Comparisons between periods related to the results of operations are for the years ended December 31 of the year specified. Net income during 1998 increased $815,166 over 1997 results based on the following income and expense transactions.
The primary source of revenue for the Company is life insurance premium income. First Alliance Insurance Company ("FAIC") began writing life insurance and annuities in November of 1995. Typical with most life insurance policies, a premium payment is required each year in order for the policyholder to receive the benefits set forth in the policy. Premium payments are classified as first year and renewal. Renewal premiums are any premium payment that is made after the first year the policy is in force. Therefore, the more years a company writes life insurance, the larger the renewal premium base and a larger revenue stream. During 1998, premium income totaled $2,383,680. In 1997, premium income totaled $1,279,679. This increase of $1,104,001 can be attributed to the growth in the renewal premium base plus an increase in first year premium sales. Of the $2,383,680 of premium income in 1998, $1,375,270 represents first year premium and $1,008,410 represents renewal premiums. Premium income in 1997 was comprised of $700,920 of first year premium and $578,759 of renewal premiums. Total premium income for 1997 increased $335,667 over 1996 primarily due to a larger renewal premium base and first year premium sales.
Commissions paid to life insurance agents totaled $933,100, $473,231 and $528,056 in 1998, 1997 and 1996, respectively. Commissions are paid to agents on both first year and renewal premium payments. First year commission percentages are significantly greater than renewal commission percentages. Accordingly, as new premiums are written and existing policies renew, commission expense increases. In August of 1997, the initial product offered by FAIC was revised and the basis used to calculate first year commissions was increased. During 1998, the revised product was sold for the entire year and first year premium sales increased which would account for the $459,869 increase in commission expense in 1998 over 1997.
During 1998, FAIC did not incur any death claims. In 1997, death claims totaled $24,848. Annuity premiums received are recorded as liabilities rather than income pursuant to Statement of Financial Accounting Standard 97 "Accounting and Reporting by Insurance enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments". Interest is paid on these annuity premium accumulations. As policies renew, the annuity fund balance increases which also increases the base on which interest is earned by the policyholder. The growth in the annuity fund balance accounts for the increase in interest expense between years. Interest expenses totaled $117,265 in 1998, $58,642 in 1997 and $17,250 in 1996.
Certain costs related to the acquisition of life insurance policies are capitalized and amortized over the premium paying period of the policies. These costs, which are referred to as deferred policy acquisition costs, include first year commissions and first year management fees based on new premiums written. During 1998, $1,197,813 of these expenses were capitalized and will be amortized over remaining premium paying period of the associated policies. In 1997 and 1996, $708,185 and $489,628 of these costs were capitalized. Amortization of deferred policy acquisition costs totaled $426,476, $339,562 and $161,163 for 1998, 1997 and 1996, respectively.
Selling, administrative and general insurance expenses increased $108,239 in a comparison of 1998 to 1997. These expenses relate to the administration and issuance of life insurance policies. This increase can be attributed to a larger sales volume and increased processing costs. Selling , administrative and general insurance expenses totaled $333,750, $225,511 and $215,652 in 1998, 1997 and 1996, respectively. Salaries, wages and employee benefits totaled $801,332 in 1998 and increased $121,139 over 1997 results. This increase is due to additional personnel, increased costs of employee benefits and incentive payments to officers.
Professional fees decreased $148,818 during 1998 compared to 1997. During 1997, the Company incurred significant actuarial and consulting fees related to the re-design of the initial product. Professional fees include accounting fees, actuarial fees, consulting fees and legal fees. Professional fees totaled $86,931 in 1998, $235,749 in 1997 and $119,472 in 1996.
Income tax expense for 1998 totaled $265,102. Federal income taxes are calculated based on the earnings of FAIC. Certain items included in income reported for financial statements are not included in taxable income for the current year and recorded as deferred income taxes. Of the $265,102, deferred income taxes totaled $210,430 and taxes currently payable totaled $54,671. In 1997 total income tax expense was $123,995 of which $109,142 was deferred.
Liabilities increased $1,674,292 during 1998 to $4,406,299. Annuity premiums received by insurance companies are classified as liabilities. At December 31, 1998 these annuity premiums, along with interest credited to policyholder balances, totaled $1,763,029. Renewal annuity premiums plus interest accounted for the $650,478 increase over 1997. Life policy reserves increased $731,958 during 1998 to $1,493,766. Life policy reserves were established on new business and additional reserves were recorded on existing policies which renewed. Deposits on pending policy applications increased from $92,215 in 1997 to $216,565 in 1998. These deposits are monies submitted with life insurance applications which are in the process of being issued. In the event these policies are issued, this money becomes premium income, otherwise it is refunded to the policyholder. The increase of $124,350 in 1998 represents increased sales volume. Policyholder premium deposits are funds placed on deposit with the Company to accumulate interest to pay future policy premiums. Interest credited to the fund along with additional deposits accounted for the $60,391 increase during 1998.
Deferred federal income taxes are based on timing differences between FAIC's financial statement taxable income and taxable income computed based on Internal Revenue Service requirements. Due to increased earnings of FAIC, the deferred federal income taxes liability increased $253,226 to $458,932 for 1998.
FAIC's insurance operations generally receive adequate cash flows from premium collections and investment income to meet their obligations. Insurance policy liabilities are primarily long term and generally are paid from future cash flows. Most of the Company's invested assets are in bonds which are readily marketable. Although there is no present need or intent to dispose of such investments, the Company could liquidate portions of their investments if such a need arose.
The costs to address year 2000 issues have been and will continue to be relatively insignificant for the Company. All of the major costs related to the insurance processing system have been borne by Navisys. Internally, year 2000 issues may require the replacement of such items as personal computers and facsimile machines, however these are not expected to cause any significant financial impact.
The financial statements listed in Item 14(a) (1) and (2) are included in this report beginning on page 19.