declines in crediting rates which reduced interest crediting by approximately $4.5 million, offset by increases in interest crediting on COLI of $3.6 million.
Amortization of deferred policy acquisition costs (“DAC”) was $48.8 million for 2000, an increase of $5.3 million, or 12.2%, from $43.5 million reported in the comparable prior year period. The increase in DAC amortization was primarily due to $4.7 million higher amortization related to the Company’s VUL business as a result of improved mortality, and higher amortization of $2.6 million related to the modified co-insurance agreement between USFL and the Company. This was offset in part by a $2.4 million reduction if FPVA amortization, due to the growing levels of exchange activity to the new variable annuity products where better persistency is expected.
Interest credited to policyholders’ account balances was $63.5 million for 1999, a decrease of $1.6 million, or 2.5%, from $65.1 million reported in the comparable prior year period. The decrease was primarily due to lower single premium deferred annuity (“SPDA”) account balances and modest declines in crediting rates which reduced interest crediting amounts by approximately $3.4 million. During 1999, SPDA account value decreased $55.3 million to $248.4 million at December 31, 1999 from $303.7 million at December 31, 1998 as a result of continued withdrawals in 1999. This was offset by a $1.1 million increase in FPVA interest credited due to increases in general account fund balances for this product.
During 2000, the Company reported cash used in operations of $94.2 million, as compared to $64.6 million during 1999, an increase of $29.6 million between the periods. The decrease in net cash flow from operations resulted primarily from higher operating expense, higher benefits payment and lower cash net investment income. In 2000, net cash flow provided by financing activities was $78.3 million, an increase of $7.9 million from $70.4 million in the prior year. This increase is primarily due to a $50.5 million note payable issued in 1999 offset by a $40 million increase in capital contributions and a $19 million increase in deposits on interest-sensitive products. The Company’s liquid assets include U.S. Treasury holdings, short-term money market investments and marketable long-term fixed maturity securities. As of December 31, 2000, the Company had readily marketable fixed maturity securities with a carrying value of $1,014.7 million, which were comprised of $477.0 million public and $537.7 million private fixed maturity securities. At that date, approximately 88.8% of the Company’s fixed maturity securities were designated in NAIC rating categories 1 and 2 (considered investment grade, with a rating of “Baa” or higher by Moody’s or “BBB” or higher by S&P). In addition, at December 31, 2000, the Company had cash and cash equivalents of $104.8 million. Management believes that the Company’s sources of liquidity are adequate to meet its anticipated needs.
The National Association of Insurance Commissioners (“NAIC”) established Risk Based Capital (“RBC”) requirements to help state regulators monitor and safeguard life insurers’ financial strength by identifying those companies that may be inadequately capitalized. The RBC guidelines provide a method to measure the adjusted capital (statutory-basis capital and surplus plus the Asset Valuation Reserve (“AVR”) and other adjustments) that a life insurance company should have for regulatory purposes, taking into consideration the risk characteristics of such company’s investments and products. A life insurance company’s RBC ratio will vary over time depending upon many factors, including its earnings, the nature, mix and credit quality of its investment portfolio and the nature and volume of the products that it sells.
The Company defines problem securities in the fixed maturity category as securities which, (i) are in default as to principal or interest payments (ii) are to be restructured pursuant to commenced negotiations (iii) went into bankruptcy subsequent to acquisition or (iv) are deemed to have other than temporary impairments to value. The fair value of problem fixed maturities was $12.5 million and $4.8 million at December 31, 2000 and 1999, respectively. For the years ended December 31, 2000, 1999 and 1998, interest income was not accrued on problem fixed maturities.