The Company owns, and the Insurance Company is the sole occupant of, two adjacent office buildings located at 69 Lydecker Street and 10 North Broadway in Nyack, New York. These buildings contain an aggregate of approximately 45,000 square feet of useable floor space.
The Company operates principally in a single business segment with two primary lines of business--individual annuities and individual life insurance. Premiums shown on the Company's consolidated financial statements in accordance with GAAP consist of premiums received for whole or term life insurance products, as well as that portion of the Company's single premium immediate annuities which have life contingencies. With respect to that portion of single premium annuity contracts without life contingencies, as well as single premium deferred annuities and universal life insurance products, premiums collected by the Company are not reported as premium revenues, but rather are reported as additions to policyholders' account balances. With respect to products that are accounted for as policyholders' account balances, revenues are recognized over time in the form of policy fee income, surrender charges and mortality and other charges deducted from the policyholders' account balances. The Company's operating earnings are derived primarily from these revenues, plus the Company's investment results, including realized gains (losses), less interest credited, benefits to policyholders and expenses.
Comparison of Fiscal Year 1996 to Fiscal Year 1995 and Fiscal Year 1995 to Fiscal Year 1994.
Total annuity considerations and life insurance premiums increased to approximately $12.7 million in fiscal 1996 from approximately $8.2 million in fiscal 1995, an increase of approximately 55.2%. Of this amount, annuity considerations increased to approximately $8.5 million in fiscal 1996 from approximately $3.8 million in fiscal 1995, an increase of approximately $4.7 million. In accordance with generally accepted accounting principles, sales of single premium deferred annuities are not reported as insurance revenues, but rather as additions to policyholder account balances. Sales of single premium deferred annuities were approximately $94.4 million and $86.9 million in fiscal 1996 and 1995, respectively.
Total annuity considerations and life insurance premiums increased to approximately $8.2 million in fiscal 1995 from approximately $5.8 million in fiscal 1994, an increase of approximately 40.7%. Of this amount, annuity considerations increased to approximately $3.8 million in fiscal 1995 from approximately $1.6 million in fiscal 1994, an increase of approximately $2.2 million.
Universal life and investment type policy fee income was approximately $2.09 million in fiscal 1996, as compared to approximately $1.93 million in fiscal 1995 and approximately $1.91 million in fiscal 1994. This represents approximately an 8.1% increase comparing fiscal 1996 to fiscal 1995 and approximately a 1.2% increase comparing fiscal 1995 to fiscal 1994. The increase in fiscal 1996 was primarily attributable to the higher level of surrender charges incurred by annuitants in connection with surrenders of their annuity contracts during fiscal 1996. Surrenders of annuity products represented approximately $124.5 million, $99.8 million, and $98.9 million in account balances during fiscal 1996, 1995 and 1994, respectively.
Total benefits and expenses for fiscal 1996 aggregated approximately $147.3 million, as compared to approximately $143.5 million for fiscal 1995 and approximately $136.9 million for fiscal 1994. This represents an increase of approximately 2.7% comparing fiscal 1996 to fiscal 1995 and an increase of approximately 4.8% comparing fiscal 1995 to fiscal 1994. The reasons for these changes will be discussed under the respective components below.
The interest expense on the Company's notes payable amounted to approximately $5.0 million in fiscal 1996, approximately $5.0 million in fiscal 1995 and approximately $5.3 million in fiscal 1994. The decrease in interest expense in fiscal 1995 is directly attributable to the Company repurchasing subordinated notes which were payable in January 1994.
The change in the net DAC for fiscal 1996 resulted in a charge of approximately $850 thousand, as compared to a credit of approximately $460 thousand in fiscal 1995 and a charge of approximately $1.9 million in fiscal 1994.
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 the second quarter of 1996, the Company's Board of Directors increased the semi-annual dividend rate to $.07 per share and authorized a buy-back program of up to 1,000,000 shares of its stock, from time to time. In the fourth quarter of 1996, the Company's Board of Directors increased the semi-annual dividend rate to $.08 per share. During 1996, the Company purchased and retired 724,000 shares of common stock.
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 1996, 1995, and 1994, the Insurance Company paid dividends of $15 million, $5 million and $12 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 $43.9 million, $30.2 million and $16.5 million in fiscal 1996, 1995 and 1994, respectively. Net cash (used in) provided by the Company's investing activities (principally reflecting investments purchased less investments called, redeemed or sold) was approximately ($63.7) million, $(162.7) million and $169.8 million in fiscal 1996, 1995 and 1994, respectively.
For purposes of the Company's consolidated statements of cash flows, financing activities relate primarily to "dollar roll" repurchase transactions, and to sales and surrenders of the Company's annuity and universal life insurance products. The payment of dividends by the Company to its stockholders also is considered to be a financing activity. Net cash provided by (used in) the Company's financing activities amounted to approximately $22.4 million, $131.4 million and $(207.3) million in fiscal 1996, 1995 and 1994, respectively. These fluctuations primarily are attributable to the net change in "dollar roll" repurchase transactions, lower policyholders' account balances, an increase in repurchasing of the Company's common stock and higher shareholder dividends.
The Indenture governing the Senior Notes contains financial covenants which, among other things, restrict the ability of the Company to incur additional indebtedness, create or permit liens, effect certain asset sales and engage in certain mergers or similar transactions. Management believes that the Company currently is in compliance with these covenants and restrictions contained in the Indenture and, further, that compliance with these covenants and restrictions will not have a material adverse effect on the Company's financial condition or results of operations.
Capital expenditures during fiscal 1996 were approximately $152,000. As of December 31, 1996, the Company had no outstanding commitments for significant capital expenditures.
As of December 31, 1996, approximately 7.6% of the Company's total invested assets were invested in limited partnerships. Pursuant to NYSID 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 $61.1 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. Interests held by the Company in limited partnerships usually are not registered with the Commission and typically are illiquid. In addition, 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.
As part of a proposed rehabilitation plan for Fidelity Mutual Life Insurance Company ("Fidelity"), on January 11, 1995 the Insurance Company signed a definitive purchase agreement with the Pennsylvania Insurance Commissioner and Fidelity to invest up to $45 million for a minority (49.9%) stake in a Fidelity subsidiary insurance holding company. In addition, the Company had agreed to purchase $25 million of Senior Notes of such company.
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 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.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", was issued in June of 1996 and requires adoption not later than fiscal years that begin after December 31, 1996. SFAS 125 establishes financial accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Management has not yet determined the impact of SFAS No. 125 on the Company.