facility in LIberty Park in Birmingham which is 100% pre-leased to an affiliated party; 3.) Urban Center Building 1200, also in Liberty Park, a 184,000 square foot office building which is 90% pre-leased and scheduled for completion in January, 1999.
Torchmark's insurance operating income rose 11% in 1997 to $553 million from $496 million, compared with a 5% gain in 1996. The 1997 acceleration in growth was primarily caused by a $35 million increase in excess investment income and a $19 million gain in life insurance underwriting income. A reduction in operating expenses in 1997 of approximately $6 million was also a factor. The expense decline was largely a result of lower legal and litigation costs at Liberty.
Life insurance. Life insurance premium increased 6% in 1997 to $910 million from $855 million in 1996. Life premium rose 11% for the year 1996. Sales of life insurance, in terms of annualized premium, were $230 million in 1997, growing 7% over 1996 sales of $215 million. This compares with a 1% decline in 1996 sales relative to 1995. Annualized premium sold in 1995 was $218 million.
Service fees are charged based on the number of accounts serviced. They include fees for transfer agency, custody, and accounting. Service fees rose 9% in 1997 to $31 million, after having increased 21% in 1996 to $28 million. The number of accounts serviced was 1.38 million at December 31, 1997, an increase of 5%. Accounts serviced were 1.31 million at year-end 1996 and 1.22 million at year-end 1995.
The quality of Torchmark's fixed-income portfolio remains high. The portfolio consists of securities of which 94.5% were rated investment grade by Standard & Poors and 95.6% were rated investment grade by NAIC classification.
The actual interest rate risk to Torchmark is greatly reduced because the effect that changes in rates have on assets are offset by the effect they have on insurance liabilities. Torchmark's insurance liabilities, in which interest assumptions are a factor in their computation, were $3.5 billion at December 31, 1997, compared with fixed income investments of $5.9 billion at the same date. Because of the long-term nature of insurance liabilities, temporary changes in value caused by rate fluctuations have little bearing on ultimate obligations. The marking of these liabilities to market is not addressed by SFAS 115.
The following table illustrates the market risk sensitivity of Torchmark's interest-rate sensitive fixed-maturity portfolio. This table measures the effect of a change in interest rates (as represented by the U.S. Treasury curve) on the fair value of Torchmark's fixed-maturity portfolio. The data is prepared through a model that measures the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points. It takes into account the effect that special option features such as call options, put options, and unscheduled repayments would have on the portfolio, given the changes in rates. The valuation of these option features is dependent upon assumptions about future interest rate volatility that are based on past performance.
Liquidity. Torchmark's liquidity relates to its ability to meet on demand the cash commitments required by its business operations and financial obligations. Torchmark's liquidity is derived from three sources: its positive cash flow from operations, its portfolio of short-term investments, and its line of credit facility.
Total debt as a percentage of total capitalization continues to decline and was 31% at December 31, 1997. In the computation of this ratio, the MIPS are counted as equity and the effect of the above-mentioned accounting rule is excluded. This debt-to-capitalization ratio was 32% at year-end 1996 and 37% at year-end 1995. Torchmark's ratio of earnings before interest, taxes and discontinued operations to interest requirements also continues to improve and was 8.1 for 1997, compared with 7.7 in 1996 and 6.3 in 1995.
Disclosures about Segments of an Enterprise and Related Information (FASB Statement No. 131) is effective for periods beginning after December 15, 1997, with comparative information for prior periods to be restated. It establishes new standards for reporting information about a company's operating segments, including disclosures regarding a company's products and services, geographic areas, and major customers. It also requires that selected information about segments be disclosed in interim financial statements. The new segment rules include determination of segments on the same basis used internally by a company for evaluating the performance of its operations and the allocation of its resources. The content of the new disclosures are similar to existing standards and include descriptive information, revenues, other components of earnings, and assets by segment.
A schedule of fixed maturities by contractual maturity at December 31, 1997 is shown below on an amortized cost basis and on a market value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
The amount of debt that becomes due during each of the next five years is: 1998, $347,152; 1999, $0; 2000, $0; and 2001, $0, and 2002, $0. Also in 1998, Torchmark intends to call $160 million principal amount of its Sinking Fund Debentures.
The Senior Notes, due May 1, 1998, are not redeemable prior to maturity. They were issued in the principal amount of $200 million. Interest is payable on May 1 and November 1 of each year at a rate of 9 5/8%. These notes have equal priority with other Torchmark unsecured indebtedness.
Restrictions on cash: A portion of the cash held in financial service subsidiaries that function as broker-dealers has been segregated for the benefit of customers in compliance with security regulations. This amount was $14.9 million at December 31, 1997 and $15.0 million at December 31, 1996.