(2) Adjusted operating income equals net income adjusted to eliminate certain items which we believe are not indicative of operating trends because they are unusual and/or nonrecurring in nature, including the impact of realized gains (losses) on investments, gain on sale of discontinued operations and net income (loss) from a venture capital investment company subsidiary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(4) Net statutory premiums include premiums collected from annuities and universal life-type products. For GAAP reporting, such premiums received are not reported as revenues. Amounts include internal rollover premiums to variable universal life or variable annuity contracts totaling $17.1 million in 1999, $29.5 million in 1998, $14.1 million in 1997, $3.6 million in 1996 and $1.5 million in 1995.
We sell universal life, variable universal life, traditional life and disability income insurance and traditional and variable annuity products. These products are principally marketed through a core distribution force consisting of approximately 1,600 exclusive Farm Bureau agents in 14 midwestern and western states. Variable universal life and variable annuity products are also marketed in other states through alliances with unaffiliated Farm Bureau companies. We also market variable products through alliances with two life insurance companies and a regional broker-dealer not affiliated with Farm Bureau. 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 insurance companies.
Premium revenues reported for traditional life and disability income insurance products are recognized as revenues when due. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits.
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 15 of the Notes to Consolidated Financial Statements (page 59) for additional information regarding segment information.
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, 1999. Weighted average common shares outstanding totaled 32.8 million in 1999, 34.4 million in 1998 and 37.0 million in 1997. These decreases are the result of acquisitions of common stock by the Company during 1999, 1998 and 1997.
INTEREST SENSITIVE PRODUCT CHARGES increased 6.1% in 1999 to $55.4 million and 8.7% in 1998 to $52.2 million. These increases are due primarily to increased cost of insurance charges resulting from an increase in the volume and age of business in force. In addition, mortality and expense charges have increased as a result of growth in variable product account balances. Surrender charge income decreased 27.6% in 1999 to $2.1 million and increased 76.3% in 1998 to $2.9 million as a result of changes in the amount of interest sensitive product surrenders.
REALIZED GAINS (LOSSES) ON INVESTMENTS increased 52.0% in 1999 to a loss of $2.3 million and decreased 111.9% in 1998 to a loss of $4.9 million. Realized gains (losses) include writedowns of investments that became other-than-temporarily impaired totaling $7.2 million in 1999, $9.4 million in 1998 and $23.8 million in 1997. These writedowns are the result of sustained operating losses, unsuccessful efforts to raise capital and various other operational or economic factors that became evident in the respective years. Net realized gains in 1997 resulted primarily from the sale of equity securities. 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.
We decreased interest crediting rates on many of our products during 1999 and 1998 in response to the general decline in market interest rates during 1998. The impact of the decreases in interest crediting rates was partially offset by increases in the average account balances outstanding.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 1.8% in 1999 to $25.4 million and 0.1% in 1998 to $25.8 million. These decreases are primarily attributable to decreases in the average interest rate used in the dividend formula for these policies to 5.72% at December 31, 1999, from 5.84% at December 31, 1998 and 5.89% at December 31, 1997.
COMMISSION EXPENSE increased 6.7% in 1999 to $9.7 million and 1.0% in 1998 to $9.1 million. Commission expense increased during the periods due primarily to an increase in direct life insurance premiums collected.
INTEREST EXPENSE increased 51.1% in 1999 to $2.6 million and 13.2% in 1998 to $1.7 million due to an increase in average debt outstanding.
OTHER EXPENSES decreased 2.8% in 1999 to $15.0 million and increased 33.6% in 1998 to $15.5 million. Other expenses were relatively consistent during 1999 as the level of financial services provided to affiliates and third parties were comparable. The increase in 1998 is due principally to an increase in the level of leasing, management and financial services provided to affiliates and third parties during 1998 compared to 1997.
INCOME TAXES decreased 1.9% in 1999 to $25.9 million and 31.2% in 1998 to $26.4 million. The effective tax rate was 31.9% for 1999, 31.8% for 1998 and 33.5% for 1997. The effective tax rates were lower than the federal statutory rate of 35% due primarily to tax-exempt interest and dividend income and a tax benefit in 1999, 1998 and a portion of 1997 associated with the payment of dividends on mandatorily redeemable preferred stock of subsidiary trust.
EQUITY INCOME, NET OF RELATED INCOME TAXES, increased 215.7% in 1999 to $4.0 million and decreased 39.8% in 1998 to $1.3 million. Equity income includes our proportionate share of gains and losses on investments owned by the underlying partnerships and joint ventures. The level of these gains and losses is subject to fluctuation from year to year depending on the prevailing economic environment and the timing of the sale of investments held by the partnerships and joint ventures.
We expect to have pre-tax savings from these two transactions of approximately $1.4 million annually beginning in 2000. Approximately $0.5 million in pre-tax cost savings were earned during 1999 as a result of the restructuring.
Income (loss) from discontinued operations totaled $0.3 million for 1998 and $0.7 million for 1997. Revenues from discontinued operations totaled $12.9 million through the date of sale in 1998 and $53.2 million in 1997.
On March 30, 1998, we exchanged a subsidiary owning our home office properties for 2,536,112 unregistered shares of Class A common stock owned by the Iowa Farm Bureau Federation. We are leasing a portion of the properties back from a wholly-owned subsidiary of the Iowa Farm Bureau Federation under a 15-year operating lease. The value of the transaction, which was structured as a tax-free exchange of a real estate subsidiary, was $45.7 million, or $18.00 per common share. The book value of the properties was $24.7 million on the date of the exchange. A gain on the transaction of approximately $21.0 million was deferred and is being amortized over the term of the operating lease. The exchange did not have a significant impact on income from continuing operations in 1999 or 1998, nor is it expected to have a significant impact in the future. The impact is not significant because the increase in net expense associated with leasing the properties versus owning them directly is substantially offset by the amortization of the deferred gain on the transaction.
Many of our computer programs were originally written using two digits rather than four to define a particular year. As a result, these computer programs had time-sensitive software that could have recognized a date using "00" as the year 1900 rather than the year 2000. This could have caused a system failure or miscalculations causing disruptions to operations, including, but not limited to, a temporary inability to process transactions, send premium notices and calculate policy reserves and accruals. The Year 2000 could have also caused other non-information technology systems, such as telephone switches, to fail or malfunction.
The total incremental cost of the Year 2000 project (those costs which would not have been incurred had the Year 2000 issue not existed) attributable to continuing operations was $3.7 million and was funded through operating cash flows. Year 2000 modification costs incurred and charged to expense totaled $0.8 million in 1999, $2.2 million in 1998 and $0.7 million in 1997. We also incurred internal costs associated with the Year 2000 project. These
costs, which are principally payroll-related expenses for information systems personnel, have not been separately accounted for and, therefore, are not available. We expect costs incurred during 2000 related to the Year 2000 project to be negligible.
Despite our success to date, we could still experience a disruption to our operations as a result of the Year 2000. However, we believe the likelihood of experiencing Year 2000 problems is remote, as our critical systems and programs have been used in our daily operations since December 31, 1999 and, as stated previously, no related problems have been encountered.
Our total investment portfolio decreased 2.7% to $2,950.2 million at December 31, 1999 compared to $3,031.4 million at December 31, 1998. This decrease is primarily the result of a $162.5 million decrease in unrealized appreciation on fixed maturity securities classified as available for sale, partially offset by positive cash flows from operations. The decrease in unrealized appreciation on fixed maturity securities is the result of an increase in market interest rates at December 31, 1999 compared to December 31, 1998.
Mortgage and other asset-backed securities constitute a significant portion of our portfolio of securities. These securities were purchased at a time when we believed these types of investments provided superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity.
Stockholders' equity decreased 13.5%, to $505.0 million at December 31, 1999 compared to $583.6 million at December 31, 1998. This decrease is principally attributable to the decrease in unrealized appreciation on securities classified as available for sale and stock repurchases, partially offset by net income during 1999.
For a substantial portion of our business in force, we have the ability to adjust interest or dividend crediting rates in reaction to changes in portfolio yield. We had the ability to adjust rates on 93% of our liabilities at December 31, 1999 and 1998. However, the ability to adjust these rates is limited by competitive factors. Surrender rates could increase and new sales could be negatively impacted if the crediting rates are not competitive with the rates on similar products offered by other insurance companies and financial service institutions. In addition, if market rates were to decrease substantially and stay at a low level for an extended period of time, our spread could be lowered due to interest rate guarantees on many of our interest sensitive products. At December 31, 1999 and 1998, interest rate guarantees on interest sensitive products ranged from 3.0% to 5.5%. The weighted average guarantee was 3.7% at December 31, 1999 and 1998.
We design our products and manage our investment portfolio in a manner to encourage persistency and to help ensure targeted spreads are earned. In addition to the ability to change interest crediting rates on our products, certain interest sensitive contracts have surrender and withdrawal penalty provisions. The following is a summary of the surrender and discretionary withdrawal characteristics of our interest sensitive products and supplementary contracts without life contingencies:
If interest rates were to increase 10% from levels at December 31, 1999 and 1998, our fixed maturity securities and short-term investments, net of corresponding changes in the values of deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserves, would decrease approximately $75.1 million at December 31, 1999 and $49.3 million at December 31, 1998. This hypothetical change in value does not take into account any offsetting change in the value of insurance liabilities for investment contracts since we estimate such value to be the cash surrender value of the underlying contracts. If interest rates were to decrease 10% from levels at December 31, 1999 and 1998, the fair value of our debt and mandatorily redeemable preferred stock of subsidiary trust would increase $2.9 million at December 31, 1999 and $3.1 million at December 31,1998.
Equity price risk is not material to us due to the relatively small equity portfolio held at December 31, 1999. 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 1999 and 1998. The mortality and expense fee rates range from 0.90% to 1.40% for 1999 and 1998. 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.
We received $25.0 million in cash on March 31, 1998 in connection with the sale of Utah Insurance. We received $3.2 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 three 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.
We acquired Class A common shares totaling 1,322,920 in 1999, 3,497,648 in 1998 and 1,930,740 in 1997 as a result of three stock repurchases and the exchange of a subsidiary owning our home office properties. These transactions reduced stockholders' equity $25.7 million in 1999, $70.7 million in 1998 and $24.8 million in 1997.
mortgage loans and our insurance products, are adequate to meet our anticipated cash obligations for the foreseeable future. Our investment portfolio at December 31, 1999, included $106.5 million of short-term investments and $271.7 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.
The Audit Committee of the Board of Directors, composed solely of nonmanagement directors, meets periodically with management, internal auditors and Ernst & Young LLP to review internal accounting control, audit activities, auditor independence and financial reporting matters. The internal auditors and Ernst & Young LLP have free access to the Audit Committee, with and without the presence of management, to discuss the adequacy of internal controls and to review the quality of financial reporting. The Audit Committee is also responsible for making recommendations to the Board of Directors concerning the selection of independent auditors.
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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 14 midwestern and western states. 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.
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 fair value as determined at or before 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 valuation allowance is established for the difference. This valuation allowance can be
reduced or eliminated should the fair value of the property increase. Changes in this valuation allowance are recognized as realized gains or losses on investments. No allowance was recorded at December 31, 1999 or December 31, 1998.
Other long-term investments include certain nontraditional investments and securities held by subsidiaries engaged in the broker-dealer or venture capital investment company industries. Nontraditional investments include a debt-related instrument and investment deposits which are reported at cost. In accordance with accounting practices for the broker-dealer and investment company industries, marketable securities held by subsidiaries in these industries are valued at market value if readily marketable or at fair value, as determined by the Board of Directors of the subsidiary holding the security, if not readily marketable. The resulting difference between cost and market is included in the statements of income as net investment income. Realized gains and losses are also reported as a component of net investment income.
Securities and indebtedness of related parties include investments in partnerships and corporations over which we may exercise significant influence. Such investments are accounted for using the equity method. Changes in the value of the Company's investment in equity investees attributable to capital transactions of the investee, such as an additional offering of stock, are recorded directly to stockholders' equity. Securities and indebtedness of related parties also includes advances and loans to the partnerships and corporations which are principally reported at cost.
The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration, and if this review indicates a decline in market value that is other than temporary, carrying value in the investment is reduced to its estimated realizable value (the sum of the estimated nondiscounted cash flows for securities or fair value for mortgage loans on real estate) and a specific writedown is taken. Such reductions in carrying value are recognized as realized losses on investments. Realized gains and losses on sales are determined on the basis of specific identification of investments. If we expect that an issuer of a security will modify its payment pattern from contractual terms but no writedown is required, future investment income is recognized at the rate implicit in the calculation of net realizable value under the expected payment pattern.
For participating traditional life insurance and interest sensitive products (principally universal life insurance policies and annuity contracts), these costs are being amortized generally in proportion to expected gross profits (after dividends to policyholders, if applicable) from surrender charges and investment, mortality, and expense margins. That amortization is adjusted retrospectively when estimates of current or future gross profits/margins (including the impact of investment gains and losses) to be realized from a group of products are revised. For nonparticipating traditional life and accident and health insurance products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits.
In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP, which was adopted prospectively as of January 1, 1999, requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. Prior to the adoption of SOP 98-1, we capitalized external software development costs and charged internal costs, primarily payroll and related items, to expense as they were incurred. Pursuant to the SOP, these internal costs are now capitalized. The effect of adopting the SOP was to increase net income for the year ended December 31, 1999 by $0.2 million.
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 assumptions 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 7.83% in 1999, 8.03% in 1998 and 8.15% in 1997. Accrued dividends for participating business are established for anticipated amounts earned to date for the period through the policy's next anniversary and are provided for as a separate liability. The declaration of future dividends for participating business is at the discretion of the Board of Directors. Participating business accounted for 40% of receipts from policyholders during the year ended December 31, 1999 and represented 17% of life insurance in force at December 31, 1999. Participating business accounted for 41% of receipts from policyholders during the year ended December 31, 1998 and represented 18% of life insurance in force at December 31, 1998.
Interest crediting rates for interest sensitive products ranged from 4.00% to 6.25% in 1999, from 4.00% to 6.50% in 1998 and from 4.00% to 7.00% in 1997.
We had undiscounted reserves of $1.3 million at December 31, 1999 and 1998 to cover estimated future assessments on known insolvencies. We had assets totaling $2.8 million at December 31, 1999 and $3.1 million at December 31, 1998 representing estimated premium tax offsets on paid and future assessments. Expenses (credits) incurred for guaranty fund assessments, net of related premium tax offsets, totaled ($0.1) million in 1999, ($1.2) million in 1998 and $1.9 million (including $1.6 million related to the adoption of an accounting standard requiring the accrual of assessments) in 1997. It is anticipated that estimated future guaranty fund assessments on known insolvencies will be paid during the two year period ended December 31, 2001 and substantially all the related future premium tax offsets will be realized during the six year period ended December 31, 2005. We believe the reserve for guaranty fund assessments is sufficient to provide for future assessments based upon known insolvencies and projected premium levels.
Other income and other expenses include revenue and expenses generated by our various non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing services. They also include revenues and expenses generated by our parent company for management services. Certain of these activities are performed on behalf of affiliates of the Company. In addition, certain revenue generated by our insurance subsidiaries is classified as other income. Revenues of the insurance subsidiaries included as other income aggregated $0.6 million in 1999, $1.4 million in 1998 and $4.0 million in 1997. Lease income from leases with affiliates totaled $7.9 million in 1999, $5.8 million in 1998 and $3.0 million in 1997. Investment advisory fee income from affiliates totaled $1.5 million in 1999, $1.3 million in 1998 and $1.2 million in 1997.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (Statement) No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 also 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. The Statement's effective date for the Company has been extended to the fiscal year beginning January 1, 2001, with earlier adoption encouraged. Because of our minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on our earnings or financial position.
Concurrent with the issuance of the 5% Preferred Securities, we purchased from the Iowa Farm Bureau Federation our Series A preferred stock at its liquidation value of $100.0 million. In addition, we issued 5,000,000 shares of Series B preferred stock to the Iowa Farm Bureau Federation for $3.0 million. Each share of Series B preferred stock has a liquidation preference of $0.60 and voting rights identical to that of Class A common stock. The Series B preferred stock pays cumulative annual cash dividends of $0.03 per share, payable quarterly, and is redeemable by us, at our option, at $0.60 per share plus unpaid dividends if the stock ceases to be beneficially owned by a Farm Bureau organization. The purchase of Series A preferred stock and simultaneous issuance of Series B preferred stock and 5% Preferred Securities were treated as noncash transactions for purposes of the 1997 statement of cash flows.
On March 30, 1998, we exchanged a subsidiary owning our home office properties for 2,536,112 unregistered shares of Class A common stock owned by the Iowa Farm Bureau Federation. The value of the transaction, which was structured as a tax-free exchange of a real estate subsidiary, was $45.7 million, or $18.00 per common share. The book value of the properties was $24.7 million on the date of the exchange. We are leasing a portion of the properties back from a wholly-owned subsidiary of the Iowa Farm Bureau Federation under a 15-year operating lease. A gain on the transaction of approximately $21.0 million was deferred and is being amortized over the term of the operating lease. The transaction was accounted for as a noncash financing activity for purposes of the 1998 statement of cash flows.
We repurchased 1,322,920 shares in 1999, 961,536 shares in 1998 and 1,930,740 shares in 1997 of Class A common stock in accordance with repurchase plans approved by our Board of Directors. The cost of the repurchases totaled $25.7 million in 1999, $25.0 million in 1998 and $24.8 million in 1997. Of the shares repurchased in 1998 and 1997, 2,701,476 were unregistered shares owned by various Farm Bureau entities. The purchase amounts were allocated partly to Class A common stock based on the average common stock balance per share on the acquisition dates with the remainder allocated to retained earnings.
Holders of the Class A common stock and Series B preferred stock, together as a group, and Class B common stock vote as separate classes on all issues. Only holders of the Class A common stock and Series B preferred stock vote for the election of Class A Directors (three to five) and only holders of the Class B common stock vote for the election of Class B Directors (ten to twenty). Voting for the Directors is noncumulative. In addition, various ownership aspects of the Company's Class B common stock are governed by a Class B Shareholder Agreement which results in the Iowa Farm Bureau Federation, which owns 67.2% of our voting stock as of December 31, 1999, maintaining control of the Company. Holders of Class A common stock and Class B common stock are entitled to share ratably on a share-for-share basis with respect to common stock dividends.
The following tables contain amortized cost and market value information on fixed maturities and equity securities:
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 $(64.2) million in 1999, $1.2 million in 1998 and $16.6 million in 1997.
We have provided an allowance for possible losses against our mortgage loan portfolio. An analysis of this allowance, which consist of specific and general reserves, is as follows:
Income taxes (credits) include a provision of ($0.8) million in 1999, ($1.7) million in 1998 and $14.3 million in 1997 for the tax effect of realized gains.
The carrying value of investments which have been non-income producing for the twelve months preceding December 31, 1999 include other long-term investments totaling $5.1 million.
In December 1997, we acquired a 35% interest in an unaffiliated life insurance company, American Equity Investment Life Holding Company (American Equity), for $25.0 million. The excess (approximately $5.9 million) of the carrying amount of the investment, which is classified as securities and indebtedness of related parties on the consolidated balance sheets, over the amount of underlying equity in net assets on the acquisition date is attributable to goodwill. This goodwill is being amortized over a 20 year period. The investment is being accounted for using the equity method. American Equity underwrites and markets life insurance and annuity products throughout the United States. In addition, during 1999 we invested an additional $2.3 million in preferred stock issued by a subsidiary of American Equity. Summarized financial information for American Equity is as follows:
We used the following methods and assumptions in estimating our fair value disclosures for financial instruments.
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 stated 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.
SHORT-TERM AND LONG-TERM DEBT: The fair values for long-term debt are estimated using discounted cash flow analysis based on our current incremental borrowing rate for similar types of borrowing arrangements. For short-term debt, the carrying value approximates fair value.
In the normal course of business, we seek to limit our exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers. Our reinsurance coverage for life insurance varies according to the age and risk classification of the insured with retention limits ranging up to $1.1 million of coverage per individual life. We do not use financial or surplus relief reinsurance. Life insurance in force ceded on a consolidated basis totaled $1,826.3 million (8.7% of total life insurance in force) at December 31, 1999 and $1,298.7 million (6.6% of total life insurance in force) at December 31, 1998.
Reinsurance contracts do not relieve the Company of its obligations to policyholders. To the extent that reinsuring companies are later unable to meet obligations under reinsurance agreements, our insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in losses. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. No allowance for uncollectible amounts has been established against our asset for reinsurance recoverable since none of our receivables are deemed to be uncollectible.
In total, including amounts applicable to traditional products, insurance premiums and product charges have been reduced by $5.3 million in 1999, $5.9 million in 1998 and $6.0 million in 1997 and insurance benefits have been reduced by $2.4 million in 1999, $2.2 million in 1998 and $6.6 million in 1997 as a result of cession agreements.
Prior to 1998, the amount of reinsurance assumed was not significant. In December 1998, we assumed a block of ordinary annuity policies with reserves totaling $22.0 million. In addition, beginning in 1998, we began assuming variable annuity business from American Equity through a modified coinsurance arrangement. Product charges from this business were not significant during 1999 or 1998.
We develop reserves for unpaid claims by using industry mortality and morbidity data. One year development on prior year reserves represents our experience being more or less favorable than that of the industry. Over time, we expect our experience with respect to disability income business to be comparable to that of the industry. A certain level of volatility in development is inherent in these reserves since the underlying block of business is relatively small.
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: 2000 - $1.1 million; 2001 - $1.1 million; 2002 - $1.0 million; 2003 - $1.0 million; 2004 - $0.9 million; and thereafter, through 2023 - $9.8 million.
results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing benefits to the extent their losses contribute to reduce consolidated taxes.
We participate with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. Beginning in 1998, we contribute FBL Financial Group, Inc. stock in the amount equal to 50 percent of an employee's contributions up to four percent of the annual salary contributed by the employees. Costs are allocated
Certain of the assets related to these plans are on deposit with the Company and amounts relating to these plans are included in our financial statements. In addition, certain amounts included in the policy liabilities for interest sensitive products relate to deposit administration funds maintained by the Company on behalf of affiliates offering substantially the same benefit programs as the Company.
In addition to benefits offered under the aforementioned benefit plans, we and several other affiliates sponsor a plan that provides group term life insurance benefits to retired full-time employees who have worked ten years and attained age 55 while in service. Postretirement benefit expense is allocated in a manner consistent with pension expense discussed above. Postretirement benefit expense aggregated $0.2 million in 1999, $0.1 million in 1998 and $0.3 million in 1997.
We have a Class A Common Stock Compensation Plan (the Plan) under which incentive stock options, nonqualified stock options, bonus stock, restricted stock and stock appreciation rights may be granted to directors, officers and employees. Option shares granted to directors are fully vested upon grant and have a contractual term that varies with the length of time the director remains on the Board. Option shares granted to officers and employees have a contractual term of 10 years and generally vest over a period up to five years, contingent upon continued employment with the Company.
Information regarding stock options outstanding at December 31, 1999 is as follows:
At December 31, 1999, shares of Class A common stock available for grant as additional awards under the Plan totaled 1,634,330.
The ability of Farm Bureau Life to pay dividends to the parent company is restricted because prior approval of the Iowa insurance commissioner is required for payment of dividends to the stockholder which exceed an annual limitation. During 2000, Farm Bureau Life could pay dividends to the parent company of approximately $40.6 million without prior approval of insurance regulatory authorities.
We share certain office facilities and services with the Iowa Farm Bureau Federation and its affiliated companies. These expenses are allocated on the basis of cost and time studies that are updated annually and consist primarily of salaries and related expenses, travel, and other operating costs.
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 $0.8 million in 1999, $0.5 million in 1998 and $0.2 million in 1997. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the Iowa Farm Bureau Federation, provides certain management services to the Company under a separate arrangement. We incurred related expenses totaling $0.5 million in 1999, $0.7 million in 1998 and $0.8 million in 1997.
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 $5.0 million in 1999, $4.5 million in 1998 and $3.9 million in 1997 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 $0.9 million in 1999, $0.7 million in 1998 and $0.5 million in 1997 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 $1.0 million in 1999 and 1998, and $1.1 million in 1997.
In the normal course of business, we may be involved in litigation where amounts are alleged that are substantially in excess of contractual policy benefits or certain other agreements. At December 31, 1999, management is not aware of any claims for which a material loss is reasonably possible.
We may earn additional consideration during each of the three years in the period ended December 31, 2002 in accordance with the earn-out provision. Under the earn-out arrangement, the Company 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 acquisition price. The earn-out calculation is performed and any settlement (subject to a maximum of $2.0 million per year) is made on a calendar year basis. We have not accrued any contingent consideration for the three year period ending December 31, 2002 as such amounts, if any, cannot be reasonably estimated as of December 31, 1999. Receipts as a result of the earn-out provision are recorded as an adjustment to the gain on the disposal of the discontinued segment.
In general, we are organized by the types of products and services we offer for sale. Our principal and only reportable operating segment is our life insurance segment. The life insurance segment includes activities related to the sale of life insurance, annuities and accident and health insurance products. Operations have been aggregated into the same segment due to the similarity of the products, including the underlying economic characteristics, the method of distribution and the regulatory environment. We also have several other operating segments that do not meet the quantitative threshold for separate segment reporting and, therefore, are aggregated herein. A summary of these segments, along with the related source of revenues, is as follows:
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 the Company Leasing.......................... Income from operating leases Corporate........................ Fees from management and administrative services
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 1999, 1998 or 1997.