Selected consolidated financial data for the Company are presented below for each of the five years in the period ended December 31, 1997. This data should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto and Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition.
In June, 1997 the Insurance Company was notified that its A.M. Best rating was reaffirmed at "A- (Excellent)". During the second quarter of 1997, the Insurance Company was notified that its Standard & Poor's claims-paying rating was upgraded from BBBq to Aq and that its Moody's Investors financial strength rating was upgraded from Baa3 to Baa2.
Total annuity considerations and life insurance premiums increased to approximately $23.6 million in fiscal 1997 from approximately $12.7 million in fiscal 1996, an increase of approximately 86.0%. Of this amount, annuity considerations increased to approximately $19.7 million in fiscal 1997 from approximately $8.5 million in fiscal 1996, an increase of approximately $11.2 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 $125.5 million and $94.4 million in fiscal 1997 and 1996, respectively. Management believes that the increase in annuity considerations is due to the successful expansion of our Marketing Department.
Net investment income totaled approximately $191.8 million in fiscal 1997, as compared to approximately $186.2 million in fiscal 1996 and approximately $170.8 million in fiscal 1995. This represents approximately a 3.0% increase comparing fiscal 1997 to fiscal 1996 and approximately a 9.0% increase comparing fiscal 1996 to fiscal 1995. Investment income from "other invested assets" totaled approximately $39.8 million in fiscal 1997, $35.3 million in fiscal 1996 and $25.3 million in fiscal 1995. In fiscal 1997 and 1996, 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, 1997, 1996 and 1995 was approximately 8.69%, 8.83% and 9.01%, respectively. For additional information, please refer to "Note 2 of the Notes to Consolidated Financial Statements."
Realized investment gains amounted to approximately $26.0 million in fiscal 1997, as compared to approximately $20.0 million of gains in fiscal 1996 and gains of approximately $17.2 million in fiscal 1995. Realized investment gains for the years ended December 31, 1997, 1996 and 1995 were partially offset by realized investment losses of approximately $4.9 million, $1.9 million and $6.0 million, respectively, attributable to writedowns of certain securities contained in the Company's investment portfolio. There can be no assurance that the Company's investment portfolio will yield comparable investment gains in future periods.
The Insurance Company's average credited rates for reserves and account balances for the 12 months ended December 31, 1997, 1996 and 1995 were less than the Company's ratio of net investment income to mean assets for the same periods as noted above under "Net Investment Income." Although management does not currently expect material declines in the spread between the Company's average credited rate for reserves and account balances and the Company's ratio of net investment income to mean assets (the "Spread"), there can be no assurance that the Spread will not decline in future periods or that such decline will not have a material adverse effect on the Company's financial condition and results of operations. Depending, in part, upon competitive factors affecting the industry in general, and the Company, in particular, the Company may, from time to time, adjust the average credited rates on certain of its products. There can be no assurance that the Company will reduce such rates or that any such reductions will broaden the Spread.
For the reasons discussed above, income before income taxes amounted to approximately $90.6 million in fiscal 1997, as compared to approximately $76.4 million in fiscal 1996 and approximately $56.4 million in fiscal 1995.
The Company currently has one bank line of credit for $25 million of which $20 million was used at December 31, 1997.
Capital expenditures during fiscal 1997 were approximately $409,000. As of December 31, 1997, the Company had no outstanding commitments for significant capital expenditures.
To meet its anticipated liquidity requirements, the Company purchases investments taking into account the anticipated future cash flow requirements of its underlying liabilities. In managing the relationship between assets and liabilities, the Company analyzes the cash flows necessary to correspond with the expected cash needs on the underlying liabilities under various interest rate scenarios. In addition, the Company invests a portion of its total assets in short-term investments (approximately 10.32%, 9.97% and 8.2% as of December 31, 1997, 1996 and 1995, respectively). The weighted average duration of the Company's debt portfolio was approximately six years as of December 31, 1997. The Company's fixed maturity investments are all classified as available for sale and includes 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. These investments are carried at estimated market value, and unrealized gains (losses), net of federal income taxes and deferred policy acquisition costs, if any, are charged directly to shareholders' equity, unless a decline in market value is considered to be other than temporary, in which event the Company recognizes a loss. Equity securities include common stocks and non-redeemable preferred stocks and are carried at market, with the related unrealized gains and losses, net of federal income taxes, if any, charged or credited directly to shareholders' equity, unless a decline in market value is considered to be other than temporary, in which event the Company recognizes a loss.
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, 1997 and 1996, approximately 5.4% and 5.4%, 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, 1997 and 1996, the carrying value of these securities was approximately $164.6 million and $119.8 million, respectively (representing approximately 6.4% and 5.0%, respectively of the Company's total assets and 32.8% and 28.3%, respectively of shareholders' equity).
In certain situations, the terms of some fixed maturity assets are restructured or modified. There were no restructured fixed maturities at December 31, 1997.
The Company disagreed with the Insurance Commissioner's actions and commenced litigation which was settled in the second quarter of fiscal 1997. As part of the settlement, the Company received $1.7 million.
The Company initiated the process of preparing its computer systems and applications for the Year 2000 in 1994. This process involves modifying or replacing certain hardware and software maintained by the Company as well as communicating with external service providers to ensure that they are taking the appropriate action to remedy their Year 2000 issues. The modification process of all significant applications will be completed by December 31, 1998. Management expects to have substantially all of the system and application changes completed during the second half of 1999.
The costs of the project and the expected completion dates are based on management's best estimates.
The Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission (the "SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities.
In December 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127 amends SFAS No. 125 by deferring for one year the effective date of paragraph 15 of SFAS No. 125, addressing secured borrowings and collateral, and for repurchase agreement, dollar roll, security lending and similar transactions, of paragraphs 9 through 12 and 237(b) of SFAS No. 125. SFAS No. 127 is effective for certain transactions occurring after December 31, 1997, and must be applied prospectively. Management is evaluating the impact of SFAS 125 and 127 on the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes standards for displaying comprehensive income and its components in a full set of general-purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997.