Our principal operations are conducted from property leased from a subsidiary of the Iowa Farm Bureau Federation under a 15 year operating lease which expires in 2013. The property leased currently consists of approximately 183,000 square feet of a 400,000 square foot office building in West Des Moines, Iowa. We also lease 22,000 square feet of an office building in Manhattan, Kansas under a 5 year operating lease which expires in 2006. We consider the current facilities to be adequate for the foreseeable future.
(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 $25.0 million in 2000, $17.1 million in 1999, $29.5 million in 1998, $14.1 million in 1997 and $3.6 million in 1996.
THE FOLLOWING SECTIONS INCLUDE A SUMMARY OF FBL FINANCIAL GROUP, INC.'S CONSOLIDATED RESULTS OF OPERATIONS, FINANCIAL CONDITION AND WHERE APPROPRIATE, FACTORS THAT MANAGEMENT BELIEVES MAY AFFECT FUTURE PERFORMANCE. PLEASE READ THIS DISCUSSION IN CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. UNLESS NOTED OTHERWISE, ALL REFERENCES TO FBL FINANCIAL GROUP, INC (WE OR THE COMPANY) INCLUDE ALL OF ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND EQUITRUST LIFE INSURANCE COMPANY (EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES).
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
INTEREST SENSITIVE PRODUCT CHARGES increased 8.0% in 2000 to $59.8 million and 6.1% in 1999 to $55.4 million. These increases are primarily due 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 increased 18.3% in 2000 to $2.5 million and decreased 27.6% in 1999 to $2.1 million as a result of changes in the level of interest sensitive product surrenders.
TRADITIONAL LIFE INSURANCE PREMIUMS increased 1.5% in 2000 to $83.8 million and 1.0% in 1999 to $82.6 million. Management believes the modest increase in the sale of traditional life insurance products is the result of a marketing emphasis placed on the sale of variable universal life insurance contracts. Premiums collected on variable universal life insurance products increased 14.4% to $48.3 million in 2000 and 11.8% to $42.3 million in 1999.
ACCIDENT AND HEALTH PREMIUMS decreased 27.7% in 2000 to $9.7 million and increased 14.0% in 1999 to $13.4 million. The decrease in 2000 is the result of our exit from the individual disability income business effective September 1, 2000. The increase in 1999 is primarily the result of the recapture of certain reinsurance ceded business.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE RELATED CHANGES IN RESERVES, increased 2.3% in 2000 to $79.3 million and 0.5% in 1999 to $77.5 million. Death and surrender benefits on traditional products increased 6.1% in 2000 to $52.2 million and 2.1% in 1999 to $49.2 million. These increases were offset by a decrease in the change in reserves on life policies. Accident and health benefits, including the related change in reserves, increased 65.9% in 2000 to $9.7 million and increased 2.1% in 1999 to $5.8 million. Traditional life insurance and accident and health benefits tend to fluctuate from year to year as a result of changes in mortality and morbidity experience. As stated above, effective September 1, 2000, all individual disability income benefits are ceded to a third party.
A summary of our underwriting, acquisition and insurance expenses is as follows:
COMMISSION EXPENSE increased 2.2% in 2000 to $10.0 million and 6.7% in 1999 to $9.7 million. Commission expense increased during the periods due primarily to an increase in direct life insurance premiums collected.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS decreased 13.0% in 2000 to $10.8 million and increased 22.2% in 1999 to $12.4 million. Amortization decreased during 2000 due principally to the impact of realized losses on investments backing the related policyholder liabilities. The increase in 1999 is due partly to a shift in product profitability to blocks of business that have a larger acquisition cost remaining to be amortized or that have higher amortization factors. For both 2000 and 1999, amortization increased due to an increase in the unamortized acquisition cost asset due to growth in the volume of business in force.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 8.7% in 2000 to $52.2 million and 7.4% in 1999 to $48.0 million. Salaries, benefits and other operating expenses increased in 2000 and 1999 primarily due to increased operating expenses associated with administering our variable product business and developing variable product alliances. In addition, other information system expenses, agent training and retirement benefit costs increased in 2000 compared to 1999. Other items impacting the comparison of expenses include (i) restructuring charges of $1.2 million in 1999 and related cost savings in 2000 relating to the closing of an administrative service center, (ii) expenses totaling $0.8 million in 1999 and $2.2 million in 1998 to modify our computer systems to prepare for the Year 2000 date conversion and (iii) a credit of $1.2 million in 1998 due to changes in the amounts and timing of estimated guaranty fund assessments. Other underwriting, acquisition and insurance expenses includes goodwill amortization totaling $0.7 million in 2000, 1999 and 1998. See "Restructuring" discussion below.
We closed an administrative service center during July 1999 and merged two life insurance subsidiaries effective July 1, 1999. As a result of the closing of the service center, a leased property was vacated, 22 job 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 closing the service center.
We recorded a gain of $0.6 million in 2000, $1.4 million in 1999 and $1.0 million in 1998, net of related income taxes, on the sale of Utah Farm Bureau Insurance Company (Utah Insurance), a former wholly-owned property-casualty insurance company, to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. In addition, during 1998 the increase in net unrealized appreciation on securities classified as available for sale was reduced $1.4 million, net of related income taxes, as a result of the sale. The gain on the sale may be increased in future years in accordance with an earn-out provision included in the related sales agreement. See "Liquidity - FBL Financial Group, Inc."
The acquisition will be accounted for using purchase accounting. A condensed statement of the assets and liabilities acquired as of January 1, 2001, on a GAAP basis, is as follows (dollars in thousands):
As consideration for the purchase, we issued 3,429,500 shares of Series C cumulative voting mandatorily redeemable preferred stock with an estimated fair value of $80.4 million. Each share of Series C preferred stock has a par value of $26.8404 and voting rights identical to that of Class A common stock. Dividends on the Series C preferred stock are payable quarterly at a rate equal to the common stock dividend per share then payable. The mandatory redemption is structured so that 49.5% of the Series C preferred stock will be redeemed at par value, or $45.6 million, on January 2, 2004 with the remaining 50.5% redeemed at par value, or $46.5 million, on January 3, 2006. In the event of a change in the control of the Company, at the option of the holder, each share of Series C preferred stock is convertible into one share of Class A common stock or redeemable for cash at par. The Series C preferred stock was issued at an $11.6 million discount to par. This discount will accrete to preferred stock dividends during the life of the securities using the effective interest method. The effective cost of capital is approximately 5.0%. Acquisition costs totaling $0.7 million have been deferred and are included as a component of goodwill.
Our total investment portfolio decreased 2.7% to $2,870.7 million at December 31, 2000 compared to $2,950.2 million at December 31, 1999. This decrease is primarily the result of (i) the acquisition of our common stock, (ii) a $32.8 million net payment for reserves pursuant to the individual disability income coinsurance arrangement, (iii) net cash outflows on interest sensitive and variable products and (iv) an increase in writedowns on other-than-temporarily impaired securities. These items were partially offset by positive cash flow from operations and a decrease in net unrealized depreciation on fixed maturity securities classified as available for sale.
Over the last several years, the mix of our life insurance business has been shifting from traditional and interest sensitive products to variable products. In addition, we have an exchange program for the rollover of universal life policies to variable universal life policies. We expect the shift to variable products to continue due to this program and the continued popularity of variable products. A majority of premiums received on variable products are typically invested in our separate accounts as opposed to the general account investments. This trend is expected to impact the future growth rate of our investment portfolio and separate account assets.
The following table sets forth the credit quality, by NAIC designation and Standard & Poors (S & P) rating equivalents, of fixed maturity securities.
The commercial and other asset-backed securities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less sensitive to interest rate changes than residential securities of similar types due principally to prepayment restrictions on many of the underlying commercial mortgage loans. Other asset-backed securities are principally mortgage related (manufactured housing and home equity loans) which historically have also demonstrated relatively less cash flow volatility than residential securities of similar types.
At December 31, 2000, we held $321.9 million or 11.2% of invested assets in mortgage loans. These mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. At December 31, 2000, mortgages more than 60 days delinquent accounted for less than 0.1% of the carrying value of the mortgage portfolio. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. Regions with the largest concentration of our mortgage loan portfolio at December 31, 2000 include: Pacific (30.9%), which includes California; and West South Central (22.5%), which includes Oklahoma and Texas. Mortgage loans on real estate are also diversified by collateral type with office buildings (44.2%) and retail facilities (34.3%) representing the largest holdings at December 31, 2000.
Policy liabilities and accruals decreased 0.2% to $2,412.1 million at December 31, 2000. The slight decrease in policy liabilities is partially attributable to our marketing emphasis on the sale of variable products. As noted under the "Investments" section above, the shift in sales to variable products will have an impact on the future growth rate of our policy liabilities and accruals as well as the separate account liabilities. In addition, future policy benefit reserves on interest sensitive products decreased due to an increase in surrender benefits during 2000. Other liabilities decreased 28.4% to $55.2 million at December 31, 2000 due primarily to a decrease in payables for investment securities purchased. At December 31, 2000, we had total liabilities of $3,130.1 million, a 2.3% increase from total liabilities at December 31, 1999.
At December 31, 2000, common stockholders' equity was $473.8 million, or $17.35 per share, compared to $502.0 million, or $15.94 per share at December 31, 1999. Included in stockholders' equity per common share is ($0.78) at December 31, 2000 and ($1.52) at December 31, 1999 attributable to unrealized investment gains (losses) resulting from marking our fixed maturity securities classified as available for sale to market value. The change in unrealized appreciation of fixed maturity and equity securities classified as available for sale increased stockholders' equity $27.5 million during 2000, after related adjustments to deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and deferred income taxes.
A majority of our insurance liabilities are backed by fixed maturity securities and mortgage loans. The fixed maturity securities have laddered maturities and a weighted average life of 7.9 years at December 31, 2000 and 8.6 years at December 31, 1999. Accordingly, the earned rate on the portfolio lags behind changes in market yields. The extent that the portfolio yield lags behind changes in market yields generally depends upon the following factors:
* The average life of the portfolio. * The amount and speed at which market interest rates rise or fall. * The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities accelerate during periods of declining interest rates. * The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities decelerate during periods of increasing interest rates.
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 92% of our liabilities at December 31, 2000 and 93% of our liabilities at December 31, 1999. 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, 2000 and 1999, interest rate guarantees on interest sensitive products ranged from 3.0% to 5.5%. The weighted average guarantee was 3.7% at December 31, 2000 and 1999.
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.
If interest rates were to increase 10% from levels at December 31, 2000 and 1999, our fixed maturity securities and short-term investments would decrease approximately $54.1 million at December 31, 2000 and $75.1 million at December 31, 1999. 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, 2000 and 1999, the fair value of our debt and mandatorily redeemable preferred stock of subsidiary trust would increase $2.8 million at December 31, 2000 and $2.9 million at December 31, 1999.
The computer models used to estimate the impact of a 10% change in market interest rates use many assumptions and estimates that materially impact the fair value calculations. Key assumptions used by the models include an immediate and parallel shift in the yield curve and an acceleration of bond calls and principal prepayments on mortgage and other asset-backed securities. The above estimates do not attempt to measure the financial statement impact on the resulting change in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserves and income taxes. Due to the subjectivity of these assumptions, the actual impact of a 10% change in rates on the fair market values would likely be different from that estimated.
services, dividends on outstanding stock and interest on our holding company debt issued to a subsidiary. In addition, our parent company will on occasion enter into capital transactions such as the acquisition of our common stock.
We acquired Class A common shares totaling 4,358,397 in 2000, 1,322,920 in 1999 and 3,497,648 in 1998 as a result of stock repurchases and an exchange of a subsidiary owning our home office properties in 1998. These transactions reduced stockholders' equity $85.8 million in 2000, $25.7 million in 1999 and $70.7 million in 1998.
We paid common and preferred stock dividends totaling $11.0 million in 2000, $10.8 million in 1999 and $10.2 million in 1998. Interest payments on the parent company's 5% Subordinated Deferrable Interest Notes (the Notes), relating to the company-obligated mandatorily redeemable preferred stock of subsidiary trust, totaled $5.0 million in 2000, 1999 and 1998. It is anticipated that cash dividend requirements for 2001 will be $0.10 per quarter per common and Series C preferred share and $0.0075 per quarter per Series B preferred share, or approximately $12.5 million. In addition, interest payments on the Notes are estimated to be $5.0 million for 2001.
FBL Financial Group, Inc. expects to rely on available cash resources and on dividends from Farm Bureau Life to make any dividend payments to its stockholders and interest payments on its Notes. In addition, it is anticipated that dividends from Farm Bureau Life will be used to fund the scheduled redemption of the Series C preferred stock in 2004 ($45.6 million) and 2006 ($46.5 million). The ability of Farm Bureau Life to pay dividends to FBL Financial Group, Inc. is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa. In addition, under the Iowa Insurance Holding Company Act, Farm Bureau Life may not pay an "extraordinary" dividend without prior notice to and approval by the Iowa insurance commissioner. An "extraordinary" dividend is defined under the Iowa Insurance Holding Company Act as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of (i) 10% of policyholders' surplus (total statutory capital stock and statutory surplus) as of December 31 of the preceding year, or (ii) the statutory net gain from operations of the insurer for the 12-month period ending December 31 of the preceding year. During 2001, the maximum amount legally available for distribution to FBL Financial Group, Inc. without further regulatory approval is $49.9 million.
During 2000, the Life Companies experienced net cash outflows of $36.5 million from continuing operations and financing activities related to interest sensitive products. The net cash outflow is primarily a result of a $32.8 million net payment for reserves pursuant to the individual disability income coinsurance arrangement and increased surrender benefits on interest sensitive products and rollovers from traditional products to variable products. This cash outflow was funded with available cash and cash provided from investing activities. The Life Companies had net cash inflows from continuing operations and financing activities related to interest sensitive products of $104.1 million in 1999 and $121.5 million in 1998. During 1999 and 1998, these funds were primarily used to increase the Life Companies' short-term and fixed maturity investment portfolios. In developing their investment strategy, the Life Companies establish a level of cash and securities which, combined with expected net cash inflows from operations, maturities of fixed maturity investments and principal payments on mortgage and asset-backed securities and mortgage loans, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations.
Through its membership in the Federal Home Loan Bank of Des Moines (FHLB), Farm Bureau Life is eligible to establish and borrow on a line of credit to provide it additional liquidity. The line of credit available is based on the amount of capital stock of the FHLB owned by Farm Bureau Life, which supported a borrowing capacity of $132.7 million as of December 31, 2000. At December 31, 2000, Farm Bureau Life had outstanding borrowings of $40.0 million under this arrangement, leaving a borrowing capacity of $92.7 million. Additional collateral would need to be deposited with the FHLB in order to access this additional borrowing capacity. The outstanding debt is due September 17, 2003, and interest on the debt is charged at a variable rate equal to the London Interbank Offered Rate less 0.0475% (6.50% at December 31, 2000). Fixed maturity securities with a carrying value of $43.1 million are on deposit with the FHLB as collateral for the note.
* Changes to interest rate levels and stock market performance may impact our lapse rates, market value of our investment portfolio and our ability to sell life insurance products, notwithstanding product features to mitigate the financial impact of such changes. * The degree to which our products are accepted by customers and agents (including the agents of our alliance partners) will impact our future growth rate. * Extraordinary acts of nature or man may result in higher than expected claim activity. * Changes in federal and state income tax laws and regulations may affect the relative tax advantage of our products.
The management of FBL Financial Group, Inc. is responsible for the integrity of the financial information contained in this annual report. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Certain financial information presented depends on management's estimates and judgments regarding the ultimate outcome of transactions that are not yet complete. Management believes these estimates and judgements are fair and reasonable based upon available information.
Management maintains a system of internal control designed to meet its responsibilities for preparing reliable financial statements. The system is designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized and reported. Reasonable assurance is based upon the premise that the cost of controls should not exceed the benefits derived from them. An internal audit department is maintained to continually monitor and challenge the adequacy of internal control. It is management's opinion that its system of internal control during the periods covered by this annual report was effective in providing reasonable assurance that the financial statements are fairly stated in all material respects.
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
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. See Note 15, "Kansas Farm Bureau Life Insurance Company Acquisition - Subsequent Event," for additional information regarding this transaction.
Other long-term investments include certain nontraditional investments and securities held by subsidiaries engaged in the broker-dealer industry. Nontraditional investments include a debt-related instrument and investment deposits which are reported at cost. In accordance with accounting practices for the broker-dealer industry, marketable securities held by subsidiaries in this industry are valued at market value. 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.
The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. If this review indicates a decline in market value that is other than temporary, carrying value of the investment is reduced to its estimated realizable value, or fair value, 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.
Market values of fixed maturity securities are reported based on quoted market prices, where available. Market values of fixed maturity securities not actively traded in a liquid market are estimated using a matrix calculation assuming a spread (based on interest rates and a risk assessment of the bonds) over U. S. Treasury bonds. Market values of redeemable preferred stocks and equity securities are based on the latest quoted market prices, or for those not readily marketable, generally at values which are representative of the market values of comparable issues.
Property and equipment, comprised primarily of furniture, equipment and capitalized software costs, are reported at cost less allowances for depreciation and amortization. Depreciation and amortization expense is computed primarily using the straight-line method over the estimated useful lives of the assets. Furniture and equipment had a carrying value of $38.8 million at December 31, 2000 and $39.2 million at December 31, 1999, and estimated useful lives that range from three to ten years. Capitalized software costs had a carrying value of $20.4 million at December 31, 2000 and $21.3 million at December 31, 1999, and estimated useful lives that range from two to five years. Depreciation expense was $8.1 million in 2000, $8.6 million in 1999 and $8.5 million in 1998. Amortization expense was $4.8 million in 2000, $2.6 million in 1999 and $1.3 million in 1998.
Goodwill represents the excess of the fair value of assets exchanged over the net assets acquired. Goodwill is generally being amortized on a straight-line basis over a period of 20 years. The carrying value of goodwill is regularly reviewed for indicators of impairment in value, which in the view of management are other than temporary. If facts and circumstances suggest that goodwill is impaired, we assess the fair value of the underlying business and reduce goodwill to an amount that results in the book value of the underlying business approximating fair value. We have not recorded any such writedowns during 2000, 1999 or 1998.
Interest crediting rates for interest sensitive products ranged from 4.00% to 6.50% in 2000, from 4.00% to 6.25% in 1999 and from 4.00% to 6.50% in 1998.
We had undiscounted reserves of $0.1 million at December 31, 2000 and $1.3 million at December 31, 1999 to cover estimated future assessments on known insolvencies. We had assets totaling $1.0 million at December 31, 2000 and $2.8 million at December 31, 1999 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 2000 and 1999 and ($1.2) million in 1998. It is anticipated that estimated future guaranty fund assessments on known insolvencies will be paid during 2001 and substantially all the related future premium tax offsets will be realized during the five 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.
Revenues for interest sensitive and variable 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. Expenses related to these products include interest credited to policyholder account balances, benefit claims incurred in excess of policyholder account balances and amortization of deferred policy acquisition costs.
As described in Note 1, "Significant Accounting Policies - Pending Accounting Change," effective January 1, 2001 the fixed maturity securities classified as held for investment were transferred to the available-for-sale category.
Net unrealized investment losses on equity securities and fixed maturity securities classified as available for sale were comprised of the following:
Realized losses on fixed maturities totaling $18.5 million in 2000, $5.2 million in 1999 and $2.8 million in 1998 were incurred as a result of writedowns for other than temporary impairment of fixed maturity securities.
We reported equity income, net of tax, from APEX Investment Fund III, an equity investee that operates in the investment company industry, totaling $7.7 million in 2000, $1.5 million in 1999 and $1.0 million in 1998. Summarized financial information for APEX Investment Fund III is as follows:
At December 31, 2000, we had committed to provide additional funding for mortgage loans on real estate aggregating $8.9 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.
No investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) exceeded ten percent of stockholders' equity at December 31, 2000.
Statement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 also excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements and allows companies to forego the disclosures when those estimates can only be made at excessive cost. Accordingly, the aggregate fair value amounts presented herein are limited by each of these factors and do not purport to represent our underlying value.
OTHER LONG-TERM INVESTMENTS: The fair values for nontraditional debt instruments and investment deposits are estimated by discounting expected cash flows using interest rates currently being offered for similar investments. The fair values for investments held by broker-dealer subsidiaries are based on quoted market prices.
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 $2,059.0 million (9.1% of total life insurance in force) at December 31, 2000 and $1,826.3 million (8.7% of total life insurance in force) at December 31, 1999.
Effective September 1, 2000, we entered into a 100% coinsurance agreement to reinsure our individual disability income business with an unaffiliated insurer. At September 1, 2000, the related accident and health reserves totaled $43.6 million and deferred acquisition costs totaled $11.8 million. We settled this transaction by transferring cash and investments equal to the reserves on this business at September 1, 2000. In addition, we received $11.1 million in cash as consideration for the transaction. A loss of $0.7 million on the transaction has been deferred and is being recognized over the term of the underlying policies.
Unpaid claims on accident and health policies (entirely disability income products) include amounts for losses and related adjustment expense and are estimates of the ultimate net costs of all losses, reported and unreported. These estimates are subject to the impact of future changes in claim severity, frequency and other factors. The activity in the liability for unpaid claims and related adjustment expense, net of reinsurance, is summarized as follows:
The effective tax rate on income from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income is different from the prevailing federal income tax rate as follows:
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0 million at December 31, 2000 and December 31, 1999. The note is due September 17, 2003, and interest on the note is charged at a variable rate equal to the London Interbank Offered Rate less 0.0475% (6.50% at December 31, 2000 and 5.77% at December 31, 1999). Fixed maturity securities with a carrying value of $43.1 million are on deposit with the FHLB as collateral for the note. As an investor in the FHLB, we have the ability to borrow an additional $92.7 million from the FHLB at December 31, 2000 with appropriate increased collateral deposits.
The 5% Preferred Securities were originally issued to the Iowa Farm Bureau Federation, our majority stockholder. On October 31, 1999, the Iowa Farm Bureau Federation exchanged the 5% Preferred Securities for $97.0 million face amount of 5% trust preferred securities issued by an equity investee of the Company. In preparing our consolidated financial statements, we do not eliminate our portion of the 5% Preferred Securities owned by the equity investee since the terms of the preferred securities issued by the equity investee are substantially similar to the terms of the 5% Preferred Securities.
The Iowa Farm Bureau Federation owns our Series B preferred stock. 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.
We repurchased 4,358,397 shares in 2000, 1,322,920 shares in 1999 and 961,536 shares in 1998 of Class A common stock in accordance with repurchase plans and a tender offer approved by our Board of Directors. The cost of the repurchases totaled $85.8 million in 2000, $25.7 million in 1999 and $25.0 million in 1998. Of the shares repurchased in 2000 and 1998, 3,745,471 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.
On March 17, 1998, our Board of Directors approved a two-for-one common stock split payable in the form of a 100% stock dividend, to stockholders of record as of April 6, 1998. The additional shares were distributed April 17, 1998. As required by our Articles of Incorporation, holders of the Class B common stock received Class A common
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 our Class B common stock are governed by a Class B Shareholder Agreement which results in the Iowa Farm Bureau Federation, which owns 69.0% of our voting stock as of December 31, 2000, 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.
We participate with several affiliates in various defined benefit plans covering substantially all of our employees. The benefits of these plans are based primarily on years of service and employees' compensation. Net periodic pension cost of the plans is allocated between participants generally on a basis of time incurred by the respective employees for each employer. Such allocations are reviewed annually. Pension expense aggregated $5.2 million in 2000, $4.5 million in 1999 and $5.7 million in 1998.
Information regarding stock options outstanding at December 31, 2000 is as follows:
At December 31, 2000, shares of Class A common stock available for grant as additional awards under the Plan totaled 1,220,050.
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, 2000, management is not aware of any claims for which a material loss is reasonably possible.
We lease our home office properties under a 15-year operating lease from a wholly-owned subsidiary of the Iowa Farm Bureau Federation. Future remaining minimum lease payments under this lease as of December 31, 2000 are as follows: 2001 - $2.1 million; 2002 - $2.1 million; 2003 - $2.3 million; 2004 - $2.4 million; 2005 - $2.4 million and thereafter, through 2013 - $18.8 million. Rent expense for the lease totaled $3.1 million in 2000, $2.3 million in 1999 and $1.3 million in 1998. These amounts are net of $1.4 million in 2000 and 1999 and $1.0 million in 1998 in amortization of the deferred gain on the exchange of home office properties for common stock (see Note 7).
We may earn additional consideration during each of the two 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 two-year period ending December 31, 2002 as such amounts, if any, cannot be reasonably estimated as of December 31, 2000. Receipts as a result of the earn-out provision are recorded as an adjustment to the gain on the disposal of the discontinued segment.
The financial statements of the Life Companies included herein differ from related statutory-basis financial statements principally as follows: (a) the bond portfolio is segregated into held-for-investment (carried at amortized cost) and available-for-sale (carried at fair value) classifications rather than generally being carried at amortized cost; (b) acquisition costs of acquiring new business are deferred and amortized over the life of the policies rather than charged to operations as incurred; (c) future policy benefit reserves for participating traditional life insurance products are based on net level premium methods and guaranteed cash value assumptions which may differ from statutory reserves; (d) future policy benefit reserves on certain interest sensitive products are based on full account values, rather than discounting methodologies utilizing statutory interest rates; (e) deferred income taxes are provided for the difference between the financial statement and income tax bases of assets and liabilities; (f) net realized gains or losses attributed to changes in the level of market interest rates are recognized as gains or losses in the statements of income when the sale is completed rather than deferred and amortized over the remaining life of the fixed maturity security or mortgage loan; (g) declines in the estimated realizable value of investments are charged to the statements of income when such declines are judged to be other than temporary rather than through the establishment of a formula-determined statutory investment reserve (carried as a liability), changes in which are charged directly to surplus; (h) agents' balances and certain other assets designated as "non-admitted assets" for statutory purposes are reported as assets rather than being charged to surplus; (i) revenues for interest sensitive and variable products consist of policy charges for the cost of insurance, policy administration charges, amortization of policy initiation fees and surrender charges assessed rather than premiums received; (j) pension income or expense is recognized in accordance with Statement No. 87, "Employers' Accounting for Pensions" rather than in accordance with rules and regulations permitted by the Employee Retirement Income Security Act of 1974; (k) the financial statements of subsidiaries are consolidated with those of the insurance subsidiary; and (l) assets and liabilities are
Net income of the Life Companies, as determined in accordance with statutory accounting practices, was $28.9 million in 2000, $40.4 million in 1999 and $52.5 million in 1998. Statutory net gain from operations for the life insurance subsidiaries, which excludes realized gains and losses, totaled $49.8 million in 2000, $41.2 million in 1999 and $56.0 million in 1998. Statutory capital and surplus, after appropriate elimination of intercompany accounts, totaled $311.9 million at December 31, 2000 and $301.5 million at December 31, 1999.
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 2001, Farm Bureau Life could pay dividends to the parent company of approximately $49.9 million without prior approval of insurance regulatory authorities.
The National Association of Insurance Commissioners has revised the ACCOUNTING PRACTICES AND PROCEDURES MANUAL, the guidance that defines statutory accounting principles. The revised manual will be effective January 1, 2001, and has been adopted by the State of Iowa, our Life Companies' state of domicile. The revised manual will result in changes to the accounting practices that the Life Companies use to prepare their statutory-basis financial statements. Management believes the impact of these changes to the Life Companies' statutory-basis capital and surplus as of January 1, 2001 will not be significant.
As noted above, we also had a property-casualty insurance segment prior to March 31, 1998. Revenues from this segment were derived from the sale of property-casualty insurance policies. See Note 11, "Discontinued Operations and Restructuring," for additional information regarding this segment.
15. KANSAS FARM BUREAU LIFE INSURANCE COMPANY ACQUISITION - SUBSEQUENT EVENT
On January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau Life Insurance Company for $81.1 million. The acquisition will be accounted for using purchase accounting. Goodwill recorded in connection with the transaction will be amortized using the straight-line method over a 20-year period. A condensed statement of the assets and liabilities acquired as of January 1, 2001, is as follows (dollars in thousands - unaudited):