PRETAX INCOME totaled $707.3 million in 1998, $537.1 million in 1997, and $392.0 million in 1996. The 31.7% improvement in 1998 over 1997 and the 37.0% improvement in 1997 over 1996 primarily resulted from increased net investment income and fee income. These favorable factors were partially offset by increased amortization of deferred acquisition costs, higher general and administrative expenses and, only with respect to 1998, higher net realized investment losses.
NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest paid on fixed annuities and other interest-bearing liabilities, increased to $841.6 million in 1998 from $679.4 million in 1997 and $492.8 million in 1996. These amounts equal 3.36% on average invested assets (computed on a daily basis) of $25.03 billion in 1998, 3.26% on average invested assets of $20.86 billion in 1997 and 3.43% on average invested assets of $14.36 billion in 1996. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1995, net investment income on related average invested assets would have been 3.14% in 1997 and 2.97% in 1996.
Total interest and dividend expense totaled $1.32 billion in 1998, $1.12 billion in 1997 and $761.5 million in 1996. The average rate paid on all interest-bearing liabilities was 5.70% in 1998, compared with 5.66% in 1997 and 5.73% in 1996. Interest-bearing liabilities averaged $23.15 billion during 1998, compared with $19.71 billion during 1997 and $13.29 billion during 1996. On a pro forma basis, assuming the Acquisitions had been consummated on October 1, 1995, the average rate paid on all interest-bearing liabilities would have been 5.62% in 1997 and 5.55% in 1996. These increases in overall rates paid primarily reflect year-over-year increases in the percentage of average interest-bearing liabilities composed of guaranteed investment contracts ("GICs"), which, on average, bear higher interest rates while generally bearing lower acquisition costs, than the Company's other interest-bearing liabilities.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $1.89 billion at September 30, 1998. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1998, Secured Loans consisted of $982.0 million of publicly traded securities and $903.5 million of privately traded securities. These Secured Loans are composed of loans to 310 borrowers spanning 44 industries, with 26% of these assets concentrated in financial institutions and 15% concentrated in utilities. No other industry concentration constituted more than 6% of these assets.
There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities. The primary risks associated with Total Return Agreements are the credit risk on the underlying non-investment-grade bonds, the risk of potential loss due to bond market fluctuations and the risk associated with counterparty nonperformance. The primary risk associated with the Company's Reverse Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Total Return Agreements, Reverse Repos and Swap Agreements are financially responsible and that the
The Company has a coordinated plan to repair or replace these noncompliant systems and to obtain similar assurances from third parties interfacing with the Company's systems and applications. In fiscal 1997, the Company recorded a $15.0 million provision for estimated programming costs to make necessary repairs of certain specific noncompliant systems. Management is making expenditures which it expects to ultimately total $15.0 million to replace certain other specific noncompliant systems, which expenditures will be capitalized as software costs and amortized over future periods. Both phases of the project are currently proceeding in accordance with the plan and management expects them to be substantially completed by the end of calendar 1998. Testing of both the repaired and replacement systems will be conducted during calendar 1999.