investment losses and gains was 31.5% in 1999 and 30.7% in 1998.
Discontinued Operations. Effective April 30, 1999, the Company completed the disposition of Unicover, which was acquired in the fourth quarter of 1998. The Company recognized a loss of $13.8 million on the disposition of the operations of Unicover, net of a related tax benefit of $8.7 million, in the first quarter of 1999. Income from
General. The Company had approximately $266.9 million of financial resources available at the holding company level at December 31, 2000, which was primarily comprised of investments in the common stock of its investment subsidiaries. The assets of the investment subsidiaries were primarily invested in fixed maturity securities, balances with independent investment managers and marketable securities. In the fourth quarter of 2000, as a result of a strategic decision to deleverage its holding company and to further emphasize insurance operations, the Company liquidated a substantial majority of the investments of its investment subsidiaries. The Company used the proceeds from these sales to repay in full the $150.0 million of outstanding borrowings under its revolving credit facility in the first quarter of 2001. As a result, the financial resources at the holding company level decreased by approximately $150.0 million. These investments contributed a significant amount to earnings over the last few years. As a result, the Company anticipates earning a lower level of income in 2001 due to this strategic decision.
Cash Flows. Operating activities increased cash and cash equivalents by $90.2 million in 2000, excluding $58.1 million of funds from a rescinded reinsurance transaction which were returned to the ceding company in the first quarter of 2000 and a net cash payment of $19.7 million related to the cession by the Company of group employee benefit product reserves. Operating cash flows in 1999 increased by $52.8 million, excluding cash inflows of $58.1 million of funds related to the rescinded reinsurance transaction and $10.0 million related to the recapture of ceded group employee benefit product reserves (see Note O to the Consolidated Financial Statements). The increase in operating cash flows is primarily due to federal income tax refunds received in 2000. Net investing activities used $458.0 million of cash during 2000 primarily for the purchase of securities, and financing activities provided $144.0 million of cash principally due to advances from the Federal Home Loan Bank and deposits from asset accumulation products.
Investments. The Company's overall investment strategy to achieve its objectives of safety and liquidity, while seeking the best available return, focuses on, among other things, managing the Company's interest-sensitive assets and liabilities and seeking to minimize the Company's exposure to fluctuations in interest rates. The Company's investment portfolio primarily consists of investments in fixed maturity securities, cash and short-term investments. The weighted average credit rating of the Company's fixed maturity portfolio as rated by Standard & Poor's Corporation was "AA" at December 31, 2000. While the investment grade rating of the Company's fixed maturity portfolio addresses credit risk, it does not address other risks, such as prepayment and extension risks, which are discussed below.
The Company, through its life insurance subsidiaries, maintains a program in which various investments were financed using advances from the Federal Home Loan Bank. The Company has utilized this program to manage the duration of its liabilities and to earn spread income, which is the difference between the financing cost and the earnings from the investments purchased with those funds. At December 31, 2000, the Company had outstanding advances of $148.5 million, of which $73.5 million were borrowed by the Company during 2000. The advances, of which $130.0 million were obtained at a fixed rate and $18.5 million were obtained at a variable rate, have a weighted average term to maturity of 9.2 years. At the Company's current level of advances, a repayment of $6.5 million will be required in April 2001. In addition, the Company has utilized reverse repurchase agreements, futures and option contracts and interest rate swap contracts from time to time in connection with its investment strategy. These transactions require the Company to maintain securities or cash on deposit with the applicable counterparty as collateral. As the market value of the collateral or contracts changes, the Company may be required to deposit additional collateral or be entitled to have a portion of the collateral returned to it. The Company also maintains a securities lending program under which certain securities from its portfolio are loaned to other institutions for short periods of time. The collateral received for securities loaned is recorded at the fair value of the collateral, which is generally in an amount in excess of the market value of the securities loaned. The Company monitors the market value of the securities loaned and obtains additional collateral as necessary.
The ability of the Company's insurance subsidiaries to make investments is subject to the insurance laws and regulations of their respective state of domicile. Each of these states has comprehensive investment regulations. In addition, the Credit Agreements and, as to SNCC, the SIG Senior Notes also contain limitations, with which the Company is currently in compliance in all material respects, on the composition of the Company's investment portfolio. The Company also continually monitors its investment portfolio and attempts to ensure that the risks associated with concentrations of investments in either a particular sector of the market or a single entity are limited.
Asset/Liability Management and Market Risk. Because the Company's primary assets and liabilities are financial in nature, the Company's financial position and earnings are subject to risks resulting from changes in interest rates. The Company manages this risk by active portfolio management focusing on matching its invested assets and
A portion of the Company's trading account portfolio consists of equity securities which are subject to risks resulting from, among other things, changes in the level of equity prices. To reduce the extent of this risk, the Company has entered into corresponding short positions relating to certain of these securities. If the fair value of the Company's trading account securities were to decrease by 10% from their year-end levels, the fair value of these securities, net of the corresponding change in the fair value of the related short positions, would decrease by approximately $2.9 million at December 31, 2000 as compared to a decline of approximately $10.9 million at December 31, 1999.
The Company manages the composition of its borrowed capital by considering factors such as the ratio of borrowed capital to total capital, future debt requirements, the interest rate environment and other market conditions. Approximately 44% of the Company's corporate debt was issued at fixed interest rates. A hypothetical 10% decrease in market interest rates would cause a corresponding $1.3 million increase in the fair value of the Company's fixed-rate corporate debt at December 31, 2000 as compared to an increase of $1.8 million at December 31, 1999. Because interest expense on the Company's floating-rate corporate debt fluctuates as prevailing interest rates change, changes in market interest rates would not materially affect its fair value.