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.
Net investment income totaled approximately $234.1 million in fiscal 2001, as compared to approximately $225.2 million in fiscal 2000 and approximately $208.1 million in fiscal 1999. This represents approximately a 4.0% increase comparing fiscal 2001 to fiscal 2000 and approximately an 8.2% increase comparing fiscal 2000 to fiscal 1999. Investment income from "other invested assets" totaled approximately $40.3 million in fiscal 2001, $36.8 million in fiscal 2000 and $30.4 million in fiscal 1999. In fiscal 2001, 2000 and 1999, 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, 2001, 2000 and 1999 was approximately 8.19%, 9.21% and 9.06%, respectively. For additional information, please refer to "Note 2 of the Notes to Consolidated Financial Statements."
Total benefits and expenses for fiscal 2001 aggregated approximately $303.0 million, as compared to approximately $226.5 million for fiscal 2000 and approximately $208.6 million for fiscal 1999. This represents an increase of approximately 33.8% comparing fiscal 2001 to fiscal 2000 and an increase of approximately 8.6% comparing fiscal 2000 to fiscal 1999. The reasons for these changes will be discussed under the respective components below.
General expenses, taxes and commissions to agents totaled approximately $50.3 million in fiscal 2001 as compared to approximately $29.9 million in fiscal 2000 and approximately $23.7 million in fiscal 1999. This represents an increase of approximately 68.2% comparing fiscal 2001 to fiscal 2000 and an increase of approximately 26.2% comparing fiscal 2000 to fiscal 1999. The increase in fiscal 2001 compared to fiscal 2000 and fiscal 2000 compared to 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 change in the net DAC for fiscal 2001 resulted in a credit of approximately $23.5 million, as compared to a credit of approximately $11.0 million in fiscal 2000 and a credit of approximately $5.2 million in fiscal 1999. Such changes are due (i) to the increase in costs associated with recent new product sales which have been deferred and are amortized in proportion to the recognition of earned revenue and (ii) 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 $(10.9) million for fiscal 2001, as compared to approximately $17.1 million in fiscal 2000 and approximately $21.2 million in fiscal 1999. The decrease in income taxes in fiscal 2001 is primarily attributable to realized capital losses during fiscal 2001. The Company's strategy was to utilize a carryback of its net capital gains reported in the Company's consolidated tax return in 1999 and 1998.
The Company is an insurance holding company and its primary uses of cash are debt service obligations, operating expenses and dividend payments. The Company's principal sources of cash are dividends from the Insurance Company, sales of and interest on the Company's investments and rent from its real estate. During 2001, the Company's Board of Directors maintained the quarterly dividend rate of $.10 per share. During 2001 and 2000, the Company purchased and retired 26,000 and 1,506,200 shares of common stock, respectively. At December 31, 2001, the Company was authorized to purchase approximately an additional 385,000 shares of common stock.
Principal sources of funds at the Insurance Company are premiums and other considerations paid, net investment income received and proceeds from investments called, redeemed or sold. The principal uses of these funds are the payment of benefits on annuity contracts and life insurance policies, (including withdrawals and surrender payments), the payment of policy acquisition costs, operating expenses and the purchase of investments.
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 $104.1 million, $71.8 million and $69.3 million in fiscal 2001, 2000 and 1999, respectively. Net cash used in the Company's investing activities (principally reflecting investments purchased less investments called, redeemed or sold) was approximately $815.4 million, $288.5 million and $172.2 million in fiscal 2001, 2000 and 1999, respectively.
Based on market values and prevailing interest rates as of December 31, 2001, a hypothetical instantaneous increase of 100 basis points would produce a loss in fair value of fixed maturity assets of approximately $193.2 million. Since the Company is able to hold its fixed maturity securities to maturity, it does not expect to realize significant losses under such a hypothetical scenario.
invests a portion of its total assets in short-term investments (approximately 8.18%, 8.77% and 8.14% as of December 31, 2001, 2000 and 1999, respectively). The weighted average duration of the Company's bond portfolio was approximately five and three quarter years as of December 31, 2001. 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.
Capital expenditures during fiscal 2001 were approximately $40,000. As of December 31, 2001, the Company had no outstanding commitments for significant capital expenditures.
The Insurance Company is subject to Regulation 130 adopted and promulgated by the NYSDI. Under this Regulation, the Insurance Company's ownership of below investment grade debt securities is limited to 20.0% of total admitted assets, as calculated under statutory accounting practices. As of December 31, 2001 and 2000, approximately 7.04% and 7.92%, respectively, of the Insurance Company's total admitted assets were invested in below investment grade debt securities.
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, 2001 and 2000, the carrying value of these securities was approximately $275.0 million and $177.4 million, respectively (representing approximately 7.3% and 6.0%, respectively, of the Company's total assets and 64.4% and 38.1%, respectively, of shareholders' equity).
As of December 31, 2001, approximately 6.7% 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 $70.1 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.
All 50 states of the United States, the District of Columbia and Puerto Rico have insurance guaranty fund laws requiring all life insurance companies doing business within the jurisdictions to participate in guaranty associations, which are organized to pay contractual obligations under insurance policies (and certificates issued under group insurance policies) issued by impaired or insolvent life insurance companies. These associations levy assessments (up to prescribed limits) on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired or insolvent insurer
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.
In March 1999, the National Association of Insurance Commissioner ("NAIC") adopted the Codification of Statutory Accounting Principles (the "Codification"). The Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The New York State Insurance Dept ("NYSID") required adoption of the Codification with certain modifications, for the preparation of statutory financial statements effective January 1, 2001. The adoption of Codification by the NAIC and the Codification as modified by the NYSID, as currently interpreted, did not adversely affect statutory capital and surplus as of December 31, 2001.
In October 2001, the FASB issued SFAS No.144, Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144"). SFAS provides a single model for accounting for long-lived assets to be disposed by superceding SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and the accounting and reporting provisions of Accounting Principles Board Opinion No.30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30"). Under SFAS 144, discontinued operations are measured at the lower of carrying value or fair value less cost to sell rather than on a net realizable value basis. Future operating losses relating to discontinued operations are also no longer recognized before they occur. SFAS 144 broadens the definition of a discontinued operation to include a component of an entity (rather than a segment of a business.) SFAS 144 also requires long-lived assets to be disposed of other than by sale to be considered held and used until disposed. SFAS 144 retains the basic provisions of (i) APB 30 regarding the presentation of discontinued operations in the income statement, (ii) SFAS 121 relating to recognition and measurement of impaired long-lived assets classified as held for sale. SFAS 144 must be adopted beginning January 1, 2002. The adoption of SFAS 144 by the Company is not expected to have a material impact on the Company's consolidated financial statements.