The following items were excluded from net income as reported in Torchmark's financial statements in order to compute net operating income:
Variable annuity collections rose 55% to $608 million in 2000, from $393 million in the prior year. Variable collections rose 31% from $299 million in 1998. The strength in financial markets throughout most of 2000 and the two preceding years has had a positive influence on sales of variable annuities in each period. The variable annuity account balance continues to grow. This balance increased 9% in 2000 from $3.3 billion at December 31, 1999 to $3.6 billion at year-end 2000. This balance had previously increased 40% in 1999 and 29% in 1998. Strong financial markets in all of these periods contributed greatly to the growth, although some weakening in markets was experienced in the latter part of 2000. Variable accounts are valued based on the market values of the underlying securities. The additional collections in each year also added to the balances.
Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. Dividends are paid by subsidiaries to the parent in order to meet its dividend payments on common and preferred stock, interest and principal repayment requirements on parent-company debt, and operating expenses of the parent company. These requirements have declined in both 2000 and 1999 from the respective prior year. Dividends from insurance subsidiaries of Torchmark are limited to the greater of statutory net gain from operations, excluding capital gains and losses, on an annual noncumulative basis, or 10% of surplus, in the absence of special approval. Distributions are not permitted in excess of statutory net worth. Subsidiaries are also subject to certain minimum capital requirements. Although these restrictions exist, dividend availability from subsidiaries has been and is expected to be more than adequate for parent company operations. During the year 2001, a maximum amount of $240 million is expected to be available to Torchmark from insurance subsidiaries without regulatory approval.
Total debt as a percentage of total capitalization was 21.5% at December 31, 2000. In the computation of this ratio, the MIPS are counted as equity and the effect of fluctuations in security values based on changes in interest rates in financial markets are excluded. This debt-to-capitalization ratio was 25.2% at year-end 1999 and 24.3% at year-end 1998. The decline in the debt-to- capitalization ratio at year-end 2000 was caused primarily by short-term debt paydowns. The 1999 increase in this ratio resulted from the increase in short- term borrowings. Torchmark's ratio of earnings before interest, taxes and discontinued operations to interest requirements was 11.3 in 2000, compared with 8.7 in 1999 and 8.9 in 1998. Torchmark's interest expense rose 4% to $54 million in 2000 after having declined 7% to $52 million in 1999. The increase in 2000 was due primarily to an increase in short-term borrowing costs which offset the lower amount of average debt outstanding. The 1999 decrease was caused by a larger portion of total debt being short-term debt that carries a lower borrowing cost.
Transactions Regarding Vesta Insurance Group. From 1993 until disposition in 2000, Torchmark held a passive investment in Vesta, a property insurance carrier. Torchmark held 5.1 million shares of Vesta stock, or approximately 28% of the outstanding shares of Vesta, until December, 1998. Torchmark carried its investment in Vesta during this period on the equity method of accounting. In June, 1998, Vesta announced that (a) an investigation of accounting irregularities that occurred during the fourth quarter of 1997 and the first quarter of 1998 would result in an aggregate $14 million net after- tax reduction in previously reported net income, and, in addition, that (b) it would restate its historical financial statements for the period of 1993 through the first quarter of 1998, reflecting reductions in reported net after-tax earnings of $49 million for the period of 1993 through 1997 and $10 million for the first quarter of 1998. To reflect its pro rata share of Vesta's cumulative reported financial corrections, Torchmark recorded a pre- tax charge of $20 million ($13 million after tax) or $.09 per diluted share in the second quarter of 1998. As a result of the announcements relating to Vesta and the decline in value of Vesta stock, Vesta is currently subject to numerous class action lawsuits in state and Federal courts filed subsequent to such announcements.
Accounting for Derivative Instruments and Hedging Activities (FASB Statement No. 133), as amended by FASB Statements No. 137 and 138, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier application of all of the provisions of this Statement encouraged. For Torchmark, the Statement is effective as of January 1, 2001. Early adoption of selective provisions is prohibited. Prior periods may not be restated for comparability.
Statement No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. It is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application is not permitted. The adoption of Statement No. 140 should have an immaterial impact on Torchmark.
We have audited the consolidated financial statements of Torchmark Corporation and subsidiaries as listed in Item 8 as of and for the year ended December 31, 1998. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedules as listed in Item 14(a) as of and for the year ended December 31, 1998. These consolidated financial statements and financial statement schedules are the responsibility of Torchmark's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit.
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. Contributions are made to the pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Accrued pension expense in excess of amounts contributed has been recorded as a liability in the financial statements and was $9.5 million and $7.5 million at December 31, 2000 and 1999, respectively. The plans covering the majority of employees are organized as trust funds whose assets consist primarily of investments in marketable long-term fixed maturities and equity securities which are valued at market.
Otherwise, no individual industry represented 3% or more of Torchmark's investments. At year-end 2000, 5% of the carrying value of fixed maturities was rated below investment grade (BB or lower as rated by Standard & Poor's or the equivalent NAIC designation). Par value of these investments was $405
Transactions with Directors and Officers: Lamar C. Smith, elected a director of Torchmark in October 1999, is an officer, director and 15% owner of Independent Research Agency for Life Insurance, Inc. (IRA), which receives commissions as the Military Agency distribution system for selling certain life insurance products offered by Torchmark's insurance subsidiaries. These commissions were $43.5 million in 2000 and $39.2 million in 1999.