Management continually evaluates the expected prepayments of the mortgage-backed securities portfolio to more accurately reflect expected paydowns on the securities as market interest rates change. In 1997, interest rates decreased, accelerating expected prepayment rates. In 1996, interest rates increased, reducing the expected prepayment rate. As a result of the changes in expected prepayments, amortization of premiums and accretion of discounts were accelerated in 1997, causing an increase in net investment income of $1.4 million in 1997. The decrease in net investment income in 1996 of $1.8 million resulting from the reduced expected prepayment rate was partially offset by discounts of $0.5 million recognized upon the early repayment of certain of the Company's mortgage loans.
The surplus debentures contain restrictions which prevent United Fidelity from making principal and interest payments if such payments reduce United Fidelity's statutory capital and surplus below an amount specified in the surplus debenture agreements. The most restrictive minimum surplus requirement contained in the surplus debentures is $37.5 million; United Fidelity's capital and surplus at December 31, 1998 was $96.9 million. Any future payment of principal or interest on such surplus debentures will be limited by the ability of the subsidiaries of United Fidelity to pay dividends to United Fidelity and may be further limited by United Fidelity's RBC requirements. See "Business: Regulation". The Company does not believe that United Fidelity will have any difficulty in meeting its obligations under these surplus debentures in the foreseeable future.
The Company believes that its investment portfolio will allow it to satisfy all existing contractual obligations to policyholders. At December 31, 1998, the Company's investment portfolio included cash and short-term investments totaling $68.2 million, marketable equity securities totaling $89.0 million as well as $324.2 million in U.S. Treasury and government securities, mortgage-backed securities and asset-backed securities and $601.0 million of corporate bonds classified as available for sale, all of which management believes could be readily converted to cash.
Statutory capital and surplus of the Company's insurance subsidiaries at December 31, 1998 includes $14.8 million relating to financial reinsurance agreements which is not included in stockholder's equity on a GAAP basis. Financial reinsurance treaties between National Farmers Union and unrelated parties contain minimum statutory surplus requirements and require National Farmers Union to place securities in an escrow account ($75.2 million at December 31, 1998) to secure National Farmers Union's obligations to the third party reinsurer.
Also in June 1997, FASB issued Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). This statement specifies revised guidelines for determination of an entity's operating segments and the type and level of financial information to be disclosed. The adoption of this statement resulted in revised and additional disclosures but had no effect on the financial position, results of operations, or liquidity of the Company.
The Company's audited consolidated financial statements for the three years ended December 31, 1998 and the related report of independent accountants thereon are set forth at pages to hereof and are incorporated herein by reference. Reference is made to the Index to Financial Statements on page herein.