The Insurance Company also owns two acres of unimproved land in Nyack, New York.
Comparison of Fiscal Year 1999 to Fiscal Year 1998 and Fiscal Year 1998 to Fiscal Year 1997.
Universal life and investment type policy fee income was approximately $2.6 million in fiscal 1999, as compared to approximately $2.1 million in fiscal 1998 and approximately $1.99 million in fiscal 1997. Policy fee income consists principally of amounts assessed during the period against policyholders' account balances for mortality charges and surrender charges.
Net investment income totaled approximately $208.1 million in fiscal 1999, as compared to approximately $187.2 million in fiscal 1998 and approximately $191.8 million in fiscal 1997. This represents approximately an 11.2% increase comparing fiscal 1999 to fiscal 1998 and approximately a 2.4% decrease comparing fiscal 1998 to fiscal 1997. Investment income from "other invested assets" totaled approximately $30.4 million in fiscal 1999, $26.4 million in fiscal 1998 and $39.8 million in fiscal 1997. The decrease in investment income from "other invested assets" during 1998 compared with 1997 is attributable to losses of $18.0 million in certain investments in limited partnerships. In fiscal 1999, 1998 and 1997, 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, 1999, 1998 and 1997 was approximately 9.06%, 8.14% and 8.69%, respectively. For additional information, please refer to "Note 2 of the Notes to Consolidated Financial Statements."
Realized investment gains amounted to approximately $2.8 million in fiscal 1999, as compared to approximately $17.2 million of gains in fiscal 1998 and gains of approximately $26.0 million in fiscal 1997. Realized investment gains for the years ended December 31, 1999, 1998 and 1997 are net of realized investment losses of approximately $14.8 million, $8.3 million and $4.9 million, respectively, attributable to writedowns of certain securities contained in the Company's investment portfolio. Realized investment gains result from sales of certain equities and convertible securities, and calls and sales of securities 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 $181.1 million in fiscal 1999 as compared to approximately $146.4 million in fiscal 1998 and approximately $137.0 million in fiscal 1997. This represents an increase of approximately 23.7% comparing fiscal 1999 to fiscal 1998 and approximately a 6.9% increase comparing fiscal 1998 to fiscal 1997. The increase in fiscal 1999 principally is attributable to a higher level of policyholder account balances as a result of the increase in annuity considerations received during the year.
The interest expense on the Company's notes payable amounted to approximately $8.96 million in fiscal 1999, approximately $7.12 million in fiscal 1998 and approximately $5.85 million in fiscal 1997. The increase in interest expense in fiscal 1999 and 1998 is attributable to the increase in the Company's notes payable.
General expenses, taxes and commissions to agents totaled approximately $23.7 million in fiscal 1999 as compared to approximately $19.3 million in fiscal 1998 and approximately $17.2 million in fiscal 1997. This represents an increase of approximately 22.7% comparing fiscal 1999 to fiscal 1998 and an increase of approximately 12.4% comparing fiscal 1998 to fiscal 1997. The increase in fiscal 1999 compared to fiscal 1998 principally is attributable to higher commissions and selling expenses incurred associated with the higher level of sales of single premium annuities. The increase in fiscal 1998 compared to fiscal 1997 principally is attributable to higher costs associated with system conversions and higher commissions and selling expenses incurred associated with the higher level of sales of single premium annuities.
Income tax expense was approximately $21.3 million for fiscal 1999, as compared to approximately $22.5 million in fiscal 1998 and approximately $29.3 million in fiscal 1997. The decrease in income taxes in fiscal 1999 is primarily attributable to lower realized capital gains during fiscal 1999.
For the reasons discussed above, the Company had net income of approximately $47.7 million in fiscal 1999, net income of approximately $49.2 million in fiscal 1998 and net income of approximately $61.3 million in fiscal 1997.
The Company is an insurance holding company and its primary uses of cash are debt service obligations, operating expenses and dividend payments. The Company's principal sources of cash are dividends from the Insurance Company, sales of and interest on the Company's investments and rent from its real estate. During 1999, the Company's Board of Directors increased the quarterly dividend rate to $.09 per share. During 1999 and 1998, the Company purchased and retired 918,300 and 896,900 shares of common stock, respectively. At December 31, 1999, the Company was authorized to purchase an additional 417,000 shares of common stock. At the February 2000 Board of Directors meeting, the Board authorized the Company to purchase an additional 500,000 shares of common stock.
The Insurance Company is subject to various regulatory restrictions on the maximum amount of payments, including loans or cash advances, that it may make to the Company without obtaining prior regulatory approval. As a New York domiciled insurance company, the Insurance Company is subject to restrictions on the payment of dividends under New York law. New York law states that no domestic stock life insurance company shall distribute any dividend to its shareholders unless a notice of its intention to declare such dividend and the amount thereof shall have been filed with the Superintendent not less than 30 days in advance of such proposed declaration. The Superintendent may disapprove such distribution by giving written notice to such company within 30 days after such filing that he or she finds that the financial condition of the company does not warrant such distribution. The NYSDI has established informal guidelines for the Superintendent's findings which focus upon, among other things, the overall financial condition and profitability of the insurer under statutory accounting practices. During fiscal 1999, 1998, and 1997, the Insurance Company paid dividends of $28.4 million, $49.4 million and $24.8 million, respectively, to the Company.
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 $69.3 million, $37.0 million and $47.3 million in fiscal 1999, 1998 and 1997, respectively. Net cash used in the Company's investing activities (principally reflecting investments purchased less investments called, redeemed or sold) was approximately $172.2 million, $27.2 million and $62.5 million in fiscal 1999, 1998 and 1997, respectively.
The Company currently has one bank line of credit for $25 million of which $15 million was used at December 31, 1999.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and other relevant market rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a discussion of the Company's primary market risk exposures and how those exposures are currently managed as of December 31, 1999.
Based on market values and prevailing interest rates as of December 31, 1999, a hypothetical instantaneous increase of 100 basis points would produce a loss in fair value of fixed maturity assets of approximately $163 million. Since the Company is able to hold its fixed maturity securities to maturity, it does not expect to realize significant losses under such a hypothetical scenario.
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, 1999 and 1998, approximately 8.37% and 7.3%, 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, 1999 and 1998, the carrying value of these securities was approximately $187.7 million and $200.7 million, respectively (representing approximately 7.1% and 7.7%, respectively, of the Company's total assets and 46.2% and 38.4%, respectively, of shareholders' equity).
As of December 31, 1999, approximately 9.9% of the Company's total invested assets were invested in limited partnerships. Pursuant to NYSDI regulations, the Company's investments in equity securities, including limited partnership interests, may not exceed 20% of the Insurance Company's invested assets. Investments in limited partnerships are included in the Company's consolidated balance sheet under the heading "Other invested assets." See "Note 2 to the Notes to Consolidated Financial Statements." The Company is committed, if called upon during a specified period, to contribute an aggregate of approximately $68.9 million of additional capital to certain of these limited partnerships. However, management does not expect this entire amount to be called because certain of these limited partnerships are nearing the end of the period during which investors are required to make contributions. The Company may make selective investments in additional limited partnerships as opportunities arise. In general, risks associated with such limited partnerships include those related to their underlying investments (i.e., equity securities, debt securities and real estate), plus a level of illiquidity, which is mitigated by the ability of the Company to take annual distributions of partnership earnings. There can be no assurance that the Company will continue to achieve the same level of returns on its investments in limited partnerships as it has historically or that the Company will achieve any returns on such investments at all. Further, there can be no assurance that the Company will receive a return of all or any portion of its current or future capital investments in limited partnerships. The failure of the Company to receive the return of a material portion of its capital investments in limited partnerships, or to achieve historic levels of return on such investments, could have a material adverse effect on the Company's financial condition and results of operations.
As previously discussed, in fiscal 1999 and 1998 the Company participated in "dollar roll" repurchase agreement transactions. Amounts outstanding to repurchase securities under such agreements were approximately $212.6 million and $148.7 million at December 31, 1999 and 1998, respectively. The Company may engage in selected "dollar roll" transactions as market opportunities arise.
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 in material amounts.
See "Item 1 - Business - Insurance Regulation" for a description of certain NAIC initiatives that also may impact the Company's financial condition and results of operations.
Purchased hardware was capitalized in accordance with normal policy. Personnel and all other costs related to the project were expensed as incurred. Since 1994, the Company has incurred approximately $4.3 million in connection with migrating to a local area network, replacing software and Year 2000 compliance. The total cost to the Company of these Year 2000 compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year.
In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, which amends SFAS 133 by deferring the effective date for fiscal years beginning after June 15, 2000. The Company has not yet completed its analysis to determine the impact of this statement on the Company's financial statements.