(7) Statutory data has been derived from the annual statements of the Company's insurance subsidiaries, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices.
LIFE INSURANCE OPERATIONS. The Life Companies sell universal life, variable universal life, traditional life and disability income insurance and traditional and variable annuity products. These products are currently marketed to Farm Bureau members and other individuals and businesses in 15 midwestern and western states through an exclusive agency force. Several subsidiaries support various functional areas of Farm Bureau Life, Western Life and other affiliates, by providing investment advisory, marketing and distribution, and leasing services.
Premiums and product charges increased $19.9 million, or 11.7%, to $189.3 million for 1997 compared to $169.4 million for 1996. Interest sensitive product charges increased $4.3 million, or 9.9%, due to an increase in the volume and age of business in force, partially offset by decreases in cost of insurance rates ranging from 4% to 12% which took effect March 14, 1996. Traditional life and accident and health insurance premiums decreased $0.3 million, or 0.3%, to $92.5 million for 1997. Management believes the sale of traditional life insurance products decreased due to a marketing emphasis placed on the sale of variable universal life insurance products. Premiums collected on variable universal life insurance products increased 21.7% to $31.6 million in 1997 from $26.0 million in 1996. Property-casualty premiums increased $15.8 million, or 47.8%, primarily due to the increase in Utah Insurance's reinsurance pool participation to 20% from 8% on June 30, 1996. In addition, the impact on premiums of rate decreases on private passenger auto and workers' compensation insurance was more than offset by growth in the volume of business in force.
Policy benefits increased $17.5 million, or 6.9%, to $271.1 million for 1997 compared to $253.6 million for 1996. Included in this increase is a $3.5 million increase in interest sensitive product benefits consisting of a $1.5 million increase in universal life death benefits in excess of related account balances and a $2.0 million increase in interest credited to these contracts. The increase in interest credited is attributable to a larger volume of business in force partially offset by a decrease in interest crediting rates on these contracts. The weighted average crediting rate for the Company's universal life liabilities decreased to 6.18% for 1997 from 6.39% for 1996, and the weighted average crediting rate for the Company's annuity liabilities decreased to 6.18% for 1997 from 6.35% for 1996. The decrease in interest crediting rates was greater than the reduction (seven basis points) in the annualized yield on the types of invested assets supporting universal life and annuity liabilities due to the Company's initiatives (decreases to interest crediting rates) to increase interest rate spreads and profitability on this business. Traditional life and accident and health benefits increased $3.8 million, or 4.8%, consisting of a $1.3 million increase in the change in the reserves on these products, a $1.8 million increase in surrender benefits, a $0.9 million increase in accident and health benefits, and a $0.2 million net decrease in other benefits. The increase in the change in reserves on traditional products is attributable to growth in the volume and age of business in force and, for 1997, is net of a $1.4 million one-time reduction in reserves related to a change in the funding of the Company's defined benefit retirement plan. Distributions to policyholders decreased to $25.9 million from $26.3 million due to a reduction in the average dividend credited to these policies to 5.89% at December 31, 1997 from 6.12% at December 31, 1996, partially offset by growth in the amount and age of participating business in force. Losses and loss adjustment expenses incurred on property-casualty policies increased $10.6 million, or 37.3%, to $39.0 million for 1997 from $28.4 million for 1996 due primarily to the changes in Utah Insurance's reinsurance pool participation. The loss and loss adjustment expense ratio decreased in 1997 to 79.9% from 86.0% in 1996 due generally to more favorable weather conditions during 1997.
Income taxes increased $0.5 million, or 1.5%, to $38.3 million for 1997 compared to $37.8 million for 1996. The effective tax rate for 1997 was 33.3% compared to 32.3% for 1996. The effective tax rates were lower than the federal statutory rate of 35% due primarily to tax exempt interest and dividend income and, in 1996, other permanent differences between book and taxable income primarily relating to investment transactions. In addition, during 1997, the Company realized a tax benefit associated with the payment of dividends on its mandatorily redeemable preferred stock of subsidiary trust. The impact of these items was partially offset during 1997 and 1996 by state income taxes.
The separate account assets and liabilities reported in the accompanying consolidated balance sheets represent funds that are separately administered, principally for the benefit of certain policyholders who bear the underlying investment risk. The separate account assets and liabilities are carried at fair value. Revenues and expenses related to the separate account assets and liabilities, to the extent of benefits paid or provided to the separate account policyholders, are excluded from the amounts reported in the accompanying consolidated statements of income.
During the year ended December 31, 1997, 13 securities with a total fair value of $15.0 million were transferred to Farm Bureau Life from the Company's venture capital subsidiary, upon its dissolution. During the year ended December 31, 1995, two securities with a total fair value of $27.6 million were transferred out of the subsidiary. Realized gains (recognized in net investment income) of $6.3 million and $24.6 million were recognized on the 1997 and 1995 transfers, respectively, although neither transfer had an impact on net income (as unrealized appreciation had been reported prior to the transfer).
In December 1997, the Company acquired a 35% interest in an unaffiliated life insurance company for $25.0 million. The excess (approximately $5.1 million) of the carrying amount of the investment, which is classified as securities and indebtedness of related parties on the consolidated balance sheet, over the amount of underlying equity in net assets is attributable to goodwill and is being amortized over a 20 year period. The investment is being accounted for using the equity method. The insurance company underwrites and markets life insurance and annuity products throughout the United States.
In February 1996, an equity investee of the Company completed an initial public offering which resulted in an increase of $4.9 million, net of $2.6 million in taxes, in the Company's share of the investee's stockholders' equity. This increase was credited directly to common stock, allocated proportionately among Class A common stock and Class B common stock based on shares outstanding. Subsequent to the public offering, the Company reclassified the investment to equity securities. The Company has sold the majority of its holdings in this investment and
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 sheet, for which it is practicable to estimate that 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 the underlying value of the Company.
FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' FUNDS: Fair values of the Company's 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 the Company would incur to extinguish the liability. The Company is not required to estimate the fair value of its liabilities under other contracts.
Information regarding stock options outstanding at December 31, 1997 is as follows:
The Company shares certain office facilities and services with the Iowa Farm Bureau Federation and its affiliated companies. These expenses are allocated by the Company on the basis of cost and time studies that are updated annually and consist primarily of salaries and related expenses, travel, and occupancy costs.
In connection with an investment in a limited real estate partnership in 1996, the Company has agreed to pay any cash flow deficiencies of a medium-sized shopping center owned by the partnership through January 1, 2001. At December 31, 1997, the Company assessed the probability and amount of future cash flows from the property and determined that no accrual was necessary. At December 31, 1997 and 1996, the limited partnership had a $5.4 million mortgage loan, secured by the shopping center, with Farm Bureau Mutual Insurance Company.
The following table sets forth the computation of earnings per common share and earnings per common share assuming dilution: