The Company's principal executive offices are located at 1105 North Market Street, Suite 1230, Wilmington, Delaware 19899. This office space is leased through an operating lease expiring in November 1999. RSLIC owns its home office building at 2501 Parkway, Philadelphia, Pennsylvania, which consists of approximately 100,000 square feet. SNCC also owns its home office building at 2043 Woodland Parkway, Suite 200, St. Louis, Missouri which consists of approximately 58,000 square feet. The Company also maintains 25 sales offices throughout the country to provide sales support and service existing business.
The selected financial data of the Company set forth below for each of the five years ended December 31, 1996, 1995, 1994, 1993 and 1992, were derived from the Consolidated Financial Statements included elsewhere herein or previously filed by the Company. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes.
(3) The Company discontinued its long-term care business in 1996 and recorded a one-time after-tax charge of $5.8 million in 1996 attributable to this discontinuance. After-tax operating losses on this business were $0.8 million, $2.3 million and $0.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. Additionally, the Company has incurred after-tax extraordinary losses associated with the early extinguishment of debt. These losses totaled $12.0 million and $0.4 million for the years ended December 31, 1993 and 1992, respectively. The Company also recognized an after-tax charge of $0.6 million related to the cumulative effect of a change in accounting for postretirement benefits other than pensions in the year ended December 31, 1992.
(5) Fully diluted book value per share is calculated by dividing shareholders' equity, as increased by the proceeds of the assumed exercise of outstanding stock options, by total shares outstanding, also increased by shares issued upon the assumed exercise of the options and deferred shares.
Insurance Premiums and Policyholder Fees. Insurance premiums and policyholder fees in 1996 were $335.2 million as compared to $260.9 million in 1995, an increase of 28%. Contributing to this increase was $56.2 million in premiums from the Company's excess workers' compensation business which was acquired as a result of the SIG Merger. Also contributing to the increase was growth in premiums from the Company's other group employee benefit products, including the impact of certain price increases, growth and development of the Company's sales force and normal growth in employment and salary levels for the Company's existing customer base. Deposits from the Company's SPDA products, including the Company's new MVA product, which it began marketing in the fall of 1995, were $57.5 million during 1996 as compared to $11.4 million in 1995. Deposits for the Company's asset accumulation products, which are long-term in nature, are not recorded as premiums; instead, the deposits are recorded as a liability.
Benefits and Expenses. Policyholder benefits and expenses in 1996 were $387.7 million as compared to $314.5 million in 1995, an increase of 23%. During 1996, benefits and expenses for group employee benefit products increased by $66.2 million as compared to 1995. Of this increase, $51.7 million was attributable to the Company's excess workers' compensation business which was acquired as a result of the SIG Merger. The remaining increase was primarily attributable to growth in the Company's other group employee benefit product lines. The combined ratio for group insurance lines, excluding excess workers' compensation insurance, decreased from 98.9% in 1995 to 97.7% in 1996. This decrease reflects the impact of certain price increases and the expansion of the Company's loss management capabilities during 1995. Amortization of cost of business acquired related to asset accumulation products was accelerated by $4.8 million during 1996 primarily due to better than anticipated investment results. Benefits and interest credited on asset accumulation products decreased by $4.0 million in 1996 as compared to 1995, principally due to the scheduled maturities during 1995 of guaranteed investment contracts with crediting rates that were generally higher than the Company's other asset accumulation products. Primarily due to these maturities, average funds under management decreased by $87.1 million and the weighted average annual crediting rate on asset accumulation products declined from 5.6% to 5.2%.
Interest Expense. Interest expense in 1996 was $18.3 million as compared to $13.3 million in 1995. The increase was primarily due to interest expense on the SIG Senior Notes, which were assumed in conjunction with the SIG Merger, and additional borrowings under the Credit Agreement in 1996 to fund the SIG Merger partially offset by a decline in the weighted average borrowing rate on the Credit Agreement. Also contributing to the increase was interest paid in 1996 in connection with the settlement of prior-year federal income taxes.
Income Taxes. Income tax expense in 1996 was $27.5 million as compared to $18.2 million in 1995. The increase was primarily due to the $35.4 million increase in operating income partially offset by a decrease in the effective tax rate from 35.7% in 1995 to 33.8% in 1996 due to an increase in tax-exempt interest earned during 1996.
Net Investment Income. Net investment income in 1995 was $117.1 million as compared to $106.6 million in 1994, an increase of 10%. The weighted average annual yield on invested assets, excluding realized and unrealized investment gains and losses, was 8.3% on average invested assets of $1,417.5 million and 6.6% on average invested assets of $1,625.2 million in 1995 and 1994, respectively. The increase in yield was primarily due to improved performance by the Company's independent investment manager program and its trading account securities. The impact of the increase in yield was partially offset by a decrease in average invested assets principally due to policy maturities and surrenders and the asset transfer associated with the reinsurance of the Company's individual life insurance business.
Net Realized Investment Gains. Net realized investment gains were $0.7 million in 1995 as compared to $10.2 million in 1994. The Company's investment strategy results in periodic sales of securities and the recognition of realized investment gains and losses arising from those sales.
Operating Income. Income from continuing operations before interest and taxes in 1995 was $64.2 million as compared to $49.9 million for 1994, an increase of 29%. The increase was primarily due to an increase in the weighted average annual yield on invested assets. Partially offsetting this increase in operating income was a decrease in realized investment gains.
Interest Expense. Interest expense for 1995 was $13.3 million as compared to $12.3 million for 1994, an increase of 8%. Interest on the $85.0 million Senior Notes was unchanged. Short-term interest rates, which affect the floating interest rate payable under the Credit Agreement, declined during the year; however, on average, they were more than 100 basis points higher than the previous year.
Discontinued Operations. The operating loss from the Company's discontinued long-term care insurance business for 1995 was $2.3 million as compared to $0.1 million for 1994. This business, which was discontinued in 1996, was acquired in December 1994.
General. The Company had approximately $117.2 million of financial resources available at the holding company level at December 31, 1996, which are primarily comprised of investments in the common stock of its non-insurance subsidiaries. The assets of these non-insurance subsidiaries are primarily invested in balances with independent investment managers and marketable securities. Substantially, all of the amounts invested with independent investment managers are withdrawable at least annually, subject to applicable notice requirements. A shelf registration is also in effect under which up to $149.2 million in securities may be issued by the Company.
Sources of liquidity available to the Company on a parent company-only basis, including the undistributed earnings of its subsidiaries, scheduled payments under the Surplus Debenture and additional borrowings available under the Credit Agreement, are expected to exceed the Company's cash requirements for 1997.
The principal liquidity requirements of the Company's insurance subsidiaries are, in the cases of RSLIC, FRSLIC and SNCC, their contractual obligations to policyholders and contractholders, and in the case of RSLIC-Texas, its payments to the Company on the Surplus Debenture. The primary sources of funding for these obligations, in addition to operating earnings,
Operating activities increased cash and cash equivalents by $95.7 million during 1996. Net investing activities provided $101.0 million of cash during 1996, primarily due to sales of securities and net cash acquired as a result of the SIG Merger. Financing activities used $123.7 million of cash during 1996, principally to reduce reverse repurchase agreement liabilities, offset by additional borrowings under the Credit Agreement to fund the cash consideration associated with the SIG Merger.
During the year ended December 31, 1996, the Company's investments in mortgage-backed securities decreased to 36% of total invested assets, or $819.8 million, as compared to 63% of total invested assets, or $1,133.5 million, at December 31, 1995. This decrease resulted from the sale of $296.3 million of mortgage-backed securities and the acquisition of SIG's investment portfolio, which totaled $566.3 million at December 31, 1996. Approximately 35% of the Company's mortgage-backed securities are guaranteed by U.S. Government sponsored entities as to the full amount of principal and interest. The remaining 65% of the mortgage-backed portfolio consists of investments in trusts created by banks and finance and mortgage companies. Ninety-nine percent of the Company's mortgage-backed securities portfolio, based on fair value, have been rated as investment grade by nationally recognized statistical rating organizations. The single largest investment in mortgage-backed securities backed by a single mortgage pool totaled $50.7 million, or 2% of total invested assets, at December 31, 1996. The Company's holdings include certain privately placed mortgage-backed securities, the fair value of which totaled $121.8 million at December 31, 1996. Although there is an additional degree of liquidity risk associated with privately placed securities, the Company believes that, if necessary, it could liquidate all or a portion of its investments in these securities in a timely manner at or close to market value. The Company has not experienced any material write-downs in its mortgage-backed portfolio.
Mortgage-backed securities subject the Company to a degree of interest rate risk, including prepayment and extension risk, which is generally a function of the sensitivity of each security's underlying collateral to prepayments under varying interest rate environments and the repayment priority of the securities in the particular securitization structure. The Company seeks to limit the extent of this risk by emphasizing the more predictable payment classes and securities with stable collateral. In addition, the Company has developed a hedging program to assist it in managing the duration of its mortgage-backed securities. The hedging program utilizes short positions in U.S. Treasury futures contracts to reduce the Company's interest rate risk, effectively shortening the duration of the Company's mortgage-backed securities. At December 31, 1996, the Company maintained mortgage-backed securities with a weighted average duration of 4.9 years, after giving effect to hedging activities, in line with the duration of its interest sensitive liabilities. The duration of the Company's mortgage-backed securities without the hedging instruments was approximately 5.6 years. At December 31, 1996, realized losses on closed futures positions totaling $23.9 million and unrealized gains on open futures positions totaling $1.4 million have been deferred and recorded as adjustments to the amortized cost of the mortgage-backed securities being hedged and will be amortized into investment income over the expected term of the securities being hedged.