NET INVESTMENT INCOME increased 3.5% in 1998, to $228.1 million, and 5.8% in 1997, to $220.4 million. These increases are attributable to increases in invested assets and the yield earned on those investments. Average invested assets totaled $2,895.5 million in 1998, $2,855.7 million in 1997 and $2,701.6 million in 1996. The annualized yield earned on average invested assets was 7.88% in 1998 compared to 7.72% in 1997 and 7.71% in 1996. Despite a general decline in market interest rates during 1998 and 1997, yield on invested assets increased due principally to an increase in fee income and discount accretion associated with bond calls and prepayments on mortgage loans and mortgage-backed securities. Fee income from mortgage loan prepayments and bond calls totaled $9.8 million in 1998, $3.1 million in 1997 and $1.3 million in 1996. This revenue is not expected to be a consistently recurring source of income for the Company. In addition, investment income increased because of the sale in 1997 and 1996 of equity securities which generate little current income and the reinvestment of the proceeds in fixed maturity securities. Partially offsetting the increase in net investment income was a $1.1 million decrease in 1998 and $1.8 million decrease in 1997 in investment income from FBL Ventures.
Many of the Company's computer programs were originally written using two digits rather than four to define a particular year. As a result, these computer programs have time-sensitive software that may recognize a date using "00" as the year 1900 rather than the year 2000. This could cause 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. To a lesser extent, the Company is dependent on various non-information technology systems, such as telephone switches. The Year 2000 could also cause these systems to fail or malfunction.
The Company has and will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. With only a few exceptions, the Year 2000 modifications and testing have been completed. The exceptions are limited to a few third-party software packages for which the Year 2000 compliant version will become available in the first quarter of 1999. It is anticipated that the Company will complete its system modifications and testing prior to any material impact on its operating systems. Non-information technology systems that are not Year 2000 compliant have been replaced or have been identified and will be replaced by December 31, 1999.
The return of principal on mortgage and other asset-backed securities occurs more frequently and is more variable than that of more traditional fixed maturity securities. The principal prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that can not be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy. Deviations in actual prepayment speeds from that originally expected can cause a change in the yield earned on mortgage and asset-backed securities purchased at a premium or discount. Increases in prepayment speeds, which typically occur in a decreasing interest rate environment, generally increases the rate at which discount is accrued and premium is amortized into income. Decreases in prepayment speeds, which typically occur in an increasing interest rate environment, generally slows down the rate these amounts are recorded into income.
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 its financial statements are fairly stated in all material respects.
Beginning in 1998, the Company has administrative services agreements with an equity investee under which the Company provides underwriting, claims processing, accounting, compliance and other administrative services relating to certain variable insurance products underwritten by the affiliate. Fee income from performing these services totaled $0.2 million during 1998.
In connection with an investment in a limited real estate partnership, 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