The following historical financial data of SMC was derived from its audited consolidated financial statements. This historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the SMC Consolidated Financial Statements and related Notes.
SMC acquired Savers Life on March 12, 1998 and Midwestern Life on October 30, 1998. These acquisitions were accounted for using the purchase method of accounting and are included in the SMC Consolidated Financial Statements commencing with their respective acquisition effective dates.
PRESENT VALUE OF FUTURE PROFITS. In accordance with industry practice, when SMC purchases additional insurance business, it assigns a portion of the purchase price, called the present value of future profits, to the right to receive future cash flows arising from existing insurance policies. This asset is recorded when the business is purchased at the value of projected future cash flows on existing policies, less a discount to present value. As future cash flows emerge, they are treated as a recovery of this asset. Therefore, if cash flows emerging from the purchased or recaptured business during a period exactly equal the projections, they are offset by that period's amortization of the cost of the policies purchased. In that event, the only income statement effect from the purchased business is the realization of the discount that was initially deducted from the asset to reflect its present value. Changes in the future annual amortization of this asset are not expected to have a significant effect on the results of operations, because the amount of amortization is expected to be equal to the profits emerging from the purchased policies, net of interest on the unrecovered present value of future profits balance. This asset is amortized over the expected life of the related policies purchased. Present value of future profits is increased for the estimated effect of realizing unrealized investment losses and decreased for the estimated effect of realizing unrealized investment gains.
UNIT-LINKED PRODUCT ACCOUNTING. Separate account assets and liabilities are maintained primarily for contracts of which the majority represents unit-linked products where benefits on surrender and maturity are not guaranteed. They generally represent funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Investment income and investment gains and losses accrue directly to such policyholders. SMC earns income from the investment management fee it charges on such unit-linked contracts, which ranges from .8% to 1.2% of the value of the underlying separate accounts.
During 1998, net investment income increased $5.1 million or 18%, to $33.7 million. Average invested assets (at book value) increased by $89.8 million or 23% due to the growth in insurance liabilities from the acquisitions of Savers Life and Midwestern Life, which contributed $4.2 million of investment income for the period. Net investment income also increased due to the impact from the new equity indexed product of $.6 million.
Amortization in 1999 increased $1.6 million or 33%, to $6.3 million. This increase relates to additional amortization of deferred acquisition costs, due to increased business in force, and the recognition of additional profits for the period. Additional profits were recognized from i) the realization of profits from increased sales of annuity products in recent periods and ii) the realization of profits from the purchased insurance business of Savers Life and Midwestern Life.