We sell universal life, variable universal life, and traditional life insurance and traditional and variable annuity products. Through December 31, 2000, these products were principally marketed through a core distribution force consisting of approximately 1,645 exclusive Farm Bureau agents in 14 midwestern and western states. On January 1, 2001, our agency force and geographic marketing territory expanded with the acquisition of the assets and liabilities of Kansas Farm Bureau Life Insurance Company, a single-state life insurance company selling traditional life and annuity products in the state of Kansas. At December 31, 2000, Kansas Farm Bureau Life had 336 exclusive agents and held the largest market share of combined life insurance and annuity business in the state of Kansas.
In accordance with accounting principles generally accepted in the United States (GAAP), premiums and considerations received for interest sensitive products such as universal life insurance and ordinary annuities are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for interest sensitive products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses. The Life Companies receive investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Amounts for interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements.
earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity. Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year based on the level of claims incurred under insurance retention limits. The profitability of the Life Companies is primarily affected by fluctuations in mortality, morbidity, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency. We have the ability to mitigate adverse experience through adjustments to credited interest rates, policyholder dividends or cost of insurance charges.
Revenues and income from continuing operations are primarily derived from our life insurance segment. Revenues and expenses of our other segments, which consist of investment advisory, marketing and distribution, leasing and management operations, are principally recorded in the other income and other expense line items on the Consolidated Statements of Income. See Note 14 of the Notes to Consolidated Financial Statements for additional information regarding segment information.
Net income totaled $39.3 million in 2000, $55.7 million in 1999 and $53.9 million in 1998. The decrease in net income in 2000 is generally attributable to an increase in realized losses on investments, due principally to writedowns for other-than-temporary impairments in value. In addition, net investment income decreased due primarily to a decrease in fee income from mortgage loan prepayments and bond calls. These items are partially offset by an increase in equity income. The increase in net income in 1999 is primarily the result of a decrease in realized losses on investments and increased equity income. These items are offset by an increase in operating expenses relating to the closing of an administrative service center and an increase in the level of operations to support our expanding variable alliances. In addition, net investment income decreased in 1999 due partially to a decrease in fee income from mortgage loan prepayments and bond calls. Adjusted operating income, which does not include the impact of realized gains and losses on investments and other items that management believes are not indicative of operating trends, totaled $54.5 million in 2000, $55.4 million in 1999 and $56.1 million in 1998. The following is a reconciliation of net income to adjusted operating income.
The adjustment for realized losses on investments noted in the table above is net of adjustments for that portion of amortization of deferred policy acquisition costs, unearned revenue reserve, value of insurance in force acquired and income taxes attributable to such gains and losses.
The change in earnings per common share from year to year is positively impacted by a decrease in the weighted average common shares outstanding during the three-year period ended December 31, 2000. Weighted average common shares outstanding, assuming dilution, totaled 30,799,891 in 2000, 32,829,972 in 1999 and 34,400,513 in 1998. These decreases are the result of acquisitions of common stock by the Company. Weighted average shares outstanding in 2001 will be similarly impacted by the acquisition of 3,750,018 shares during the fourth quarter of 2000.
Our acquisition of the assets and liabilities of Kansas Farm Bureau Life on January 1, 2001 impacts our financial position and results of operations. See "Kansas Farm Bureau Life Insurance Company Acquisition - Subsequent Event" for additional information regarding the acquisition.
Effective September 1, 2000, we entered into a 100% coinsurance agreement to reinsure our individual disability income business with an unaffiliated insurer. As a result, the Consolidated Statements of Income include the operating results from our individual accident and health business only through August 31, 2000. A loss of $0.7 million on the coinsurance transaction has been deferred and is being recognized over the term of the underlying policies. Effective September 1, 2000, our agents began to offer a long-term disability income product underwritten by one of our variable alliance partners. We do not share in the risks, costs or profits of the new product, but earn a commission on new sales. We still have a small block of group long-term disability income business that has annualized premiums of approximately $0.9 million.
NET INVESTMENT INCOME, which excludes investment income on separate account assets relating to variable products, decreased 2.0% in 2000 to $221.4 million and 1.0% in 1999 to $225.8 million. The decreases are attributable to decreases in yield, partially offset by increases in average invested assets. Average invested assets (based on assets excluding the impact of recording certain fixed maturity securities at market value) totaled $2,991.3 million in 2000, $2,982.1 million in 1999 and $2,895.5 million in 1998. The annualized yield earned on average invested assets was 7.40% in 2000 compared to 7.57% in 1999 and 7.88% in 1998. The yield during 2000 and 1999 declined due to changing market conditions and a reduction in the amount of prepayment and bond call fee income. Fee income from mortgage loan prepayments and bond calls totaled $0.4 million in 2000, $5.2 million in 1999 and $9.8 million in 1998. In addition, we recorded $1.7 million in interest income during 1999 relating to the settlement of a fixed maturity security that had been in default. We had discontinued the accrual of interest on this security during 1996. Net investment income in 2001 will be impacted by our acquisition of 3,750,018 FBL Class A common shares for $75.3 million during the fourth quarter of 2000.
REALIZED LOSSES ON INVESTMENTS increased to $26.0 million in 2000 and decreased to $2.3 million in 1999. Realized losses include writedowns of investments that became other-than-temporarily impaired totaling $24.5 million in 2000, $7.2 million in 1999 and $9.4 million in 1998. These writedowns are the result of sustained operating losses, defaults on loan payments, declarations of bankruptcy, unsuccessful efforts to raise capital and various other operational or economic factors that became evident in the respective years. Approximately $14.4 million of the realized losses in 2000 were from eight securities that were of investment grade when acquired. The level of realized
gains (losses) is subject to fluctuation from year to year depending on the prevailing interest rate and economic environment and the timing of the sale of investments.
OTHER INCOME decreased 6.3% in 2000 to $18.9 million and 2.8% in 1999 to $20.2 million. The decrease in 2000 is primarily due to a decrease in the level of leasing and investment advisory services provided to affiliates and third parties. The decrease in 1999 is primarily due to a decrease in rental income. A summary of our policy benefits is as follows:
INTEREST SENSITIVE PRODUCT BENEFITS increased 3.5% in 2000 to $127.6 million and 0.6% in 1999 to $123.2 million. The components of interest sensitive product benefits, along with selected average contractual interest crediting rates, are as follows:
The average crediting rate on our product portfolio has been relatively consistent during 2000 and 1999. However, due to competitive factors, we did increase the crediting rate on our flexible premium deferred annuity 0.25% in September 2000. In addition, we decreased the crediting rate on our universal life contracts 0.15% in November 2000. During 1998 we reduced the crediting rate on many of our products, in response to the general decline in market interest rates during that year. Interest sensitive death benefits increased due to an increase in the amount of insurance in force. Interest sensitive death benefits can tend to fluctuate from year to year as a result of mortality experience.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 1.3% in 2000 to $25.0 million and 1.8% in 1999 to $25.4 million. The decrease for 2000 is primarily attributable to a decrease in the amount of participating business in force. The decrease for 1999 is principally due to a decrease in the average interest rate used in the dividend formula for these policies. This average interest rate was 5.72% at December 31, 2000 and 1999 and 5.84% at December 31, 1998.
INTEREST EXPENSE increased 43.2% in 2000 to $3.7 million and 51.1% in 1999 to $2.6 million due primarily to increases in average debt outstanding.
INCOME TAXES decreased 47.5 % in 2000 to $13.6 million and 1.9% in 1999 to $25.9 million. The effective tax rate was 30.3% for 2000, 31.9% for 1999 and 31.8% for 1998. The effective tax rates were lower than the federal statutory rate of 35% due primarily to the tax benefit associated with the payment of dividends on mandatorily redeemable preferred stock of subsidiary trust, tax-exempt interest and tax-exempt dividend income in 2000, 1999 and 1998. The impact of these permanent differences, which are relatively consistent from year to year, on the effective tax rate is more significant in 2000 due to the decrease in pre-tax income.
EQUITY INCOME, NET OF RELATED INCOME TAXES, increased 207.0% in 2000 to $12.2 million and 215.7% in 1999 to $4.0 million. Equity income includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies where we exhibit some control but have a minority ownership interest. Given the timing of availability of financial information from these entities, we will consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are venture capital investment companies, whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. The income in 2000 is primarily driven by unrealized appreciation on two internet-related equity securities owned by two of these venture capital investment companies. A substantial portion of the positions held by the equity investees in these two entities was distributed to us and subsequently sold during 2000. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of equity securities held by the investment partnerships, timing and success of initial public offerings and other exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures. Equity income includes goodwill amortization totaling $0.4 million in 2000, 1999 and 1998.
The mortgage-backed portfolio includes pass-through and collateralized mortgage obligation (CMO) securities. With a pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. We invest in sequential tranches, which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We do not purchase certain types of collateralized mortgage obligations that we believe would subject the investment portfolio to greater than average risk. These include, but are not limited to, interest only, principal only, floater, inverse floater, PAC II, Z and support tranches.
The following table sets forth the par value, amortized cost and carrying value of our mortgage and asset-backed securities at December 31, 2000, summarized by type of security.
Securities and indebtedness of related parties decreased 14.4% to $52.5 million at December 31, 2000 due primarily to distributions from equity investees and unrealized depreciation on fixed maturity securities owned by an equity investee. These items were partially offset by the impact of equity income on the securities and indebtedness balance during 2000. Reinsurance recoverable increased 966.3% to $51.3 million at December 31, 2000 due principally to the reinsurance of our individual disability income business. Deferred policy acquisition costs increased 6.2% in 2000 to $251.0 million. This increase is due to the capitalization of costs incurred with new sales, partially offset by amortization and an $11.8 million decrease resulting from the reinsurance of our individual disability income business. Assets held in separate accounts increased 27.9%, to $327.4 million at December 31, 2000 due primarily to net transfers to the separate accounts resulting from sales of our variable products. At December 31, 2000, we had total assets of $3,704.0 million, a 1.1% increase from total assets at December 31, 1999.
Stockholders' equity decreased 5.6%, to $476.8 million at December 31, 2000, compared to $505.0 million at December 31, 1999. This decrease is principally attributable to stock repurchases and dividends paid, offset, in part, by net income and a change in net unrealized investment gains/losses.
A major component of our asset-liability management program is structuring the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of our insurance liabilities. We use computer models to perform simulations of the cash flows generated from existing insurance policies under various interest rate scenarios. Information from these models is used in the determination of interest crediting rates and investment strategies. Effective duration is a common measure for price sensitivity to changes in interest rates. It measures the approximate percentage change in the market value of a portfolio when interest rates change by 100 basis points. This measure includes the impact of estimated changes in portfolio cash flows from features such as bond calls and prepayments. When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is reduced because a change in the value of assets should be largely offset by a change in the value of liabilities. The effective duration of our fixed maturity portfolio was approximately 4.3 at December 31, 2000 and 4.7 at December 31, 1999. The effective duration of the interest sensitive products was approximately 4.7 at December 31, 2000 and 4.5 at December 31, 1999.
Equity price risk is not material to us due to the relatively small equity portfolio held at December 31, 2000. However, we do earn investment management fees (on those investments managed by us) and mortality and expense fee income based on the value of our separate accounts. On an annualized basis, the investment management fee rates range from 0.20% to 0.45% for 2000 and 1999. The mortality and expense fee rates range from 0.90% to 1.40% for 2000 and 1999. As a result, revenues from these sources do fluctuate with changes in the market value of the equity, fixed maturity and other securities held by the separate accounts.
Parent company cash inflows from operations consists primarily of (i) dividends from subsidiaries, if declared and paid, (ii) fees which it charges the various subsidiaries and affiliates for management of their operations, (iii) expense reimbursements from subsidiaries and affiliates and (iv) tax settlements between the parent company and its subsidiaries. Cash outflows are principally for salaries and other expenses related to providing these management
We received $25.0 million in cash on March 31, 1998 in connection with the sale of Utah Insurance. We received $5.2 million (before applicable taxes) subsequent to the sale in accordance with an earn-out provision included in the underlying sales agreement. We may receive additional consideration during each of the two years in the period ending December 31, 2003, in accordance with the earn-out provision. Under the earn-out arrangement, we and Farm Bureau Mutual share equally in the dollar amount by which the incurred losses on Utah Insurance's direct business, net of reinsurance ceded, is less than the incurred losses assumed in the valuation model used to derive the initial $25.0 million acquisition price. The earn-out calculation is performed and settlements (subject to a maximum of $2.0 million per year) are made on a calendar year basis.
The parent company had available cash and investments totaling $22.2 million at December 31, 2000. As of December 31, 2000, we had no commitments for capital expenditures other than for the assets and liabilities of Kansas Farm Bureau Life, which was funded with the issuance of Series C preferred stock on January 1, 2001.
The Life Companies' cash inflows consist primarily of premium income, deposits to policyholder account balances, product charges on variable products, income from investments, sales, maturities and calls of investments and repayments of investment principal. The Life Companies' cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, dividends and current operating expenses. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. The Life Companies' liquidity positions continued to be favorable in 2000, with cash inflows at levels sufficient to provide the funds necessary to meet their obligations.
We have a $12.0 million line of credit with Farm Bureau Mutual in the form of a revolving demand note. Borrowings on the note, which totaled $9.9 million at December 31, 2000 and $11.7 million at December 31, 1999, were used to acquire assets that were leased to certain affiliates, including Farm Bureau Mutual. Interest was payable at a rate equal to the prime rate of a national bank (9.50% at December 31, 2000). During January 2001, this note was repaid through the sale of the related assets to Farm Bureau Mutual.
We anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. We believe that the current level of cash and available-for-sale and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage and asset-backed securities, mortgage loans and our insurance products, are adequate to meet our anticipated cash obligations for the foreseeable future. Our investment portfolio at December 31, 2000, included $64.7 million of short-term investments and $271.1 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value.
FBL FINANCIAL GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FBL Financial Group, Inc. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
FBL Financial Group, Inc. (we or the Company) operates predominantly in the life insurance industry through its principal subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust) (collectively, the Life Companies). We currently market individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in 15 midwestern and western states through an exclusive agency force. Variable universal life insurance and variable annuity contracts are also marketed in these and other states through alliances with other insurance companies and a regional broker/dealer. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage four Farm Bureau affiliated property-casualty companies.
Fixed maturity securities, comprised of bonds and redeemable preferred stocks that we have a positive intent and ability to hold to maturity, are designated as "held for investment." Held for investment securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the market value of these securities, except for declines that are other than temporary, are not reflected in our financial statements. Fixed maturity securities which may be sold are designated as "available for sale." Available for sale securities are recorded at market value and unrealized gains and losses on these securities are included directly in stockholders' equity as a component of accumulated other comprehensive income or loss. The unrealized gains and losses included in accumulated other comprehensive income or loss are reduced by a provision for deferred income taxes and adjustments to deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserve that would have been required as a charge or credit to income had these amounts been realized. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on mortgage and asset-backed securities incorporates prepayment assumptions to estimate the securities' expected lives.
Equity securities, comprised of common and non-redeemable preferred stocks, are reported at market value. The change in unrealized appreciation and depreciation of equity securities is included directly in stockholders' equity, net of any related deferred income taxes, as a component of accumulated other comprehensive income or loss.
Investment real estate is reported at cost less allowances for depreciation. Real estate acquired through foreclosure, which is included with investment real estate in our consolidated balance sheets, is recorded at the lower of cost (which includes the balance of the mortgage loan, any accrued interest and any costs incurred to obtain title to the property) or estimated fair value on the foreclosure date. The carrying value of these assets is subject to regular review. If the fair value, less estimated sales costs, of real estate owned decreases to an amount lower than its carrying value, a specific writedown is taken. Such reductions are recorded as realized losses on investments.
The liability for future policy benefits for participating traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality, and other factors underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 2.5% to 6.0%. The average rate of assumed investment yields used in estimating gross margins was 7.74% in 2000, 7.83% in 1999 and 8.03% in 1998. Accrued dividends for participating business are established for anticipated amounts earned to date that have not been paid. The declaration of future dividends for participating business is at the discretion of the Board of Directors. Participating business accounted for 38% of receipts from policyholders during 2000 and represented 16% of life insurance in force at December 31, 2000. Participating business accounted for 40% of receipts from policyholders during 1999 (1998 - 41%) and represented 17% of life insurance in force at December 31, 1999.
We use reinsurance to manage certain risks associated with our insurance operations. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential risks arising from large claims and provide additional capacity for growth. The cost of reinsurance ceded is generally amortized over the contract periods of the reinsurance agreements.
All insurance-related revenues, benefits and expenses are reported net of reinsurance ceded.
Unrealized gains and losses on our available-for-sale securities are included in accumulated other comprehensive income (loss) in stockholders' equity. Other comprehensive income (loss) excludes net investment gains (losses) included in net income which merely represent transfers from unrealized to realized gains and losses. These amounts totaled ($14.4) million in 2000, ($0.1) million in 1999 and ($0.9) million in 1998. These amounts, which have been measured through the date of sale, are net of income taxes and adjustments to deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserve totaling $9.5 million in 2000, $0.2 million in 1999 and $0.5 million in 1998.
Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform to the 2000 financial statement presentation.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (Statement) No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 2000, the FASB issued Statement 138, "Accounting for Certain Derivative Instruments and Certain Hedging Acitivites." Statement No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. Statement No. 133 allows companies to transfer securities classified as held for investment to either the available-for-sale or trading categories in connection with the adoption of the new standard. Statement 138 amends Statement 133 to clarify the appropriate accounting for certain hedging transactions. We adopted the Statements on January 1, 2001, their effective dates.
The carrying value and estimated market value of our portfolio of fixed maturity securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The change in net unrealized investment gains/losses are recorded net of deferred income taxes and other adjustments for assumed changes in the amortization pattern of deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserve totaling $18.6 million in 2000, ($64.2) million in 1999 and $1.2 million in 1998.
The carrying value of impaired loans (those loans in which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements) were under $0.1 million at December 31, 2000 and 1999.
Realized gains (losses) and the change in unrealized appreciation/depreciation on investments, excluding amounts attributed to investments held by subsidiaries engaged in the broker-dealer industry, are summarized below:
Income taxes (credits) include a provision of ($9.1) million in 2000, ($0.8) million in 1999 and ($1.7) million in 1998 for the tax effect of realized gains and losses.
During 2000, equity investees distributed to us equity securities with a fair value totaling $14.5 million. Also during 2000, we received an interest in ten real estate properties with a fair value of $5.0 million in satisfaction of a fixed maturity security that had been in default. These transactions were treated as noncash items for purposes of the 2000 statement of cash flow.
At December 31, 2000, affidavits of deposits covering investments with a carrying value totaling $2,595.7 million were on deposit with state agencies to meet regulatory requirements.
The carrying value of investments which have been non-income producing for the twelve months preceding December 31, 2000 include real estate, fixed maturities and other long-term investments totaling $7.7 million.
FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' FUNDS: Fair values of our liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities, deposit administration funds and supplementary contracts) are estimated at cash surrender value, the cost we would incur to extinguish the liability. We are not required to estimate the fair value of our liabilities under other insurance contracts.
In total, insurance premiums and product charges have been reduced by $9.5 million in 2000, $5.3 million in 1999 and $5.9 million in 1998 and insurance benefits have been reduced by $6.2 million in 2000, $2.4 million in 1999 and $2.2 million in 1998 as a result of cession agreements.
We assume variable annuity business from American Equity and another alliance partner through a modified coinsurance arrangement. Product charges from this business totaled $0.1 million in 2000 and less than $0.1 million in 1999 and 1998. In 1998, we assumed a block of ordinary annuity policies with reserves totaling $22.0 million from another alliance partner.
Net amortization of the value of insurance in force acquired, based on expected future gross profits/margins, for the next five years and thereafter is expected to be as follows: 2001 - $1.1 million; 2002 - $1.0 million; 2003 - $1.0 million; 2004 - $0.9 million; 2005 - $0.8 million; and thereafter, through 2023 - $9.2 million.
We have a $12.0 million line of credit with Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate, in the form of a revolving demand note. Borrowings on the note, which totaled $9.9 million at December 31, 2000 and $11.7 million at December 31, 1999 were used to acquire assets that were leased to certain affiliates, including Farm Bureau Mutual. Interest was payable at a rate equal to the prime rate of a national bank (9.50% at December 31, 2000 and 8.50% at December 31, 1999). Rental income from the related leases included a provision for interest on the carrying value of the assets. During January 2001, this note was paid off, principally by transferring the underlying assets to Farm Bureau Mutual. No gain or loss was recorded on this transaction, as fair value of the assets was equal to book value on the transfer date.
Minority interest in the consolidated balance sheets includes $97.0 million of 5% Preferred Securities issued by FBL Financial Group Capital Trust (the Trust), one of our wholly-owned subsidiaries. FBL Financial Group, Inc. (parent company) issued 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes) with a principal amount of $100.0 million to support the 5% Preferred Securities. The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes. As of December 31, 2000 and 1999, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
shares in payment of the stock dividend. In addition, the 5.0 million shares of Series B preferred stock have non-dilutive voting rights. As a result, voting rights on these shares increased proportionately while the number of shares outstanding did not change.
We participate with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. We contribute FBL Financial Group, Inc. stock in the amount equal to 50% of an employee's contributions up to 4% of the annual salary contributed by the employees. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Related expense totaled $0.4 million in 2000 and $0.3 million in 1999 and 1998.
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for our stock options. No compensation expense is recognized under APB 25 because the exercise price of our stock options equals the market price of the underlying stock on the date of grant. Under the alternative accounting method provided by Statement No. 123, compensation expense is recognized in an amount equal to the estimated fair value of stock options on the date of grant. We have not adopted the accounting provisions of Statement No. 123 because the valuation of non-traded stock options is highly subjective and, in management's opinion, the existing pricing models do not necessarily provide a reliable single measure of the fair value of our options.
Pro forma information regarding net income and earnings per common share is required by Statement No. 123, and has been determined as if we had accounted for the stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
We have management agreements with Farm Bureau Mutual and other affiliates under which we provide general business, administrative and management services. Fee income for these services totaled $1.1 million in 2000, $0.8 million in 1999 and $0.5 million in 1998. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the Iowa Farm Bureau Federation, provides certain management services to us under a separate arrangement. We incurred related expenses totaling $0.9 million in 2000, $0.5 million in 1999 and $0.7 million in 1998.
We have marketing agreements with the Farm Bureau property-casualty companies operating within our marketing territory, including Farm Bureau Mutual and other affiliates. Under the marketing agreements, the property-casualty companies are responsible for development and management of our agency force for a fee equal to a percentage of commissions on first year life insurance premiums and annuity deposits. We paid $6.0 million in 2000, $5.0 million in 1999 and $4.5 million in 1998 to the property-casualty companies under these arrangements.
We are licensed by the Iowa Farm Bureau Federation to use the "Farm Bureau" and "FB" designations in Iowa. In connection with this license, royalties of $0.7 million in 2000, $0.9 million in 1999 and $0.7 million in 1998 were paid to the Iowa Farm Bureau Federation. We have similar arrangements with Farm Bureau organizations in other states in our market territory. Total royalties paid to Farm Bureau organizations other than the Iowa Farm Bureau Federation were $1.2 million in 2000 and $1.0 million in 1999 and 1998.
We have administrative services agreements with American Equity under which we provide underwriting, claims processing, accounting, compliance and other administrative services primarily relating to certain variable insurance products underwritten by them. Fee income from performing these services totaled $0.3 million in 2000 and 1999 and $0.2 million in 1998
Income from discontinued operations in 1998 was comprised of revenues totaling $12.9 million and benefits and expenses totaling $12.6 million.
In addition to merging Western Life into Farm Bureau Life, we also closed an administrative processing center during 1999. As a result of the closing of the service center, a leased property was vacated, 22 positions were eliminated and moving costs were incurred. During 1999, we charged to expense costs totaling $1.2 million for related severance benefits, lease costs and other costs primarily associated with the closing of the service center. The restructuring expenses are recorded in the underwriting, acquisition and insurance expense line of the 1999 consolidated statement of income.
SEGMENT SOURCE OF REVENUES Investment advisory.......... Fee income from the management of investments Marketing and distribution... Commissions and distribution fee income from the sale of mutual funds and insurance products not issued by us Leasing...................... Income from operating leases Corporate.................... Fees from management and administrative services
Our investment in equity method investees and the related equity income are attributable to the life insurance segment. The exchange of our home office properties for Class A common stock described in Note 7 is attributable to the life insurance segment.
Transactions between segments are recorded at negotiated rates generally intended to be at levels commensurate with charges that would be assessed to unaffiliated parties. Interest expense and expenditures for long-lived assets were not significant during 2000, 1999 or 1998.
Earnings per common share for each quarter is computed independently of earnings per common share for the year. As a result, the sum of the quarterly earnings per common share amounts may not equal the earnings per common share for the year due primarily to transactions affecting the number of weighted average common shares outstanding in each quarter.