Management believes that the Company's present facilities are adequate for its anticipated needs.
Selected consolidated financial data for the Company are presented below for each of the five years in the period ended December 31, 1998. 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.
Total annuity considerations and life insurance premiums increased to approximately $32.2 million in fiscal 1998 from approximately $23.6 million in fiscal 1997, an increase of approximately 36.4%. Of this amount, annuity considerations increased to approximately $28.1 million in fiscal 1998 from approximately $19.7 million in fiscal 1997, an increase of approximately $8.5 million. In accordance with generally accepted accounting principles, sales of single premium deferred annuities are not reported as annuity considerations, but rather as additions to policyholder account balances. Sales of single premium annuities were approximately $135.2 million, $125.5 million and $94.4 million in fiscal 1998, 1997 and 1996, respectively. Management believes that the increase in annuity considerations is due to the successful expansion of our Marketing Department. Beginning in 1996, the Company added regional sales directors in various states. These regional sales directors have added new general agents which have generated sales.
Universal life and investment type policy fee income was approximately $2.1 million in fiscal 1998, as compared to approximately $1.99 million in fiscal 1997 and approximately $2.09 million in fiscal 1996. Policy fee income consists principally of amounts assessed during the period against policyholders' account balances for mortality charges and surrender charges.
The interest expense on the Company's notes payable amounted to approximately $7.12 million in fiscal 1998, approximately $5.85 million in fiscal 1997 and approximately $5.0 million in fiscal 1996. The increase in interest expense in fiscal 1998 is attributable to the increase in the Company's short term note payable.
General expenses, taxes and commissions to agents totaled approximately $19.3 million in fiscal 1998 as compared to approximately $17.2 million in fiscal 1997 and approximately $17.2 million in fiscal 1996. This represents an increase of approximately 12.4% comparing fiscal 1998 to fiscal 1997 and no increase comparing fiscal 1997 to fiscal 1996. 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.
For the reasons discussed above, income before income taxes amounted to approximately $71.7 million in fiscal 1998, as compared to approximately $90.6 million in fiscal 1997 and approximately $76.4 million in fiscal 1996.
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 1998, the Company's Board of Directors increased the quarterly dividend rate to $.075 per share. During 1998 and 1997, the Company purchased and retired 896,900 and 372,300 shares of common stock, respectively. At December 31, 1998, the Company was authorized to purchase an additional 335,300 shares of common stock. At the February 1999 Board of Directors meeting, the Board authorized the Company to purchase an additional 1,000,000 shares of common stock.
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 $37.0 million, $47.3 million and $43.9 million in fiscal 1998, 1997 and 1996, respectively. Net cash provided by (used in) the Company's investing activities (principally reflecting investments purchased less investments called, redeemed or sold) was approximately $(27.2) million, $(62.5) million and $(63.7) million in fiscal 1998, 1997 and 1996, respectively.
For purposes of the Company's consolidated statements of cash flows, financing activities relate primarily to "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 by (used in) the Company's financing activities amounted to approximately $(21.9) million, $27.9 million and $22.4 million in fiscal 1998, 1997 and 1996, respectively. These fluctuations primarily are attributable to the net change in "dollar roll" repurchase transactions, higher policyholder account balances, an increase in common stock repurchased and an increase in borrowings under the Company's line of credit during fiscal 1997.
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, 1998.
Based on market values and prevailing interest rates as of December 31, 1998, a hypothetical instantaneous increase of 100 basis points would produce a loss in fair value of fixed maturity assets of approximately $140 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, 1998 and 1997, approximately 7.3% and 5.4%, respectively of the Insurance Company's total admitted assets were invested in below investment grade debt securities.
In certain situations, the terms of some fixed maturity assets are restructured or modified. There were no restructured fixed maturities at December 31, 1998.
As previously discussed, in fiscal 1998 and 1997 the Company participated in "dollar roll" repurchase agreement transactions. Amounts outstanding to repurchase securities under such agreements were approximately $148.7 million and $205.2 million at December 31, 1998 and 1997, respectively. The Company may engage in selected "dollar roll" transactions as market opportunities arise.
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
In 1994, the Company initiated the process of migrating to a local area network and preparing its computer systems and applications for the Year 2000. 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. Management believes that the modification process of all significant administrative systems has been completed by December 31, 1998 and that all of the remaining non-critical system and application changes will be completed during the second half of 1999.
The Company's contingency plans, which are expected to be completed during the second quarter of 1999, will be structured to address both remediation of those systems not yet compliant and their components and overall business operating risk. These plans are intended to mitigate both internal risk as well as potential risks relative to a significant exposure identified relative to the dependencies on third-party systems.
Purchased hardware will be capitalized in accordance with normal policy. Personnel and all other costs related to the project are being expensed as incurred. Based on Management's best estimates, the total cost to the Company of both migrating to a local area network, replacing software and Year 2000 compliance activities is not expected to exceed $4.0 million. Since 1994, the Company has incurred approximately $2.9 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.
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 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.