Universal life and investment type policy fee income was approximately $1.93 million in fiscal 1995, as compared to approximately $1.91 million in fiscal 1994 and approximately $2.7 million in fiscal 1993. This represents approximately a 1.2% increase comparing fiscal 1995 to fiscal 1994 and approximately a 28.3% decrease comparing fiscal 1994 to fiscal 1993. The decrease in fiscal 1994 was primarily attributable to the lower level of surrender charges incurred by annuitants in connection with surrenders of their annuity contracts during fiscal 1994. Surrenders of annuity products represented approximately $99.8 million, $98.9 million, and $114.2 million in account balances during fiscal 1995, 1994 and 1993, respectively.
Net investment income totaled approximately $170.8 million in fiscal 1995, as compared to approximately $157.3 million in fiscal 1994 and approximately $185.2 million in fiscal 1993. This represents approximately an 8.6% increase comparing fiscal 1995 to fiscal 1994 and approximately a 15.1% decrease comparing fiscal 1994 to fiscal 1993. Investment income from "other invested assets" totaled approximately $32.5 million in fiscal 1995, $25.1 million in fiscal 1994 and $51.0 million in fiscal 1993. In fiscal 1995 and 1994, 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, 1995, 1994 and 1993 was approximately 9.01%, 8.49% and 9.88%, respectively. For additional information, please refer to "Note 2 of the Notes to Consolidated Financial Statements."
Realized investment gains amounted to approximately $17.2 million in fiscal 1995, as compared to approximately $7.3 million of gains in fiscal 1994 and gains of approximately $8.8 million in fiscal 1993. Realized investment gains for the years ended December 31, 1995 and 1994 were partially offset by realized investment losses of approximately $6.0 million and $9.7 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.
Interest credited and benefits to policyholders amounted to approximately $123.9 million in fiscal 1995 as compared to approximately $119.7 million in fiscal 1994 and approximately $126.7 million in fiscal 1993. This represents an increase of approximately 3.5% comparing fiscal 1995 to fiscal 1994 and approximately a 5.5% decrease comparing fiscal 1994 to fiscal 1993. The increase in fiscal 1995 principally is attributable to a higher average credited rate and a higher level of policyholder account balances. The decrease in fiscal 1994 principally is attributable to lower average credited interest rates and a lower level of policyholder account balances (as a result of the level of surrenders as discussed above).
The Insurance Company's average credited rates for reserves and account balances for the 12 months ended December 31, 1995, 1994 and 1993 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.
The interest expense on the Company's notes payable amounted to approximately $5.0 million in fiscal 1995, approximately $5.3 million in fiscal 1994 and approximately $6.5 million in fiscal 1993. These decreases are directly attributable to (i) the Company repurchasing the senior term notes payable in 1993 and the subordinated notes payable in January 1994 and (ii) the issuance of new Senior Notes in fiscal 1993 at a lower rate.
Income tax expense (benefit) was approximately $7.3 million for fiscal 1995, as compared to approximately $(2.7) million in fiscal 1994 and approximately $13.2 million in fiscal 1993. As a result of the finalization of the Company's federal income tax return, the federal income tax recoverable from operations and capital loss carryback recorded at December 31, 1994 was increased in fiscal 1995 by $3.1 million which reduced income tax expense by a similar amount. The 1994 decrease is primarily attributable to a utilization of a prior unrecognized capital loss in 1994 and a decrease in realized capital gains.
As more fully discussed in "Note 6 of the Notes to Consolidated Financial Statements," effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative effect of the accounting change relating to prior years was to increase net income by approximately $2.8 million, or $.09 per share. Such change is reported separately in the consolidated statement of operations. See "Notes 1I and 6 of the Notes to Consolidated Financial Statements."
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 $30.2 million, $16.5 million and $8.4 million in fiscal 1995, 1994 and 1993, respectively. Net cash (used) provided by the Company's investing activities (principally reflecting investments purchased less investments called, redeemed or sold) was approximately $(162.7) million, $169.8 million and $(140.6) million in fiscal 1995, 1994 and 1993, respectively.
For purposes of the Company's consolidated statements of cash flows, financing activities relate primarily to the plan of refinancing, "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 (used) by the Company's financing activities amounted to approximately $131.5 million, $(207.3) million and $149.3 million in fiscal 1995, 1994 and 1993, respectively. These fluctuations primarily are attributable to the level of "dollar roll" repurchase transactions, the level of policyholders' account balances, and the consummation of the private placement of 5,250,000 shares of common stock referred to below.
During fiscal 1993, the Company completed its plan of refinancing which included: (i) a private placement of 5,250,000 shares of common stock, which placement was consummated on August 18, 1993, and from which the Company received net proceeds of approximately $35.7 million; (ii) the repayment with a portion of the net proceeds of the Shares of $25 million aggregate principal amount of the Company's senior term notes (the "Senior Term Notes"), in October, 1993; (iii) the sale of $50 million of 9.5% Senior Notes on December 15, 1993; and (iv) the retirement, with the net proceeds of the Notes and a portion of the net proceeds from the shares of common stock, in January of 1994 of the Company's $44.7 million aggregate principal amount of 11.125% Subordinated Notes due May 15, 1994 (the "Subordinated Notes").
Given the Insurance Company's historic cash flow and current financial results, management believes that, for the next twelve months and for the reasonably foreseeable future, the Insurance Company's cash flow from operating activities will provide sufficient liquidity for the operations of the Insurance Company, as well as provide sufficient funds to the Company, so that the Company will be able to make dividend payments, as described in "Item 5 - Market for the Registrant's Common Equity and Related Shareholder Matters," satisfy its debt service obligations and pay its other operating expenses.
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 8.2%, 6.4% and 22.2% as of December 31, 1995, 1994 and 1993, respectively). The weighted average duration of the Company's investment portfolio was approximately seven years as of December 31, 1995. 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. Fixed maturity investments available for sale represent investments which may be sold in response to changes in various economic conditions. 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 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.
Management expects that (primarily as a result of calls, redemptions and repayments) the percentage of the Company's portfolio invested in below investment grade debt securities will decline over time as it does not currently intend to purchase below investment grade debt investments. No new below investment grade investments have been made since the first quarter of fiscal 1990, but some investment grade corporate securities have been downgraded. Notwithstanding the foregoing, the Company's investment policies may change from time to time in response to market and other conditions.
In certain situations, the terms of some fixed maturity assets are restructured or modified. Management defines restructured investments in accordance with Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings ("SFAS No. 15"). Restructured fixed maturities amounted to $2.1 million at December 31, 1995.
As previously discussed in fiscal 1995 and 1994, the Company participated in "dollar roll" repurchase agreement transactions. Amounts outstanding to repurchase securities under such agreements were approximately $160.4 million and $39.4 million at December 31, 1995 and 1994, respectively. The Company may engage in selected "dollar roll" transactions as market opportunities arise.
The Company disagrees with the Commissioner's decision to reopen the process and has reserved all of its rights, including those under the Stock Purchase Agreement signed in January 1995 with the Pennsylvania Insurance Department.
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.
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation", was issued in October of 1995 and requires adoption not later than fiscal years that begin after December 15, 1995. SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. It requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) application of the "fair value" method of accounting for an employee stock option.