(2) On October 1, 1998, the Company acquired the 50% of College Insurance Group, Inc. not previously owned by the Company.
Life insurance operations. Income before income taxes increased $2.9 million from 1999 to 2000. This increase in profits is due to (i) a $10.5 million decrease in death benefits, net of reserves for policy benefits released on traditional death benefits, offset by (ii) a $4.6 million decrease in deferred policy acquisition costs resulting from revisions made to the Company's estimate of future gross profits from its interest-sensitive life and annuity products in both 2000 and 1999. In addition, amortization expense of cost of business acquired assets increased $2.9 million on a closed block of annuity business in 2000 due to higher levels of surrenders in 2000. This increased amortization expense was partially offset by a $1.0 million increase in surrender charge revenue on this same block of business. Income before income taxes decreased $10.5 million from 1998 to 1999. This decrease in profits is primarily due to a $9.6 million increase in death benefits in 1999.
The difference between the segment revenues and income before income taxes shown above and the amounts reported in the Company's consolidated financial statements appearing elsewhere in this Form 10-K result from items not allocated to specific segments. The significant reconciling items are interest expense and a portion of (i) net investment income, (ii) operating expenses, (iii) net realized investment gains or losses and (iv) certain non-recurring transactions such as gains from the sale of subsidiaries. The reconciling items had the effect of decreasing income before income taxes by $3.1 million from 1999 to 2000. The primary reasons for the decrease were (i) a $10.8 million increase in net realized investment losses not allocated to segments, offset by (ii) a $3.9 million decrease in operating expenses due to cost controls implemented in 2000, (iii) a $1.9 million increase in net investment income related to a reduction in the unrecovered ceding commission due to the Reinsurer, and (iv) a $1.6 million decrease in interest expense due to lower average outstanding notes payable in 2000 compared to 1999.
Premiums and policy revenues. Premiums and policy revenues totaled $220.7 million in 2000 compared to $224.9 million in 1999. Excluding the effect of the payroll-deduction business, premiums and policy revenues increased $11.0 million from 1999 to 2000. Premiums from traditional life insurance business increased $10.3 million. First year premiums on life insurance sold in the preneed market increased $14.7 million in 2000 compared to 1999. Sales in this market began in the 4th quarter of 1999. The increase in the preneed market was offset by a decrease in premiums from the remainder of the Company's inforce traditional life insurance business. Policy revenues from interest-sensitive life and annuity products increased $0.7 million from 1999 to 2000. This increase was primarily due to (i) a $2.7 million increase in surrender charges from the Company's asset accumulation business, (ii) a $1.0 million increase in surrender charges related to a closed block of annuity business, offset by (iii) a $3.9 million decrease in administration charges on the Company's universal life insurance business.
Net realized investment gains (losses). Net realized investment losses totaled $6.6 million in 2000 compared to net realized investment gains of $4.2 million in 1999. In 2000, the Company realized losses of $11.4 million on the sale of fixed maturity investments and gains of $4.3 million on the sale of common stocks. In 1999, the Company realized gains of $2.6 million on the sale of common stocks and gains of $2.6 million on the sale of fixed maturity investments.
Included in 2000 and 1999 realized investment gains and losses were $8.3 million of losses and $0.6 million of gains, respectively, on short positions held on common stocks and fixed maturity investments by the Company. There was a like amount of change in market value on the related long position of the common stocks and fixed maturity investments which is included in unrealized gains in stockholder's equity.
Premiums and policy revenues. Premiums and policy revenues totaled $224.9 million in 1999 compared to $218.5 million in 1998. Premiums from traditional life insurance business for the year ended December 31, 1999 were comparable to the year ended December 31, 1998. Policy revenues increased $6.3 million from asset accumulation business acquired in October of 1998 in conjunction with the Company acquiring the 50% of CIG. Inc. not previously owned and the recapture of business which was previously ceded to an unaffiliated insurance company. In addition, administrative charges on the Company's universal life insurance business increased $3.1 million. This increase was offset by a $2.3 million decrease in surrender charges from a closed block of annuity business.
Policyholder benefits. Policyholder benefits totaled $261.3 million in 1999 compared with $251.5 million in 1998. This increase resulted primarily from a $10.2 million increase in death benefits. Interest credited on universal life and annuity funds balances remained comparable between periods: however, (i) interest credited on the Company's closed block of annuity business decreased $6.2 million due to reduced fund values, (ii) interest credited on asset accumulation business increased $12.8 million, and (iii) interest credited on other interest-sensitive products decreased due to a reduction in rates made in response to market conditions.
Other operating expenses. Other operating expenses totaled $91.0 million in 1999 compared with $94.3 million in 1998. Other operating expenses decreased due to the Company amending its advisory and data processing agreements with FHC in June 1999. The effect of these amendments was to lower the fees paid to FHC by $5.9 million. Also, other operating expenses decreased $2.8 million related to the relocation of the Company's Columbus, Ohio operations to other Company locations during 1998. In addition, other operating expenses increased in 1999 principally due to costs associated with litigation.
In connection with the acquisition of The Victory Life Insurance Company in July 1995, Americo issued notes payable to the seller with face amounts aggregating $17 million. Of the $17 million face amount of notes payable issued to the seller, $5 million mature in 2015 and the remaining $12 million mature in 24 equal semi-annual installments, the first of which was due in 1995. The notes are recorded in the Company's Consolidated Financial Statements at their discounted value, which assumes an average effective rate of 11.5%.
The principal sources of liquidity for the Company's insurance subsidiaries are premium receipts, net investment income received and net proceeds from investments that have been sold or matured or from mortgage loans that have been repaid. Cash flows from premiums received and investment income are generally sufficient to meet the subsidiaries' obligations, which consist of the payment of claims and benefits on insurance policies, purchases of investments and the payment of operating expenses. Although there is no intent to dispose of investments at this time, the Company's investments are predominantly in readily marketable securities.
The Company believes that its investment portfolio will allow it to satisfy all existing contractual obligations to policyholders. At December 31, 2000, the Company's investment portfolio included cash and short-term investments totaling $110.3 million, marketable equity securities totaling $104.8 million as well as $339.9 million in U.S. Treasury and government securities, mortgage-backed securities and asset-backed securities and $586.0 million of corporate bonds classified as available for sale, the vast majority of which management believes could be readily converted to cash.
Statutory capital and surplus of the Company's insurance subsidiaries at December 31, 2000 includes $12.1 million relating to financial reinsurance agreements which is not included in stockholder's equity on a GAAP basis.
(1) The ratings set forth above are based on the ratings assigned by S&P and Moody's Investors Service, Inc. ("Moody's"). If S&P's ratings were unavailable, ratings assigned by Moody's were used. If ratings assigned S&P and Moody's were not equivalent, securities were categorized in this table based upon the rating assigned by S&P. Bonds not rated by S&P or Moody's are classified for the purpose of the table according to the rating assigned to them by the NAIC as follows: NAIC class 1 is included in the "A" rating; class 2 in "BBB" and class 3 and 4, "BB or below".
(2) Carrying amount is amortized cost. The market value of held to maturity securities at December 31, 2000 was $737.5 million.
(3) Carrying amount is market value. The amortized cost of available for sale securities at December 31, 2000 was $1,050.4 million.
The primary risk associated with MBS is that a changing interest rate environment might cause prepayment of the underlying mortgages at prepayment rates different than anticipated at the time of their purchase. The degree to which a security is at risk to either increases or reductions in yield is influenced by (i) the difference between its carrying value and par value, (ii) the relative sensitivity of the underlying mortgages to prepayment in a changing interest rate environment and (iii) the repayment priority of the securities in each securitization structure.
Real estate investments made up 1.2% of the carrying value of the Company's cash and invested assets at December 31, 2000.
In order to reduce the probability of unexpected increases in policy or contract surrenders, which would create a need for increased liquidity, the Company has structured its interest-sensitive life insurance and annuity products to include substantial surrender charges. At December 31, 2000, approximately 87% and 94% of the reserves for interest-sensitive life insurance and annuity products, respectively, were for policies with surrender charges or otherwise not subject to discretionary withdrawal by the policyholder. Also at December 31, 2000, the aggregate cash surrender values of the Company's interest-sensitive life insurance and annuity products were approximately 87% and 90%, respectively, of the aggregate policyholder fund value.