The Company leases its principal executive office at 1105 North Market Street, Suite 1230, Wilmington, Delaware under an operating lease expiring in October 2003. RSLIC owns its administrative office building at 2501 Parkway, Philadelphia, Pennsylvania, which consists of approximately 100,000 square feet. In the fourth quarter of 1999, the Company entered into an agreement to sell RSLIC's administrative office building. The sale is expected to close in mid-2000. In conjunction with the sale, the Company has entered into a nine-year lease agreement for approximately 108,000 square feet of office space in Philadelphia, Pennsylvania to which the Company will relocate its administrative office. SNCC owns its home office building at 2043 Woodland Parkway, Suite 200, St. Louis, Missouri, which consists of approximately 58,000 square feet. DCM and FRSLIC lease their offices at 153 East 53rd Street, 49th Floor, New York, New York under an operating lease expiring in July 2008. Matrix leases its
principal office at 4777 Hellyer Avenue, Suite 200, San Jose, California under an operating lease expiring in December 2006. The Company also maintains sales and administrative offices throughout the country to provide nationwide sales support and service existing business.
Operating Income. Income from continuing operations excluding realized investment gains and losses and before interest and income tax expense and dividends in 1999 was $145.0 million as compared to $125.0 million in 1998, an increase of 16%. This increase is primarily attributable to the growth in the Company's group employee benefits segment and the increase in the yield on invested assets in 1999.
Discontinued Operations. Effective April 30, 1999, the Company completed the disposition of Unicover, which was acquired in the fourth quarter of 1998. The Company recognized a loss of $13.8 million on the disposition of the discontinued operations of Unicover, net of a related tax benefit of $8.7 million, in the first quarter of 1999. Income from Unicover's operations totaled $13.2 million in 1998, net of tax expense of $8.8 million. See Note Q to the Consolidated Financial Statements.
Premium and Fee Income. Premium and fee income in 1998 was $426.9 million as compared to $360.9 million in 1997, an increase of 18%. This increase was primarily attributable to the Company's group employee benefits segment and reflects strong production of new business, normal growth in employment and salary levels for the Company's existing customer base and expansion within the alternative risk transfer market. A decrease in excess workers' compensation premiums from prior year levels as a result of a weak pricing environment in this market sector did not have a material impact on underwriting results due to corresponding decreases in benefits. Deposits from the Company's SPDA products, including the Company's MVA annuity product, were $46.0 million in 1998 as compared to $55.5 million in 1997. Deposits for these products, which are long-term in nature, are not recorded as premiums; instead, the deposits are recorded as a liability. The decrease in deposits was principally attributable to a decline in the demand for fixed annuity products due to the low interest rate environment during 1998.
Net Investment Income. Net investment income in 1998 was $168.7 million as compared to $162.4 million in 1997, an increase of 4%. The weighted average annual yield on invested assets, excluding realized and unrealized investment gains and losses, was 8.1% on average invested assets of $2,083.0 million in 1998 and 7.9% on average invested assets of $2,048.2 million in 1997.
Benefits and Expenses. Policyholder benefits and expenses were $470.6 million in 1998 as compared to $404.9 million in 1997, an increase of 16%. Benefits and expenses for the Company's group employee benefit products increased by $60.6 million in 1998 primarily due to growth in this segment. The combined ratio (loss ratio plus expense ratio) for the Company's group employee benefits segment was 96.5% in 1998 and 95.9% in 1997. Benefits and interest credited on asset accumulation products decreased by $4.1 million in 1998 principally due to a decrease in average funds under management from $670.1 million in 1997 to $628.7 million in 1998. In addition, the weighted average annual crediting rate on asset accumulation products decreased from 5.3% in 1997 to 5.2% in 1998.
Net Realized Investment Gains. Net realized investment gains were $8.1 million in 1998 as compared to $14.6 million in 1997. The Company's investment strategy results in periodic sales of securities and the recognition of realized investment gains and losses.
Income Tax Expense. The Company's effective tax rate decreased from 32.4% in 1997 to 31.0% in 1998 primarily due to tax-exempt investment income.
Other sources of liquidity at the holding company level include dividends paid from subsidiaries, primarily generated from operating cash flows and investments, and borrowings available under the Credit Agreement. During 2000, RSLIC will be permitted, without prior regulatory approval, to make dividend payments of $30.0 million. In addition, SNCC will be permitted, without regulatory or other approval, to make dividend payments of $19.5 million in 2000. Additional dividends may also be paid by RSLIC and SNCC with the requisite approvals. See "Business Regulation." In general, dividends from the Company's non-insurance subsidiaries are not subject to regulatory or other restrictions. As of December 31, 1999, the Company had $23.0 million of borrowings available to it under the Credit Agreement.
The Company's current liquidity needs, in addition to funding operating expenses, include principal and interest payments on outstanding borrowings under the Credit Agreement, the Senior Notes, the SIG Senior Notes and the Subordinated Notes and distributions on the Capital Securities. The maximum amount of borrowings available under the Credit Agreement will be reduced to the following amounts in October of each year: 2000 - $150.0 million, 2001 - $110.0 million and 2002 - $60.0 million. At the Company's current level of borrowings, a principal repayment of $7.0 million will be required under the Credit Agreement in October 2000. The Senior Notes mature in their entirety in October 2003 and are not subject to any sinking fund requirements nor are they redeemable prior to maturity. The SIG Senior Notes mature in $9.0 million annual installments, with the next installment payable in May 2000, and the Subordinated Notes mature in their entirety in June 2003. The junior subordinated debentures underlying the Capital Securities are not redeemable prior to March 25, 2007. See Note E to the Consolidated Financial Statements. The Company from time to time engages in discussions with respect to acquiring blocks of business and insurance and financial services companies, any of which could, if consummated, be material to the Company's operations.
Sources of liquidity available to the Company on a parent company-only basis, including the undistributed earnings of its subsidiaries and additional borrowings available under the Credit Agreement, are expected to exceed the Company's current and long-term cash requirements.
Investments. The Company's overall investment strategy to achieve its objectives of safety and liquidity, while seeking the best available return, focuses on, among other things, managing the durations of the Company's interest-sensitive assets and liabilities and minimizing the Company's exposure to fluctuations in interest rates. The Company's investment portfolio primarily consists of investments in fixed maturity securities, cash and short-term investments. The weighted average credit rating of the Company's fixed maturity portfolio as rated by Standard & Poor's Corporation was "AA" at December 31, 1999. While the investment grade rating of the Company's fixed maturity portfolio addresses credit risk, it does not address other risks, such as prepayment and extension risks, which are discussed below.
will likely be different from the actual changes experienced under given interest rate scenarios, and those differences may be material.
In connection with, and because it desires to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements in the above "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K and in any other statement made by, or on behalf of, the Company, whether in future filings with the Securities and Exchange Commission or otherwise. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Some forward- looking statements may be identified by the use of terms such as "expects," "believes," "anticipates," "intends," "judgment" or other similar expressions. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. Examples of such uncertainties and contingencies include, among other important factors, those affecting the insurance industry generally, such as the economic and interest rate environment, legislative and regulatory developments and market pricing and competitive trends relating to insurance products and services, and those relating specifically to the Company's business, such as the level of its insurance premiums and fee income, the claims experience and other factors affecting the profitability of its insurance products, the performance of its investment portfolio, the emergence of Year 2000 problems not currently apparent, acquisitions of companies or blocks of business, and ratings by major rating organizations of its insurance subsidiaries. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. The Company disclaims any obligation to update forward-looking information.