| UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||
| Washington, D. C. 20549 | ||
| FORM 10-K | ||
| (Mark one) | ||
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2013 | ||
| or | ||
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from____________________ to____________________ | ||
| Commission File Number: 1-11917 | ||
| (Exact name of registrant as specified in its charter) | ||
| Iowa | 42-1411715 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| 5400 University Avenue, West Des Moines, Iowa | 50266-5997 | |
| (Address of principal executive offices) | (Zip Code) | |
| (515) 225-5400 | ||
| (Registrant's telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Class A common stock, without par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [X] | Non-accelerated filer [ ] | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2013, the aggregate market value of the registrant's Class A and B Common Stock held by non-affiliates of the registrant was $416,478,677 based on the closing sale price as reported on the New York Stock Exchange.
| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: | ||
| Title of each class | Outstanding at February 18, 2014 | |
| Class A Common Stock, without par value | 24,787,511 | |
| Class B Common Stock, without par value | 11,413 | |
| DOCUMENTS INCORPORATED BY REFERENCE | ||
| Document | Parts Into Which Incorporated | |
| Proxy statement for annual shareholders meeting on May 22, 2014 | Part III | |
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| FBL FINANCIAL GROUP, INC. | ||||
| FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013 | ||||
| TABLE OF CONTENTS | ||||
(This page has been left blank intentionally.)
Cautionary Statement Regarding Forward Looking Information
This Form 10-K includes statements relating to anticipated financial performance, business prospects, new products and similar matters. These statements and others, which include words such as "expect," "anticipate," "believe," "intend" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. A variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include but are not limited to the following.
| • | Difficult conditions in the financial markets and the economy may materially adversely affect our business and results of operations. |
| • | Adverse financial market conditions may significantly affect our liquidity, access to capital and cost of capital. |
| • | Our valuation of fixed maturity securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition. |
| • | Our investment portfolio is subject to credit quality risks that may diminish the value of our invested assets and affect our profitability and reported book value per share. |
| • | Changing interest rates, market volatility and general economic conditions affect the risks and the returns on both our products and our investment portfolio. |
| • | We face competition from companies having greater financial resources, more advanced technology systems, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength. |
| • | As a holding company, we depend on our subsidiaries for funds to meet our obligations, but our life insurance subsidiaries' ability to make distributions to us is limited by law, and could be affected by minimum risk-based capital requirements. |
| • | A significant ratings downgrade may have a material adverse effect on our business. |
| • | All segments of our business are highly regulated and these regulations or changes in them could affect our profitability. |
| • | An inability to access Federal Home Loan Bank funding could adversely affect our profitability. |
| • | Actual experience which differs from our assumptions regarding future persistency, mortality and interest rates used in pricing our products and calculating reserve amounts and deferred acquisition costs could have a material adverse impact on our financial results. |
| • | We may be required to accelerate the amortization of deferred acquisition costs, which could adversely affect our results of operations or financial condition. |
| • | Our earnings are influenced by our claims experience, which is difficult to estimate for future periods. If our future claims experience does not match our pricing assumptions or past results, our earnings could be materially adversely affected. |
| • | Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them. |
| • | Our business is highly dependent on our relationships with Farm Bureau organizations and could be adversely affected if those relationships became impaired. |
| • | Our relationship with Farm Bureau organizations could result in conflicts of interests. |
| • | Changes in federal tax laws may affect sales of our products and profitability. |
| • | Our ability to maintain competitive costs is dependent upon the level of new sales and persistency of existing business. |
| • | If we are unable to attract and retain agents, sales of our products and services may be reduced. |
| • | Attracting and retaining employees who are key to our business is critical to our growth and success. |
| • | Success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements. |
| • | We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business. |
See Part 1A, Risk Factors, for additional information.
1
PART I
ITEM 1. BUSINESS
General
FBL Financial Group, Inc. (we or the Company) sells individual life insurance and annuity products principally under the consumer brand name Farm Bureau Financial Services. This brand identity is represented by the distribution channel of our subsidiary Farm Bureau Life Insurance Company (Farm Bureau Life). In addition, in the state of Colorado, we offer life and annuity products through Greenfields Life Insurance Company (Greenfields Life). As of December 31, 2013, these distribution channels consisted of 1,801 exclusive agents and agency managers. These agents and agency managers sell our products in the Midwestern and Western sections of the United States.
FBL Financial Group, Inc. was incorporated in Iowa in October 1993. Its life insurance subsidiary, Farm Bureau Life, began operations in 1945 and Greenfields Life, a subsidiary of Farm Bureau Life, was launched in early 2013. Several other subsidiaries support various functional areas and affiliates by providing investment advisory and marketing and distribution services. In addition, we manage all aspects of two Farm Bureau affiliated property-casualty insurance companies (Farm Bureau Property & Casualty Insurance Company and Western Agricultural Insurance Company) which operate predominately in eight states in the Midwest and West.
FBL Financial Group, Inc. Business and Distribution Channels
| FBL Financial Group, Inc. |
| COMPANY | Farm Bureau Life Insurance Company | Greenfields Life Insurance Company | Farm Bureau Property & Casualty Insurance Company and Western Agricultural Insurance Company | ||
| RELATIONSHIP | Wholly-owned subsidiary | Subsidiary of Farm Bureau Life | Managed by FBL Financial Group. Underwriting results do not impact FBL Financial Group's results | ||
BRAND  |  | | | ||
| DISTRIBUTION | 1,793 exclusive Farm Bureau agents and agency managers | New company in 2013; 8 exclusive agents and agency managers | 1,121 exclusive Farm Bureau agents and agency managers (included under the 1,793 Farm Bureau Life agents) | ||
| PRODUCTS | A comprehensive line of life insurance, annuity and investment products | A comprehensive line of life insurance, annuity and investment products | A full line of personal and commercial property-casualty insurance products | ||
| TERRITORY | 14 Midwestern and Western states | Colorado | Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah | ||
Investor information, including electronic versions of periodic reports filed on Forms 10-K, 10-Q and 8-K, and proxy material, are available free of charge through the Investor Relations section of our website at www.fblfinancial.com. These documents are posted to our website immediately after they are filed. Also available on our website are many corporate governance documents including a code of ethics for the Chief Executive Officer and senior financial officers, committee charters, corporate governance guidelines, director profiles and more. Product information may be found on our consumer websites, www.fbfs.com and www.greenfieldslife.com.
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Business Strategy
Our core business strategies leverage areas where we have competitive advantages. Our exclusive agent distribution channel enables deep customer engagement and long-term customer relationships. We benefit from close ties to the unique needs of the agricultural market and affinity with the Farm Bureau brand, and our cross-sell culture results in industry leading cross-sell rates.
Our 1,801 agents are multi-line agents who sell both property-casualty insurance products and life insurance and investment products. Having multi-line agents enhances our ability to develop a more comprehensive relationship with our customers and increases our ability to cross-sell our life insurance and annuity products to the pool of Farm Bureau property-casualty customers.
Our multi-line exclusive agent distribution channel is our foundation and we are defined by our service to the Farm Bureau niche marketplace. We capitalize on the Farm Bureau brand to grow our business and build upon our agricultural and rural market leadership. We focus on needs-based selling and have a broad portfolio of life insurance and annuity products so that we have products available to satisfy the needs of our agents and customers.
Because of their multi-line nature, our agents focus on cross-selling life insurance products to customers who already own a property-casualty policy issued by our property-casualty company partners. For example, in the eight-state region where we manage the affiliated property-casualty insurance companies and related field force (Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah), 24% of our property-casualty policyholders also own a Farm Bureau Life annuity or life product. We are considered among the best-in-industry in cross-sell rates. This percentage is and has historically been higher than the industry average for multi-line exclusive agents, which is 12% according to the most recent research by Life Insurance and Market Research Association (LIMRA). We believe there is further opportunity for growth from cross-selling as 71% of the Farm Bureau members in the eight-state region have a Farm Bureau property-casualty insurance product, while only 21% of Farm Bureau members in the eight-state region have a life insurance product with us.
We provide our agents with sales materials, the necessary training and a high level of sales support. In addition, throughout our marketing territory, certain agents are life and investment specialists who work as a resource to help their fellow agents with cross-selling techniques and client needs analysis.
Our sales model is designed so that our agents act like entrepreneurial business owners with a retail financial services business. Under this model our agents have sales and service associates who assist them and provide a variety of support for insurance sales and clients.
While we underwrite the majority of the products available for sale by our agents, we broker products sold by other carriers when we do not have the expertise, ratings or scale to compete efficiently in the marketplace. Examples of brokered products include variable products, long-term care insurance, health insurance and last survivor life policies. We earn fees from the sale of brokered products, a portion of which is passed on to the agents as commissions for the underlying sales.
Our growth has been augmented by our long and successful history of being a consolidator among Farm Bureau affiliated insurance companies. This has allowed us to grow to the operation we are today. While we believe further consolidation makes sense, this is a long-term strategy. By focusing on maintaining solid relationships with the leaders of these companies and the Farm Bureau organizations, we are prepared to react when opportunities arise.
Marketing and Distribution
Market Area
Sales through our distribution channels are currently conducted in 15 states which we characterize as follows: multi-line states (we own the Farm Bureau affiliated life company and manage the Farm Bureau affiliated property-casualty companies) - Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah; and life partner states (we own the Farm Bureau affiliated life company and non-owned/non-managed Farm Bureau affiliated property-casualty companies manage the exclusive multi-line agents) - Colorado, Idaho, Montana, North Dakota, Oklahoma, Wisconsin and Wyoming.
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Our target market is Farm Bureau members and "Middle America." We traditionally have been very strong in rural and small town markets and also have a presence in many small and mid-metro markets. This target market represents a relatively financially conservative and stable customer base. The financial needs of our target market tend to focus on security, insurance needs and retirement savings.
Affiliation with Farm Bureau
Many of our customers are members of Farm Bureau organizations affiliated with the American Farm Bureau Federation (American Farm Bureau). The American Farm Bureau is the nation's largest grassroots farm and ranch organization and has a current membership of 6.1 million member families. In order to market insurance products in a given state using the "Farm Bureau" and "FB" designations, related trademarks and service marks, a company must have an agreement with the state's Farm Bureau organization. Generally, these marketing rights have only been granted to companies owned by or closely affiliated with Farm Bureau organizations. For each of the states in our Farm Bureau marketing territory, we have the right to use the "Farm Bureau" name and "FB" logo for marketing life insurance and investment products.
All of the state Farm Bureau organizations in our marketing area are associated with the American Farm Bureau. The primary goal of the American Farm Bureau is to be the unified national voice of agriculture, working through its grassroots organization to enhance and strengthen the lives of rural Americans and to build strong, prosperous agricultural communities. There are currently Farm Bureau organizations in all 50 states and Puerto Rico, each with their own distinctive mission and goals. Within each state, Farm Bureau is organized at the county level. Farm Bureau programs include policy development, government relations activities, leadership development and training, communications, market education classes, commodity conferences and young farmer activities. Member services provided by Farm Bureau vary by state but often include programs such as risk management, alternative energy development and guidance on enhancing profitability. Other benefits of membership include newspaper and magazine subscriptions, as well as savings in areas such as health care, entertainment and automobile rebates. In addition, members have access to accidental death insurance, banking services, credit card programs, computerized farm accounting services, electronic information networks, feeder cattle procurement services, health care insurance, property-casualty insurance and financial services.
The American Farm Bureau may terminate our right to use the "Farm Bureau" and "FB" designations in our states (i) in the event of a material breach of the trademark license that we do not cure within 60 days, (ii) immediately in the event of termination by the American Farm Bureau of the state Farm Bureau's membership in the American Farm Bureau or (iii) in the event of a material breach of the state Farm Bureau organization's membership agreement with the American Farm Bureau, including by reason of the failure of the state Farm Bureau to cause us to adhere to the American Farm Bureau's policies.
We have royalty agreements with each state Farm Bureau organization in our Farm Bureau marketing territory giving us the right to use the Farm Bureau and FB designations in that particular state. Each state Farm Bureau organization in our Farm Bureau territory could terminate our right to use the Farm Bureau designations in that particular state without cause at the conclusion of the royalty agreements. The royalties paid to a particular state Farm Bureau organization are based on the sale of our products in the respective state. For 2013, royalty expense totaled approximately $2.3 million.
Our relationship with Farm Bureau provides a number of advantages. Farm Bureau organizations in our marketing territory tend to be well known and long established, have active memberships and provide a number of member benefits other than financial services. The strength of these organizations provides enhanced prestige and brand awareness for our products and increased access to Farm Bureau members, which results in a competitive advantage for us.
Our life insurance and investment products are available for sale to both members and non-members. Property-casualty products sold by the property-casualty insurance companies affiliated with Farm Bureau are available for sale to Farm Bureau members. Annual Farm Bureau memberships in our marketing territory average $60 and are available to individuals, families, partnerships or corporations.
We have service agreements with all of our property-casualty company partners in our marketing area, pursuant to which the property-casualty companies provide certain services, which include recruiting and training the shared agency force that sells both property-casualty products for that company and life products for us. The service agreements have expiration dates through December 31, 2022. In 2013, we paid $9.7 million for the services provided under these agreements.
Our Advisory Committee, which consists of executives of the property-casualty insurance company partners in our marketing territory, assists us in our relationships with the property-casualty organizations and the Farm Bureau organization leaders in their respective states. The Advisory Committee meets on a regular basis to coordinate efforts and issues involving the agency
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force and other matters. The Advisory Committee is an important contributor to our success in marketing products through our distribution system.
Royalty and property-casualty agreements vary in term and expiration date as shown below.
| Royalty and Property-Casualty Service Agreements by State | ||||||
| State | Property-Casualty Service Agreement Expiration Date | Royalty Agreement Expiration Date | Percent of 2013 First Year Premiums Collected | |||
| Iowa | December 31, 2015 | December 31, 2033 | 28.6 | % | ||
| Kansas | December 31, 2015 | December 31, 2033 | 17.0 | |||
| Wyoming | December 31, 2021 | December 31, 2021 | 8.3 | |||
| Nebraska | December 31, 2015 | December 31, 2033 | 7.5 | |||
| Oklahoma | December 31, 2022 | December 31, 2022 | 6.9 | |||
| Idaho | December 31, 2021 | December 31, 2021 | 5.4 | |||
| Minnesota | December 31, 2015 | December 31, 2033 | 5.1 | |||
| Utah | December 31, 2015 | December 31, 2033 | 3.9 | |||
| New Mexico | December 31, 2015 | December 31, 2033 | 3.4 | |||
| Montana | December 31, 2021 | December 31, 2021 | 3.2 | |||
| Arizona | December 31, 2015 | December 31, 2033 | 2.9 | |||
| South Dakota | December 31, 2015 | December 31, 2033 | 2.9 | |||
| Wisconsin | December 31, 2020 | December 31, 2020 | 2.3 | |||
| North Dakota | December 31, 2021 | December 31, 2021 | 1.8 | |||
| Colorado | December 31, 2021 | N/A | 0.3 | |||
| Other | N/A | N/A | 0.5 | |||
| 100.0 | % | |||||
Agency Force
Our agency force is one of our most important competitive advantages. Our priority is to ensure that we have best-in-class distribution systems and support, including agent recruiting and retention, training and leadership.
Our life insurance and annuity products are marketed throughout our marketing territory by our exclusive agents. We have a written contract with each member of our agency force. The contracts cover a number of topics including privacy, compensation payments and reserving our ownership of customer lists.
Sales activities of our agents focus on personal contact and on cross-selling life and annuity products to the existing property-casualty customers. The Farm Bureau name recognition and access to Farm Bureau membership leads to additional customers, cross-selling of additional insurance products and increased retention.
Our agents are independent contractors and exclusive agents. In the multi-line states where we manage the Farm Bureau affiliated property-casualty companies, our agents are supervised by agency managers employed by the property-casualty companies which are under our direction. There are 1,121 agents and managers in our multi-line states. These agents market a full range of our life insurance and annuity products. They also market products for the property-casualty companies that we manage.
In our life partner states, our life insurance and annuity products are marketed by agents that we share with our property-casualty company partners in that state. There are 680 agents and managers in our life partner states. These agents market our life and annuity products and market the property-casualty products of that state's affiliated property-casualty company.
5
We are responsible for product and sales training for all lines of business in our multi-line states, and for training the agency force in life insurance products and sales methods in our life partner states.
We structure our agents' life products compensation system to encourage production and persistency. Agents receive commissions for new life insurance and annuity sales and service fees on premium payments in subsequent years. Production bonuses are paid based on the premium level of new life business written in the prior 12 months and the persistency of the business written by the agent. Persistency is a common measure used in life insurance, which measures the quality and the consistent payment of premiums, and is included in calculating the bonus to either increase or decrease (or even eliminate) the agent's production bonus. We are willing to pay added incentives for higher volumes of business only as long as the business is profitable. Production bonuses allow agents to increase their compensation significantly.
The focus of agency managers is to recruit, train, supervise and retain agents to achieve high production levels of profitable business. Managers receive overwrite commissions on each agent's life insurance commissions which vary according to that agent's productivity level and persistency of business. Agent development is encouraged through a bonus structure that rewards goal attainment and agency growth. New agent development is also encouraged through financing arrangements and the annualization of commissions paid when a life policy is sold.
In order to further strengthen our distribution, current efforts are focused on making sure we have the systems and technology solutions in place to support our agents' sales and service processes. In addition, in order to increase an agent's opportunity for success, we have changed how we recruit and train new agents.
We have a variety of incentives and recognition programs to focus agents on production of quality life insurance business. Some recognition programs and incentives are jointly conducted with the property-casualty companies. These programs provide significant incentives for the most productive agents. Approximately 18% of our agents and agency managers qualify for our annual incentive trip. Agent recruiting, training, financing and compensation programs are designed to develop a productive agent for the long term. Our four-year agency force retention rate for 2013 was approximately 27%.
Business Segments
We analyze operations by reviewing financial information regarding our primary products that are aggregated into the Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company.
See Note 13 to our consolidated financial statements included in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Information" included in Item 7 for additional information regarding our financial results by operating segment. Included in the following discussion of our segments are details regarding premiums. We use premiums collected to measure the productivity of our exclusive agents. Premiums collected is not a measure used in financial statements prepared according to U.S. generally accepted accounting principles (GAAP). Note 13 to our consolidated financial statements also includes a discussion of the most comparable GAAP financial measures and, as applicable, a reconciliation to such GAAP measures.
Annuity Segment
We sell a variety of traditional annuity products through our exclusive agency force. The Annuity segment primarily consists of fixed rate and indexed annuities and supplementary contracts (some of which involve life contingencies). Traditional annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest.
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| Premiums Collected - Annuity Segment | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| First year - individual | $ | 139,156 | $ | 166,230 | $ | 216,713 | |||||
| Renewal - individual | 111,585 | 138,191 | 136,534 | ||||||||
| Group | 8,725 | 11,923 | 15,909 | ||||||||
| Total Annuity | $ | 259,466 | $ | 316,344 | $ | 369,156 | |||||
We intentionally decreased the amount of annuity sales beginning in 2012 by suspending sales of certain products and reducing agent commission rates on certain products where it was difficult to achieve profitability targets during this period of low interest rates. We expect modest increases in annuity sales due to the recent rise in market interest rates and a renewed emphasis placed on sales of products with low guaranteed crediting rates. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rates on our products and the perceived security of our products compared to those of competing products. Average crediting rates on our individual deferred annuity contracts were 2.97% in 2013, 3.15% in 2012 and 3.36% in 2011. Traditional annuity premiums collected in our Farm Bureau market territory in 2013 were concentrated primarily in the states of Iowa (29%), Kansas (26%) and Wyoming (8%).
Fixed Rate Annuities
We offer annuities that are marketed to individuals in anticipation of retirement. We offer traditional annuities in the form of flexible premium deferred annuities (FPDA) that allow policyholders to make contributions over a number of periods. For traditional annuity products, policyholder account balances are credited interest at rates that we determine. The annuitant may elect to take the proceeds of the annuity either in a single payment or in a series of payments for life, for a fixed number of years, for a fixed amount, or a combination of these options.
In addition to FPDAs, we also market single premium deferred annuities (SPDA) and single premium immediate annuity (SPIA) products which feature a single premium paid when the contract is issued. Benefit payments and the surrender charge structure on SPDA contracts are similar to other fixed rate annuities. Benefit payments on SPIAs begin immediately after the issuance of the contract. Sales of the single premium fixed rate annuities are currently suspended due to the low interest rate environment.
Approximately 36% of our existing individual traditional annuity business, based on account balances, is held in qualified retirement plans. For the deferred annuity products, to further encourage persistency, a surrender charge is imposed against the policyholders' account balance for early termination of the annuity contract within a specified period after its effective date. The surrender structure varies by product, but typically starts at 6% to 10% and decreases 1% per year until it reaches 0%.
We invest the premiums we receive from fixed rate annuities. The assets reside in our general account. Acquisition costs are paid from the general account as they arise. The difference between the yield we earn on our investment portfolio and the interest we credit on our fixed rate annuities is known as the spread. The spread is a major driver of the profitability for all of our traditional annuity products.
Withdrawal Rates
Withdrawal rates (excluding death benefits) for our individual deferred annuities were 5.1% for 2013, 4.8% for 2012 and 4.6% for 2011. We believe the competitive environment, due to the low level of market interest rates discussed above, has favorably impacted the level of withdrawal rates in these periods.
Interest Crediting Policy
We have a rate setting committee that meets monthly, or more frequently if required, to review and establish current period interest rates based upon existing and anticipated investment opportunities. This applies to new sales and to annuity products after an initial guaranteed period. We examine earnings on assets by portfolio. We then establish rates based on each product's target spread and competitive market conditions at the time. Most of our annuity contracts have guaranteed minimum crediting rates. These rates range from 1.00% to 5.50%, with a weighted average guaranteed crediting rate of 2.55% at December 31,
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2013 and 2.59% at December 31, 2012. The weighted average interest rate guarantees on annuity contracts issued during 2013 was 1.00%.
Index Annuities
Our multi-line distribution channel began selling index annuities in late 2012. With an index annuity, the policyholder may choose from a traditional fixed rate strategy or an index strategy, with the underlying index being the S&P 500®. The product requires crediting of interest and a reset of the index annually. The computation of the index credit is based upon either a point-to-point calculation (i.e., the gain in the index from the beginning of the contract year to the next reset date) or a monthly averaging of the index during the period, subject to a cap. This product allows contract holders to transfer funds among the index accounts and a traditional fixed rate strategy at the end of each reset period. It automatically includes a guaranteed lifetime withdrawal benefit rider. If activated by the policyholder, the rider provides a minimum amount that is available for withdrawal at specified withdrawal rates even if the accumulated value goes to zero. There is an additional annual charge for the activated rider.
The index annuity contract value is equal to the premiums paid plus interest credited to the fixed portion of the contract and index credits on the indexed portion of the contract, less partial withdrawals taken from the contract.
The minimum guaranteed contract values are equal to 87.5% of the premium collected plus interest credited at an annual rate of 1.0% compounded annually.
We purchase one-year call options on the S&P 500 to fund the index credits due to the index annuity contract holders. On the respective anniversary dates of the index annuity contracts, the index used to compute the index credits is reset, and subsequently new call options are purchased to fund the next index credit. The cost of the options is managed through the terms of the index annuities, which permit changes to caps, subject to minimum guarantees.
We invest index premiums and the investments reside in our general account. We then purchase call options and pay acquisition costs from the general account. With respect to that portion of the index account value allocated to an index crediting strategy, our spread is measured as the difference between the aggregate yield on the relevant portion of our invested assets, less the aggregate option costs and the costs associated with minimum guarantees. If the minimum guaranteed value of an index product exceeds the index value (computed on a cumulative basis over the life of the contract), the general account earnings are available to satisfy the minimum guarantees. If there were little or no gains in the entire series of options purchased over the life of an index annuity, we would incur expenses for credited interest over and above our option costs. In addition, if we are not successful in matching the terms of call options purchased with the terms of the index annuities, index credits could exceed call option proceeds. This would cause our spreads to tighten and reduce our profits.
| Interest Crediting Rates Compared to Guarantees - Annuity Segment | |||
| Liabilities at | |||
| December 31, 2013 | |||
| (Dollars in thousands) | |||
| Fixed rate annuities: | |||
| Greater than or equal to 100 basis points over guarantee | $ | 762,531 | |
| 50 basis points to 99 basis points over guarantee | 121,229 | ||
| 1 basis point to 49 basis points over guarantee | 112,969 | ||
| At guaranteed rate | 1,617,063 | ||
| Other annuities | 45,395 | ||
| Non-discretionary rate setting products | 513,411 | ||
| Total interest sensitive product liabilities | $ | 3,172,598 | |
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| In Force - Annuity Segment | |||||||||||
| December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Number of contracts | 53,252 | 53,757 | 53,894 | ||||||||
| Interest sensitive reserves | $ | 3,172,598 | $ | 3,048,797 | $ | 2,812,666 | |||||
| Other insurance reserves | 376,879 | 383,340 | 378,319 | ||||||||
Life Insurance Segment
We sell a variety of traditional and universal life insurance products through our exclusive agency force. The Life Insurance segment consists of whole life, term life and universal life policies. These policies provide benefits upon the death of the insured and may also allow the customer to build cash value on a tax-deferred basis.
| Premiums Collected - Life Insurance Segment | |||||||||||
| For the year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Universal life: | |||||||||||
| First year | $ | 70,470 | $ | 30,217 | $ | 14,888 | |||||
| Renewal | 57,693 | 51,325 | 47,311 | ||||||||
| Total | 128,163 | 81,542 | 62,199 | ||||||||
| Participating whole life: | |||||||||||
| First year | 11,909 | 11,202 | 11,463 | ||||||||
| Renewal | 96,532 | 96,738 | 96,242 | ||||||||
| Total | 108,441 | 107,940 | 107,705 | ||||||||
| Term life and other: | |||||||||||
| First year | 11,352 | 11,242 | 11,244 | ||||||||
| Renewal | 79,941 | 74,292 | 68,623 | ||||||||
| Total | 91,293 | 85,534 | 79,867 | ||||||||
| Total Life Insurance | 327,897 | 275,016 | 249,771 | ||||||||
| Reinsurance ceded | (20,423 | ) | (19,307 | ) | (20,303 | ) | |||||
| Total Life Insurance, net of reinsurance | $ | 307,474 | $ | 255,709 | $ | 229,468 | |||||
Life premiums collected were higher in 2013 and 2012 compared to prior years, reflecting the attractiveness of enhanced universal life and term life product offerings and the strong farm and energy subsectors of the economy in our marketplace, as well as our emphasis on life insurance product sales. Life insurance premiums collected in our market territory in 2013 were concentrated primarily in the states of Iowa (27%), Kansas (15%) and Oklahoma (9%).
Traditional Life Insurance
We offer traditional participating whole life insurance products. Participating whole life insurance provides benefits for the life of the insured. It provides level premiums and a level death benefit and requires payments in excess of mortality costs in early years to offset increasing mortality costs in later years. Under the terms of these policies, policyholders have a right to participate in our surplus to the extent determined by the Board of Directors, generally through annual dividends. Participating business accounted for 34% of life receipts from policyholders during 2013 and represented 13% of life insurance in force at December 31, 2013.
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We also market non-participating term insurance policies that provide life insurance protection for a specified period. Term insurance is mortality based and generally has no cash value. However, we also offer a return of premium term product, which returns a percentage of premiums after a set number of years. For a portion of our business, we may change the premium scales at any time but may not increase rates above guaranteed levels.
Universal Life Insurance
Our universal life policies provide permanent life insurance protection with a flexible or fixed premium structure which allows the customer to pre-fund future insurance costs and accumulate savings on a tax-deferred basis. Premiums received, less policy assessments for administration expenses and mortality costs, are credited to the policyholder's account balance. Interest is credited to the cash value at rates that we periodically set.
Underwriting
We follow formal underwriting standards and procedures designed to properly assess and quantify life insurance risks before issuing policies to individuals. To implement these procedures, we employ an underwriting staff of 14 underwriters who have an average of 21 years of experience in the insurance industry. Our underwriters review each applicant's application, which is prepared under the supervision of our agents, and any required medical records. We generally employ blood, oral fluid or urine testing (including HIV antibody testing) to provide additional information whenever the applicant is age 18 or older and the face amount is $100,000 or greater. Based on the results of these tests, we may adjust the mortality charge or decline coverage completely. We also have an automated process for handling term policies for ages 18 to 60 with face amounts of $20,000 to $100,000 and whole life policies for ages 18 to 80 with face amounts of $25,000 to $50,000. We use our automated underwriting guidelines to evaluate the medical history provided by the applicant and information received from three service providers. Based on the evaluation against our automated underwriting guidelines, we may adjust the mortality charge or decline coverage. Generally, tobacco use by a life insurance applicant within the preceding one-year period results in a substantially higher mortality charge. In accordance with industry practice, material misrepresentation on a policy application can result in the cancellation of the policy upon the return of any premiums paid.
Interest Crediting and Participating Dividend Policy
The interest crediting policy for our life insurance products is the same as for our traditional annuity products in the Annuity segment. See "Interest Crediting Policy" under the Annuity Segment discussion. We pay dividends, credit interest and determine other nonguaranteed elements on the individual insurance policies depending on the type of product. Some elements, such as dividends, are generally declared for a year at a time. Interest rates and other nonguaranteed elements are determined based on experience as it emerges and with regard to competitive factors. Weighted average contractual credited rates on our universal life contracts were 4.11% in 2013, 4.14% in 2012 and 4.19% in 2011. Our universal life contracts have guaranteed minimum crediting rates that range from 3.00% to 4.50%, with a weighted average guaranteed crediting rate of 3.72% at December 31, 2013 and 3.79% at December 31, 2012.
| Interest Crediting Rates of Interest Sensitive Life Products Compared to Guarantees - Life Insurance Segment | |||
| Liabilities at | |||
| December 31, 2013 | |||
| (Dollars in thousands) | |||
| Discretionary rate setting products with minimum guarantees: | |||
| Greater than or equal to 100 basis points over guarantee | $ | 93,743 | |
| At guaranteed rate | 648,038 | ||
| Non-discretionary rate setting products | 35,790 | ||
| Total interest sensitive product liabilities | $ | 777,571 | |
Policyholder dividends are currently being paid and will continue to be paid as declared on participating policies. Policyholder dividend scales are generally established annually and are based on the performance of assets supporting these policies, the mortality experience of the policies and expense levels. Other factors, such as changes in tax law, may be considered as well. Our participating business does not have minimum guaranteed dividend rates.
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| In Force - Life Insurance Segment | |||||||||||
| December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands, except face amounts in millions) | |||||||||||
| Number of policies - traditional life | 358,924 | 355,519 | 352,274 | ||||||||
| Number of policies - universal life | 61,250 | 59,833 | 58,115 | ||||||||
| Face amounts - traditional life | $ | 42,866 | $ | 40,333 | $ | 38,235 | |||||
| Face amounts - universal life | 6,190 | 5,807 | 5,482 | ||||||||
| Traditional insurance reserves | 1,679,942 | 1,615,088 | 1,549,886 | ||||||||
| Interest sensitive reserves | 777,571 | 686,067 | 647,711 | ||||||||
Corporate and Other Segment
The Corporate and Other segment includes (i) advisory services for the management of investments and other companies; (ii) marketing and distribution services for the sale of mutual funds and insurance products not issued by us; (iii) leasing services with affiliates; (iv) closed blocks of variable annuity, variable life and accident and health products; (v) interest expense and (vi) investments and related investment income not specifically allocated to our product segments.
We discontinued underwriting new sales of variable products during 2010 and terminated new sales with our variable alliance partners in 2010 and 2011. We continue to receive premiums from sales that occurred prior to this change. Variable premiums collected were $68.3 million in 2013, $73.8 million in 2012 and $79.9 million in 2011. During 2010, we began selling variable products underwritten by a large well-known insurance company with variable product expertise. We earn fees from the sale of brokered products, which are reported as other income. A portion of these revenues are passed on to the agents as commissions for the underlying sales. The decision to discontinue underwriting variable products was made because we lacked the scale necessary to generate acceptable returns and be competitive in this product line over time. The existing in force business remains on our books and we continue to administer this business.
Reinsurance
We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance agreements. New sales of life products are reinsured above prescribed limits and do not require the reinsurer's prior approval within certain guidelines. We do not use financial or surplus relief reinsurance. We enter into indemnity reinsurance arrangements to assist in diversifying our risks and to limit our maximum loss on risks that exceed our policy retention limits. Our maximum retention limit on an insured life ranges up to $1.5 million depending on when the policy was issued.
Reinsurance contracts do not fully discharge our obligation to pay claims on the reinsured business. As the ceding insurer, we remain responsible for policy claims to the extent the reinsurer fails to pay claims. No reinsurer of business ceded by us has failed to pay any material policy claims (either individually or in the aggregate) with respect to our ceded business. We continually evaluate the financial strength of our reinsurers and monitor concentrations of credit risk. If for any reason reinsurance coverages would need to be replaced, we believe that replacement coverages from financially responsible reinsurers would be available.
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Primary Reinsurers as of December 31, 2013
| Reinsurer | A.M. Best Rating | Amount of In Force Ceded | Reserve Credit | ||||||
| (Dollars in millions) | |||||||||
| Swiss Re Life & Health America Inc. | A+ | $ | 5,497.2 | $ | 19.0 | ||||
| RGA Reinsurance Company | A+ | 4,022.5 | 26.4 | ||||||
| SCOR Global Life USA Reinsurance Company | A | 2,519.0 | 10.9 | ||||||
| All other (11 reinsurers)* | A- to A++ | 1,181.3 | 6.6 | ||||||
| Total | $ | 13,220.0 | $ | 62.9 | |||||
* All other includes Scottish Re, which is not rated by A.M. Best. New business with Scottish Re was terminated in early 2007, following difficulties at that company and related ratings downgrades. As of December 31, 2013, $331.5 million of in force was ceded to Scottish Re. Scottish Re continues to meet its reinsurance obligation with us in a normal fashion.
In addition, we have an annual 100% quota share accidental death reinsurance agreement. Coverage includes all acts of terrorism including those of a nuclear, chemical or biological origin. Coverage is subject to an annual aggregate retention by us of $13.0 million.
Ratings and Competition
Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Insurer financial strength ratings represent the opinions of rating agencies regarding the ability of an insurance company to meet its financial obligations to policyholders and contract holders. Credit ratings represent the opinions of rating agencies regarding an issuer's ability to repay its indebtedness. Ratings are subject to revision or withdrawal at any time by the rating agency, and therefore, no assurance can be given that a rating will be maintained.
As of the date of this filing, Farm Bureau Life's A.M. Best financial strength rating is A- (Excellent) with a positive outlook and FBL Financial Group's A.M. Best issuer credit rating is bbb- with a positive outlook.
A.M. Best has 16 financial strength ratings assigned to insurance companies, which currently range from A++ (Superior) to S (Suspended). A.M. Best's long-term credit ratings range from aaa (exceptional) to d (in default). A + or - may be appended to ratings from aa to ccc to indicate relative position within a category. A rating of bbb- or above is considered investment grade. As of the date of this filing, A.M. Best has the life/annuity industry on a stable rating outlook.
We operate in a highly competitive industry. Insurers compete based primarily upon price, service level and the financial strength of the company. The operating results of companies in the insurance industry historically have been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings from rating agencies and other factors. We believe our ability to compete with other insurance companies is dependent upon, among other things, our ability to attract and retain agents to market our insurance products, our ability to develop competitive and profitable products and our ability to maintain good or better ratings from rating agencies. In connection with the development and sale of our products, we encounter significant competition from other insurance companies, and other financial institutions, such as banks and broker/dealers, many of which have financial resources substantially greater than ours.
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Regulation
Our insurance subsidiaries are subject to state and federal government regulation in each of the states in which they are authorized to do business. The regulation of insurance companies is vested primarily in state agencies having broad administrative power dealing with all aspects of the insurance business such as agent licensing, policy rates, policy forms, insurer solvency and capital adequacy, and focuses on protecting and balancing the interests of policyholders and the insurance companies. Our variable insurance products, investment advisors, broker/dealer and certain licensed agents are also subject to regulation by the Securities and Exchange Commission (SEC), state securities regulators (in each state where they are authorized to do business) and the Financial Industry Regulatory Authority (FINRA). Our companies are subject to various state corporate statutes, as well as federal statutes and regulations dealing with such matters as taxes, retirement benefits, compliance and fraud and statutes that deal with the companies as employers.
While legislation has been introduced in Congress in the past which could result in the federal government assuming regulation of all or part of the insurance industry, there is currently no pending legislation and no serious effort to bring such legislation forward. In light of ongoing legislative developments, the National Association of Insurance Commissioners (NAIC) and state insurance regulators have begun to focus discussions on increased uniformity of insurance laws and regulations, which involves continuous evaluation of law and regulations, which include some of the following topics: accounting policies and procedures, investments, insurer solvency, insurance holding company regulation, market conduct, reinsurance, risk-adjusted capital guidelines, enterprise risk management, agent and company licensing and new products. We do not believe the adoption of any of the current NAIC initiatives will have a material adverse impact on us; however, we cannot predict the form of any future proposals or regulation.
The Dodd-Frank Act established the Federal Insurance Office (FIO) within the Department of Treasury to collect information about the insurance industry, recommend prudential standards and represent the U.S. in dealings with foreign insurance regulators. The FIO recently released its long overdue report titled "How to Modernize and Improve the System of Insurance Regulation in the United States." The report includes recommendations for changes in several areas, including capital adequacy, safety and soundness, and marketplace regulation. We continue to monitor the activities of the FIO, NAIC and the state insurance regulators.
The Dodd-Frank Act has also resulted in certain insurance companies (but not ours) being designated as non-bank systemically important financial institutions by the Financial Services Oversight Committee, which will result in their capital plans being regulated by both the states and the Federal Reserve. As part of the Dodd-Frank Act, many key rules have yet to be formalized, some of which might have an impact on insurers.
Portions of the Affordable Care Act became effective in 2014, and while the act has a substantial impact on the health insurance and health care industries, it does not directly affect our life insurance and annuity business as we no longer underwrite or administer any health insurance products. The Act will likely have an impact on our exclusive agents as most of our agents sell medical insurance through a brokerage arrangement with third parties. Some of our exclusive agents who have a substantial number of health insurance customers are likely to see some changes in their income in future years, but the nature of any such change is impossible to determine at this time. The Act also applies to us as an employer, but to date, the impact on our organization in this area has been minimal.
Employees
At December 31, 2013, we had 1,589 employees. A majority of our employees, including the executive officers, also provide services to Farm Bureau Property & Casualty Insurance Company and other affiliates pursuant to management agreements. None of our employees are members of a collective bargaining unit.
ITEM 1A. RISK FACTORS
Risk Factors
The performance of our company is subject to a variety of risks which you should review. Occurrence of these risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company.
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Difficult conditions in the financial markets and the economy may materially adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the economy and financial markets. Slow growth and low market rates continue to challenge the life insurance and annuity industries. While recent economic data indicates growth, future growth could be impacted by U.S. fiscal policies to address significant national budget deficits and debt levels. In the financial markets, strong liquidity, strong corporate profitability and modest economic growth continue to support fundamental credit quality. However, low economic growth and low inflation has restrained interest rates, challenging growth in investment income and resulting in declining portfolio investment yields across the insurance industry.
Our business benefits from moderate to strong economic expansion. Conversely, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact such actions could have on our business, results of operations, cash flows or financial condition.
Adverse financial market conditions may significantly affect our liquidity, access to capital and cost of capital.
As described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" of this Form 10-K, Farm Bureau Life has historically generated positive cash flow as measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. At December 31, 2013, we believe the probability we would have to sell investments in an unrealized loss position to meet cash flow needs is remote. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition" and Note 2 to our consolidated financial statements included in Item 8 for details regarding the unrealized gains and losses on our fixed maturity securities.
Capital requirements depend on factors including Farm Bureau Life's accumulated statutory earnings, statutory capital and surplus, the rate of sales growth of our products, aggregate reserve levels and the levels of credit risk and/or interest rate risk in our invested assets. In order to support these capital requirements, we may need to increase or maintain Farm Bureau Life's statutory capital and surplus through additional financings, which could include debt, equity or other transactions.
Adverse capital market conditions may affect the availability and cost of borrowed funds and could impact our ability to refinance existing borrowings, thereby ultimately impacting our profitability and ability to support or grow our businesses. Without sufficient capital, we could be forced to curtail certain of our operations, and our business could suffer. Actions we might take to access financing may in turn cause rating agencies to reevaluate our ratings.
We manage our capital level to be consistent with statutory and rating agency requirements. As of December 31, 2013, we estimate that Farm Bureau Life has sufficient capital to meet our rating objectives. However, this capital may not be sufficient if significant future losses are incurred and access to additional capital is limited.
Our valuation of fixed maturity securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.
During periods of market disruption, it may be difficult to value certain securities if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the financial environment or market conditions.
Certain market sectors may become dislocated following periods of volatile and illiquid market conditions, as has occurred during the recent financial crisis, increasing the difficulty in valuing certain instruments, as trading has been less frequent and/or market data less observable. As a result, certain valuations require greater estimation and judgment as well as more complex valuation methods. These values may not ultimately be realizable in a market transaction, and such values may change rapidly as market conditions change and valuation assumptions are modified.
The decision on whether to record an other-than-temporary impairment is determined in part by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability of the particular security as well as an evaluation of our intent to sell and whether it is more likely than not that we would be required to sell prior to recovery. Our conclusions regarding the recoverability of a particular security's fair value may ultimately prove to be incorrect as facts and circumstances change.
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Our investment portfolio is subject to credit quality risks that may diminish the value of our invested assets and affect our profitability and reported book value per share.
Particularly in the event of a major downturn in economic activity, we are subject to the risk that issuers of fixed maturity securities, other debt securities and commercial mortgage borrowers, will default on principal and interest payments. As of December 31, 2013, we held $6.1 billion of fixed income securities, $0.3 billion of which represented below-investment grade holdings. Of these below-investment grade holdings, 93.2% were acquired as investment grade holdings but, as of December 31, 2013, had been downgraded to below investment grade. An increase in defaults on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability.
Although we seek to diversify the investment portfolio across multiple asset classes, industries and geographies, the concentration of our investment portfolio in any particular industry, group of related industries or geographic sector could have an adverse effect on our investment portfolios and, consequently, on our results of operations and financial position. As of December 31, 2013, we held $0.4 billion of fixed income securities in European countries, representing 6.9% of our total fixed maturities. Our largest European exposures are in the United Kingdom and the Netherlands, with 44% and 15% of the balance, respectively.
Changing interest rates, market volatility and general economic conditions affect the risks and the returns on both our products and our investment portfolio.
The fair value of our investments and our investment performance, including yields and realization of gains or losses, may vary depending on economic and market conditions. The shape of the yield curve and the level of interest rates can impact the profitability of our products. Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can materially affect the profitability of our products, the fair value of our investments and the reported value of stockholders' equity.
A key component of our financial results is the spread earned (the investment yield we earn less the crediting rates we pay to our policyholders). A narrowing of spreads would adversely affect operating results. Although we have the right to adjust interest crediting rates on a portion of our business in force, changes to crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. Our ability to lower crediting rates is subject to minimum crediting rates filed with and approved by state regulators. In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid the narrowing of spreads under certain market conditions.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risks of Financial Instruments" for further discussion of our interest rate risk exposure and information regarding our asset-liability management program to help mitigate our exposure to interest rate risk.
We face competition from companies having greater financial resources, more advanced technology systems, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
See "Item 1. Business - Ratings and Competition" for information regarding risks relating to competition.
As a holding company, we depend on our subsidiaries for funds to meet our obligations, but our life insurance subsidiaries' ability to make distributions to us is limited by law, and could be affected by minimum risk-based capital requirements.
As a holding company, we rely on dividends from subsidiaries to assist in meeting our obligations. The ability of our subsidiaries to pay dividends or to make other cash payments in the future may materially affect our ability to satisfy our parent company payment obligations, including debt service and dividends on our common stock.
The amount of dividends we have available to pay our common shareholders is limited to a certain extent by the amount of dividends our primary operating subsidiary, Farm Bureau Life, is able to pay to its parent, FBL Financial Group, Inc. Farm Bureau Life's ability to pay dividends to FBL Financial Group, Inc. is limited by Iowa 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. Further, Farm Bureau Life’s dividends are required to be approved by the Insurance Division, Department of Commerce, State of Iowa (Iowa Insurance Division) if the dividend plus all dividend distributions for the preceding twelve months exceed the greater of 10% of its statutory surplus or its statutory net gain from
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operations for the 12-month period ended December 31st of the preceding year. At December 31, 2013 Farm Bureau Life’s statutory unassigned surplus was $359.0 million. Due to the $120.0 million extraordinary dividend paid by Farm Bureau Life to FBL Financial Group, Inc. during the third quarter of 2013, we have exceeded the annual approval limit through the third quarter of 2014; accordingly, any dividends made prior to the fourth quarter of 2014 will require approval of the Iowa Insurance Division.
In addition, Farm Bureau Life is subject to the risk-based capital (RBC) requirement of the NAIC set forth in the Risk-Based Capital for Insurers Model Act (the Model Act). The main purpose of the Model Act is to provide insurance regulators a method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. U.S. insurers and reinsurers are required to report the results of their RBC calculations as part of the statutory annual statements filed with state insurance regulatory authorities. State laws specify regulatory actions if an insurer's risk-based capital ratio, a measure of solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against certain minimums, with an RBC ratio of 200% or lower resulting in an increasing severity of regulatory actions with an RBC ratio of 70% being the point at which the regulators will assume control over the insurance company.
Failure to maintain adequate capital levels could lead to ratings downgrades and liquidity issues which could adversely affect our business and financial condition. Our current capital levels are well above any action level required by insurance company regulation. As of December 31, 2013, our total adjusted capital was $558.4 million, resulting in a RBC ratio of 499%, compared with authorized capital of $111.8 million required for an RBC of 200%.
A significant ratings downgrade may have a material adverse effect on our business.
Ratings are an important factor in establishing the competitive position of insurance companies. If our ratings were lowered, our ability to access reinsurance and market products to new customers could be harmed and existing policyholders might cancel their policies or withdraw the cash values of their policies. These events, in turn, could have a material adverse effect on our financial results and liquidity. Our ratings reflect the agency's opinions as to our financial strength, operating performance and ability to meet obligations to Farm Bureau Life's policyholders. There is no assurance that a rating will remain in effect for any given period of time or that a rating will not be reduced, suspended or withdrawn entirely by the rating agency, if in the rating agency's judgment, circumstances so warrant. See "Item 1. Business - Ratings and Competition" for a summary of our current ratings.
All segments of our business are highly regulated and these regulations or changes in them could affect our profitability.
We are subject to statutes and regulations in various states in which our life subsidiaries operate. Insurance regulation is different in each state, but is similar in that it is intended to provide safeguards for policyholders, agents, insurance companies and their holding companies. State insurance regulators oversee matters relating to the business of life insurance and annuities, such as sales practices, policy forms, claims practices, types and amounts of investments, reserve adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of dividends. They continually examine existing laws and regulations, and may recommend or make changes as they see appropriate.
As noted above, through adoption by law in states where we do business, our life subsidiaries are subject to the NAIC's RBC requirements. These guidelines are used by state insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. Our life subsidiaries also may be required, under solvency or guarantee laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities for insolvent insurance companies.
Although the federal government does not directly regulate the business of insurance, our company is subject to the same federal laws as other corporations, including, but not limited to pension regulation, discrimination, financial services regulation, securities regulation and federal taxation. Any one of these regulatory schemes can significantly affect the insurance business. In addition, various forms of direct and indirect federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies. The Dodd-Frank Act established the Federal Insurance Office within the Department of Treasury to collect information about the insurance industry, recommend prudential standards and represent the U.S. in dealings with foreign insurance regulators. The FIO recently released its long overdue report titled "How to Modernize and Improve the System of Insurance Regulation in the United States." The report includes recommendations for changes in several areas, including capital adequacy, safety and soundness, and marketplace regulation. We continue to monitor the activities of the FIO, NAIC and the state insurance regulators.
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The Dodd-Frank Act has also resulted in certain other insurance companies (but not ours) being designated as non-bank systemically important financial institutions by the Financial Services Oversight Committee, which will result in their capital plans being regulated by both the states and the Federal Reserve. As part of the Dodd-Frank Act, many key rules have yet to be formalized, some of which might have an impact on insurers. The regulatory framework at the state and federal level applicable to our insurance products is evolving and could affect the design of our products and our ability to sell certain products. Any changes in these laws and regulations could materially and adversely affect our business, financial condition or results of operations.
Portions of the Affordable Care Act became effective in 2014, and while the act has a substantial impact on the health insurance and health care industries, it does not directly affect our life insurance and annuity business as we no longer underwrite or administer any health insurance products. The Act will likely have an impact on our exclusive agents as most of our agents sell medical insurance through a brokerage arrangement with third parties. Some of our exclusive agents who have a substantial number of health insurance customers are likely to see some changes in their income in future years, but the nature of any such change is impossible to determine at this time. The Act also applies to us as an employer, but to date, the impact on our organization in this area has been minimal.
Exclusive agents who are also registered representatives of our affiliated broker-dealer may be affected by rules required by Dodd-Frank that would create an as-yet undefined fiduciary relationship between the registered representative and their customers. It is too early to tell what effect there will be until the rule making process has been completed.
Our investment management subsidiary is an SEC-registered investment adviser. This entity manages funds primarily for affiliated companies, but also manages funds for a few non-affiliated organizations. It also provides administrative services to our separate accounts, which are registered as investment companies under the Investment Company Act. Our registered separate accounts are themselves highly regulated under the Investment Company Act.
In addition, our broker-dealer subsidiary is registered with the SEC and is subject to regulation under the Exchange Act and various state securities laws, and is a member of and subject to regulation by FINRA. Registered representatives sell variable products and mutual funds through our affiliated broker/dealer and are regulated by FINRA and state securities regulators. We are not aware of any proposed or future legislation or rule making by any regulator that is likely to have a material adverse impact on our financial condition or operational flexibility.
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. From time to time, we are required to adopt new or revised accounting standards. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our financial condition and results of operations. This includes the current work by accounting standards setting bodies on a project evaluating the accounting for insurance contracts. It is uncertain what the outcome of that project will be or when it will be completed. The impact of accounting pronouncements that have been issued but not yet implemented is discussed in Note 1 to our consolidated financial statements included in Item 8.
An inability to access Federal Home Loan Bank (FHLB) funding could adversely affect our profitability.
The Federal Housing Finance Agency (FHFA) in 2010 issued an Announced Notice of Proposed Rulemaking (ANPR). The purpose of the ANPR is to seek comment on several possible changes to the requirements applicable to members of the FHLB. Any changes to such requirements that eliminate our eligibility for continued FHLB membership or limit our FHLB borrowing capacity could have an adverse effect on us. The FHFA also released an advisory bulletin on the particular risks associated with lending to insurance companies as opposed to banks, which includes standards for evaluating lending to an insurance company member. These standards are broad and raise concerns about the insurance regulatory framework and of FHLB creditor status in the event of insurer insolvency. The recommended standards could result in stricter regulation of, or a reduced incidence of, FHLB-insurer lending. In response to these initiatives, Iowa and certain other states are reviewing amendments to legislation which would alter the status of insurance company collateral used in FHLB loans. Any event that adversely affects FHLB lending to us could have an adverse effect on our profitability.
Actual experience which differs from our assumptions regarding future persistency, mortality and interest rates used in pricing our products and calculating reserve amounts and deferred acquisition costs could have a material adverse impact on our financial results.
The process of pricing products and calculating reserve amounts and deferred acquisition costs for an insurance organization involves the use of a number of assumptions including those related to persistency (how long a contract stays with the
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company), mortality (the relative incidence of death in a given time) and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts). Actual results could differ significantly from those assumed. Actual experience which differs from one or more of these assumptions could have a material adverse impact on our results of operations.
We may be required to accelerate the amortization of deferred acquisition costs, which could adversely affect our results of operations or financial condition.
Deferred acquisition costs (DAC) include certain direct costs of successfully acquiring new insurance business, including commissions and other expenses related to the production of new business, to the extent recoverable from future policy revenues and gross profits. Also included are premium bonuses and bonus interest credited to contracts during the first contract year only. We amortize these costs over the expected lives of the contracts. We test the DAC recorded on our consolidated balance sheet to determine if these amounts are recoverable under current assumptions. In addition, we regularly review the estimates and assumptions underlying DAC for those products for which we amortize DAC in proportion to gross profits. Given changes in facts and circumstances, these tests and reviews could lead to reductions in DAC that could have an adverse effect on the results of our operations and our financial condition. Increases in actual or expected future withdrawals or surrenders and investment losses, which are more likely in a severe economic recession, would result in an acceleration of DAC amortization. In addition, significant or sustained equity and bond market declines could result in an acceleration of DAC amortization related to variable annuity and variable universal life contracts.
Our earnings are influenced by our claims experience, which is difficult to estimate for future periods. If our future claims experience does not match our pricing assumptions or past results, our earnings could be materially adversely affected.
Our earnings are significantly influenced by the claims paid under our insurance contracts and will vary from period to period depending upon the amount of claims incurred. There is only limited predictability of claims experience within any given quarter or year. The liability that we have established for future insurance and annuity policy benefits is based on assumptions concerning a number of factors, including interest rates, expected claims, persistency and expenses. In the event our future experience does not match our pricing assumptions or our past results, our operating results could be materially adversely affected.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance agreements. New sales of life products are reinsured above prescribed limits and do not require the reinsurer's prior approval within certain guidelines. We enter into indemnity reinsurance arrangements to assist in diversifying our risks and to limit our maximum loss on risks that exceed our policy retention limits. Our maximum retention limit on an insured life ranges up to $1.5 million depending upon when the policy was issued.
Indemnity reinsurance does not fully discharge our obligation to pay claims on the reinsured business. As the ceding insurer, we remain responsible for policy claims to the extent the reinsurer fails to pay claims. Should any reinsurer fail to meet the obligations assumed under such reinsurance, we remain liable, and payment of these obligations could result in losses. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk.
Our business is highly dependent on our relationships with Farm Bureau organizations and could be adversely affected if those relationships became impaired.
Farm Bureau Life's business relies significantly upon the maintenance of our right to use the Farm Bureau and FB trade names and related trademarks and service marks which are controlled by the American Farm Bureau Federation and state Farm Bureau organizations. See discussion under "Item 1. Business - Marketing and Distribution - Affiliation with Farm Bureau" for information regarding these relationships and circumstances under which our access to the Farm Bureau membership base and use of the Farm Bureau and FB designations could be terminated. We believe our relationship with the Farm Bureau organizations provides a number of advantages. Farm Bureau organizations in our marketing territory tend to be well known and long established, have active memberships and provide a number of member benefits other than financial services. The strength of these organizations provides enhanced prestige and brand awareness for our products and increased access to Farm Bureau members. The loss of the right to use these designations in a key state or states could have a material adverse effect on operating results.
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Our relationship with Farm Bureau organizations could result in conflicts of interests.
Our business and operations are interrelated to a degree with that of the American Farm Bureau Federation, its affiliates, and state Farm Bureau organizations. The overlap of the business, including service of certain common executive officers and directors of the Company and the state Farm Bureau organizations, may give rise to conflicts of interest among these parties. Conflicts could arise, for example, with respect to business dealings among the parties, the use of a common agency force, the sharing of employees, space and other services and facilities under intercompany agreements, and the allocation of business opportunities between them. Conflicts of interest could also arise between the Company and the various state Farm Bureau organizations in our life-only states, some of whose presidents serve as directors of the Company, and which control their state affiliated property-casualty insurance company, with respect to the use of the common agency force. We have adopted a conflict of interest policy which requires a director to disclose to the Board of Directors and any appropriate committee of the Board, the existence of any transaction or proposed transaction in which the Director has a direct or indirect interest, and the material facts relating thereto.
Changes in federal tax laws may affect sales of our products and profitability.
The annuity and life insurance products that we market generally offer income tax advantages to policyholders as compared to other savings instruments, such as certificates of deposit and taxable bonds. Current federal income tax law allows for the deferral of income tax on the earnings during the accumulation period of certain annuity or insurance policies, as opposed to the current taxation of other savings instruments. In addition, life insurance death benefits are generally exempt from the income tax. Legislation eliminating this tax deferral or tax exemption for death benefits, or changes to reduce the taxation of competing products, could adversely affect our financial position and results of operations.
Congress has from time to time considered legislation that would increase the amount of income tax expense incurred by insurance companies, including proposals to reduce the deduction for dividends received on assets held in separate accounts to support variable products. Reduction or elimination of federal tax credits for low-income housing has also been discussed as a potential means to reduce federal budget deficits. To the extent legislation were enacted that includes either of these items, we would incur additional income tax expense, thereby reducing earnings.
Our ability to maintain competitive costs is dependent upon the level of new sales and persistency of existing business.
Maintaining competitive costs depends upon numerous factors, including the level of new sales, persistency of existing business and expense management. A decrease in sales or persistency without a corresponding reduction in expenses could affect our business and results of operations.
If we are unable to attract and retain agents, sales of our products and services may be reduced.
We compete to attract and retain exclusive agents for Farm Bureau Life. Intense competition exists for persons with demonstrated ability. We compete primarily on the basis of our reputation, products, compensation, support services, rating agency ratings and financial position. Sales and our results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining agents.
Attracting and retaining employees who are key to our business is critical to our growth and success.
The success of our business and the ability to reach goals is dependent, to a large extent, on our ability to attract and retain key employees. Competition is intense in the job market for certain positions, such as actuaries and other insurance professionals with demonstrated ability, particularly with our headquarters being located in central Iowa, a hub of insurance company home offices, where we compete with other insurance and financial institutions.
Our employees are not subject to employment contracts, except for a retention agreement with our Chief Executive Officer. There can be no certainty regarding the length of time any of our named executive officers will remain with us. To mitigate the risk following the loss of any named executive, we have succession and leadership development plans in place for all executive management positions. Our inability to retain our key employees, or attract and retain additional qualified employees, could materially adversely affect our sales, results of operations and financial condition.
Success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements.
Our business is dependent upon effective technology for interacting with employees, agents, policyholders, vendors, agents, third parties and investors. It is crucial to our business to reach a large number of people and secure, store and provide sizable
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amounts of information. If we do not maintain adequate systems to reflect technological advancements, we could experience adverse consequences including inadequate pricing, underwriting and reserving decisions, regulatory problems, security breaches or litigation exposure. This could adversely affect our relationships and ability to do business with our clients and make it difficult to attract new customers.
Our business strategy involves providing customers with easy-to-use products and systems to meet their needs, and our information systems require an ongoing commitment of resources to maintain current standards. We are continuously enhancing and updating our systems to keep pace with changes in information processing technology, evolving industry and regulatory standards, threats and customer demands. Our success is dependent on protecting, maintaining and enhancing the effectiveness of existing systems, as well as continuing to buy or build information systems that support our business processes in a cost-effective manner.
A technology failure could occur and potentially disrupt our business, damage our reputation and adversely affect our profitability. Disruptions or breaches could occur as a result of natural disasters, man-made disasters, epidemic/pandemic, industrial accident, blackout, computer virus, criminal activity, technological changes or events, terrorism or other unanticipated events beyond our control. While the company has obtained insurance and has implemented a variety of preventative security measures such as risk management, information protection, disaster recovery and business continuity plans, no predictions of specific scenarios can be made. Unanticipated problems with our systems or recovery plans could have a material adverse impact on our ability to conduct business, our results and financial position.
We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulators such as the Iowa Insurance Division, and federal regulators such as the SEC, FINRA, the Department of Labor and the Internal Revenue Service, regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, tax laws, the Employee Retirement Income Security Act of 1974 and laws governing the activities of broker-dealers. Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. Moreover, we are subject to the risks of errors and misconduct by our exclusive agents, such as fraud, non-compliance with policies and recommending transactions that are not suitable. While we are not a party to any lawsuit that we believe will have a material adverse effect on our business, financial condition or results of operations, there can be no assurance that such litigation, or any future litigation, will not have such an effect, whether financially, through distraction of our management or otherwise.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal operations are conducted from property leased from a subsidiary of the Iowa Farm Bureau Federation under a 10 year operating lease that expires in 2021, with automatic five-year extensions unless terminated by one of the parties at least six months prior to the expiration date. Currently, the property leased primarily consists of approximately 156,000 square feet of a 400,000 square foot office building in West Des Moines, Iowa. We consider the current facilities to be adequate for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Information required for Item 3 is incorporated by reference from the discussion in Note 10 to our consolidated financial statements included in Item 8.
ITEM 4. MINE AND SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Market and Dividend Information
The Class A common stock of FBL Financial Group, Inc. is traded on the New York Stock Exchange under the symbol FFG. The following table sets forth the cash dividends per common share and the high and low prices of FBL Financial Group Class A common stock as reported in the consolidated transaction reporting system for each quarter of 2013 and 2012.
| Class A Common Stock Data (per share) | 1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | |||||||||||
| 2013 | |||||||||||||||
| High | $ | 39.16 | $ | 43.51 | $ | 46.28 | $ | 46.82 | |||||||
| Low | 33.25 | 37.31 | 42.58 | 42.49 | |||||||||||
| Dividends declared and paid | 0.11 | 0.11 | 2.15 | 0.15 | |||||||||||
| 2012 | |||||||||||||||
| High | $ | 36.65 | $ | 33.93 | $ | 35.05 | $ | 34.59 | |||||||
| Low | 32.23 | 24.70 | 27.60 | 29.27 | |||||||||||
| Dividends declared and paid | 0.10 | 0.10 | 0.10 | 0.10 | |||||||||||
Special Dividend
On August 21, 2013, the Board of Directors approved a special cash dividend on Class A common stock of $2.00 per share, which was paid on September 13, 2013, to shareholders of record as of September 6, 2013. The aggregate dividend was $51.4 million.
Tender Offer of Class B Shares
There is no established market for purchasing our Class B common stock, although it is convertible upon demand into Class A common stock on a share for share basis. As part of a comprehensive capital management program, the Board of Directors authorized the repurchase of Class B common shares through a tender offer for 99 percent of all Class B shares outstanding. The tender offer was conditioned upon all the Class B shareholders either tendering their shares or converting their shares to Class A. The tender price of $45.33 was based upon the average of the closing price of FBL’s Class A common stock for the seven consecutive business days preceding the tender closing date of September 25, 2013. All Class B shareholders participated with 1,023,948 Class B common shares repurchased for $46.4 million and 105,930 shares of Class B common stock converted to Class A common stock.
Other Information
As of January 17, 2014, there were approximately 5,400 holders of Class A common stock and 21 holders of record of Class B common stock.
Class B common stockholders receive dividends at the same rate as that declared on Class A common stock. We intend to declare regular quarterly cash dividends in the future, subject to the discretion of the Board of Directors, which depends in part upon general business conditions, legal restrictions and other factors the Board of Directors deems relevant. It is anticipated that the quarterly dividend rate for 2014 will increase to $0.35 per share.
For restrictions on dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources" included in Item 7.
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Comparison of Five-Year Total Return
| Period Ending | ||||||||||||||||||||||||
| 12/31/2008 | 12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | |||||||||||||||||||
| FBL Financial Group, Inc. | $ | 100.00 | $ | 127.04 | $ | 198.65 | $ | 237.95 | $ | 242.32 | $ | 335.93 | ||||||||||||
| S&P 500 Index | 100.00 | 126.46 | 79.6 | 145.51 | 148.59 | 172.37 | 228.19 | |||||||||||||||||
| S&P 500 Life & Health Insurance Index | 100.00 | 115.57 | 144.76 | 114.78 | 131.53 | 215.02 | ||||||||||||||||||
Source: SNL Financial LC
The performance graph shows a comparison of the cumulative total return over the past five years of our Class A common stock, the S&P 500 Index and the S&P 500 Life and Health Insurance Index. The graph plots the changes in value of an initial $100 investment, assuming reinvestment of dividends.
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Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities for the quarter ended December 31, 2013 and $20.3 million remains to be purchased under the repurchase plan announced on November 15, 2012. The plan authorizes us to make up to $30.0 million in repurchases of Class A common stock in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Completion of the program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
| As of or for the year ended December 31, | |||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||||
| Consolidated Statement of Income Data | |||||||||||||||||||
| Interest sensitive product charges | $ | 111,575 | $ | 101,410 | $ | 97,103 | $ | 93,881 | $ | 88,757 | |||||||||
| Traditional life insurance premiums | 180,944 | 175,086 | 168,519 | 162,056 | 154,154 | ||||||||||||||
| Net investment income | 370,651 | 361,324 | 343,310 | 324,540 | 303,486 | ||||||||||||||
| Realized gains (losses) on investments | 13,555 | 452 | (8,296 | ) | 11,576 | (30,660 | ) | ||||||||||||
| Total revenues | 691,231 | 655,540 | 618,337 | 606,342 | 533,209 | ||||||||||||||
| Income from continuing operations | 108,393 | 82,796 | 52,209 | 80,993 | 46,285 | ||||||||||||||
| Income (loss) from discontinued operations | — | (2,939 | ) | (11,464 | ) | 34,587 | 18,375 | ||||||||||||
| Net income | $ | 108,393 | $ | 79,857 | $ | 40,745 | $ | 115,580 | $ | 64,660 | |||||||||
| Earnings per common share: | |||||||||||||||||||
| Income from continuing operations | $ | 4.25 | $ | 3.01 | $ | 1.69 | $ | 2.66 | $ | 1.54 | |||||||||
| Income (loss) from discontinued operations | — | (0.11 | ) | (0.37 | ) | 1.14 | 0.61 | ||||||||||||
| Earnings per common share | $ | 4.25 | $ | 2.90 | $ | 1.32 | $ | 3.80 | $ | 2.15 | |||||||||
| Earnings per common share - assuming dilution: | |||||||||||||||||||
| Income from continuing operations | $ | 4.21 | $ | 2.97 | $ | 1.67 | $ | 2.63 | $ | 1.53 | |||||||||
| Income (loss) from discontinued operations | — | (0.10 | ) | (0.37 | ) | 1.13 | 0.61 | ||||||||||||
| Earnings per common share - assuming dilution | $ | 4.21 | $ | 2.87 | $ | 1.30 | $ | 3.76 | $ | 2.14 | |||||||||
| Cash dividends (1) | $ | 2.5200 | $ | 0.4000 | $ | 0.2875 | $ | 0.2500 | $ | 0.3125 | |||||||||
| Weighted average common shares outstanding - assuming dilution | 25,774,415 | 27,838,548 | 31,215,023 | 30,718,616 | 30,201,476 | ||||||||||||||
| Consolidated Balance Sheet Data (1) | |||||||||||||||||||
| Total investments | $ | 7,040,002 | $ | 7,160,650 | $ | 6,397,195 | $ | 5,853,341 | $ | 5,024,876 | |||||||||
| Assets held in separate accounts | 693,955 | 618,809 | 603,903 | 675,586 | 630,094 | ||||||||||||||
| Total assets | 8,461,323 | 8,417,726 | 8,109,368 | 15,177,657 | 14,079,220 | ||||||||||||||
| Long-term debt | 97,000 | 147,000 | 146,968 | 271,168 | 371,084 | ||||||||||||||
| Total liabilities | 7,416,532 | 7,205,479 | 6,906,939 | 14,132,931 | 13,325,024 | ||||||||||||||
| Total stockholders' equity (2) | 1,044,791 | 1,212,247 | 1,202,429 | 1,044,725 | 754,198 | ||||||||||||||
| Book value per common share (2) | 42.08 | 47.47 | 39.13 | 33.66 | 24.64 | ||||||||||||||
Notes to Selected Consolidated Financial Data
| (1) | Dividends in 2013 include a special $2.00 per share cash dividend to Class A and B common shareholders. |
| (2) | Amounts are impacted by accumulated other comprehensive income (loss) totaling $119.1 million in 2013, $289.9 million in 2012, $177.8 million in 2011, $51.6 million in 2010 and ($127.4) million in 2009. These amounts are net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, unearned revenue reserve, value of insurance in force acquired and policyholder liabilities. |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When reading the following Management's Discussion and Analysis of Financial Condition and Results of Operations, please refer to our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data," of this report. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its insurance subsidiaries Farm Bureau Life Insurance Company (Farm Bureau Life) and Greenfields Life Insurance Company (Greenfields Life).
In this discussion and analysis, we explain our consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance, including:
| • | factors which affect our business, |
| • | our revenues and expenses in the periods presented, |
| • | changes in revenues and expenses between periods, |
| • | sources of earnings and changes in stockholders' equity, |
| • | impact of these items on our overall financial condition and |
| • | expected sources and uses of cash. |
We have organized our discussion and analysis as follows:
| • | First, we discuss our business and drivers of profitability. |
| • | We then describe the business environment in which we operate including factors that affect operating results. |
| • | We highlight significant events that are important to understanding our results of operations and financial condition. |
| • | We then review the results of operations beginning with an overview of the total Company results, followed by a more detailed review of those results by operating segment. |
| • | Finally, we discuss critical accounting policies and recently issued accounting standards. The critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult or complex judgment. |
Overview and Profitability
We operate predominantly in the life insurance industry through our principal subsidiary, Farm Bureau Life. Farm Bureau Life markets individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in the Midwestern and Western sections of the United States through an exclusive agency force. Several subsidiaries support various functional areas of Farm Bureau Life and other affiliates by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.
We analyze operations by reviewing financial information regarding our primary products that are aggregated in Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company. We analyze our segment results based on pre-tax operating income, which excludes the impact of certain items that are included in net income. See Note 13 to our consolidated financial statements for further information regarding how we define our segments and operating income.
We also include within our analysis “premiums collected” which is not a measure used in financial statements prepared in accordance with GAAP, but is a common industry measure of agent productivity. See Note 13 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.
On December 30, 2011, we completed the sale of our wholly-owned subsidiary, EquiTrust Life Insurance Company (EquiTrust Life). As a result of the sale, certain lines of business are considered discontinued operations, and unless otherwise indicated, have been removed from the discussion that follows. See Note 15 to our consolidated financial statements for additional information related to the sale.
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Our profitability is primarily a factor of:
| • | The volume of our life insurance and annuity business in force, which is driven by the level of our sales and the persistency of the business written. |
| • | The amount of spread (excess of net investment income earned over interest credited) we earn on contract holders' general account balances. |
| • | Our ability to price our life insurance products to earn acceptable margins over the cost of providing benefits and the expenses of acquiring and administering the products. Competitive conditions, mortality experience, persistency, investment results and our ability to maintain expenses in accordance with pricing assumptions drive our margins on the life products. On many products, we have the ability to mitigate adverse experience through adjustments to credited interest rates, policyholder dividends or cost of insurance charges. |
| • | Our ability to manage our investment portfolio to maximize investment returns while providing adequate liquidity for obligations to policyholders and minimizing the risk of defaults or impairments of invested assets. |
| • | Our ability to manage the level of our operating expenses. |
| • | Actual experience and changes in assumptions for expected surrender and withdrawal rates, mortality and spreads used in the amortization of deferred acquisition costs. |
Our profitability is also impacted by changes in accounting guidance that impact the timing of profit recognition. During the first quarter of 2012, we adopted new guidance that reduced the deferral of costs associated with the issuance of life insurance and annuity products which increased the amount of such expenses recognized in the current year and reduced the amount of amortization in future years. See Note 1 to our Consolidated Financial Statements for more information on this change.
In addition to the impact from the adoption of the guidance above, the accounting standards setting bodies are currently working on a project evaluating the accounting for insurance contracts, which may significantly impact the timing of profit emergence for those products. It is uncertain what the outcome of that project will be or when it will be completed.
Impact of Recent Business Environment
Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations, cash flows or financial condition.
While there were positive economic signs during 2013, the U.S. economy continues to face a number of challenges. Pertinent recent economic events include, but are not limited to the following:
| • | Gross Domestic Product increased approximately 1.9% during 2013 based on early estimates. |
| • | U.S. unemployment remains high at 6.7% through December 2013. |
| • | Growth in personal income generally remains below average. |
| • | Based on USDA estimates, U.S. net farm income is forecasted to have grown 15.1% and farm real estate value is forecasted to have grown 7.5% during 2013. |
| • | The European debt crisis continues to cause intermittent stress within the markets. |
| • | Continued uncertainty as to actions the United States Congress will take to address the national debt, including potential actions to change the tax advantages of life insurance. |
An increase in market interest rates during 2013 has reduced the fair value of our fixed maturity investment portfolio. The benchmark 10-year U.S. Treasury yield rose during 2013, while credit spreads decreased. Strong liquidity and favorable corporate profitability continue to support fundamental credit quality. In the securitized markets, spreads on agency residential mortgage-backed securities and commercial mortgage-backed securities declined but rose for asset-backed securities. The yield curve remained moderately steep at year end, but low current interest rates create a challenging environment for sales of new money fixed annuity products.
We intentionally decreased the amount of annuity sales beginning in 2012 by suspending sales of certain products and reducing agent commission rates on certain products where it was difficult to achieve profitability targets during this period of low interest rates. We expect modest increases in annuity sales due to the recent rise in market interest rates and a renewed emphasis placed on sales of products with low guaranteed crediting rates. Our life sales have increased, reflecting the attractiveness of
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enhanced universal life and term life product offerings and the strong farm and energy subsectors of the economy in our marketplace, as well as Farm Bureau Life's emphasis on life insurance product sales.
Results of Operations for the Three Years Ended December 31, 2013
| Year ended December 31, | Change over prior year | ||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | |||||||||||||
| Pre-tax operating income: | |||||||||||||||||
| Annuity segment | $ | 63,592 | $ | 55,910 | $ | 58,263 | 14 | % | (4 | )% | |||||||
| Life Insurance segment | 48,814 | 43,741 | 50,502 | 12 | % | (13 | )% | ||||||||||
| Corporate and Other segment | 22,172 | 16,856 | 2,293 | 32 | % | 635 | % | ||||||||||
| Total pre-tax operating income | 134,578 | 116,507 | 111,058 | 16 | % | 5 | % | ||||||||||
| Income taxes on operating income | (33,985 | ) | (33,748 | ) | (32,240 | ) | 1 | % | 5 | % | |||||||
| Operating income | 100,593 | 82,759 | 78,818 | 22 | % | 5 | % | ||||||||||
| Realized gains/losses on investments (1) | 8,206 | (477 | ) | (5,983 | ) | (1,820 | )% | (92 | )% | ||||||||
| Change in net unrealized gains/losses on derivatives (1) | (241 | ) | 619 | 932 | (139 | )% | (34 | )% | |||||||||
| Loss on debt redemption (1) | — | (22 | ) | (21,564 | ) | NA | (100 | )% | |||||||||
| Net impact of discontinued operations (1) | — | (2,939 | ) | (11,464 | ) | NA | (74 | )% | |||||||||
| Net income attributable to FBL Financial Group, Inc. | $ | 108,558 | $ | 79,940 | $ | 40,739 | 36 | % | 96 | % | |||||||
| Operating income per common share - assuming dilution | $ | 3.90 | $ | 2.97 | $ | 2.52 | 31 | % | 18 | % | |||||||
| Earnings per common share - assuming dilution: | |||||||||||||||||
| Continuing operations | $ | 4.21 | $ | 2.97 | $ | 1.67 | |||||||||||
| Discontinued operations | — | (0.10 | ) | (0.37 | ) | ||||||||||||
| Earnings per common share - assuming dilution | $ | 4.21 | $ | 2.87 | $ | 1.30 | |||||||||||
| Effective tax rate on operating income | 25 | % | 29 | % | 29 | % | |||||||||||
| Average invested assets, at amortized cost | $ | 6,723,601 | $ | 6,343,284 | $ | 5,887,520 | 6 | % | 8 | % | |||||||
| Annualized yield on average invested assets | 5.74 | % | 5.87 | % | 6.01 | % | |||||||||||
| Impact on operating income of unlocking deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve, net of tax | $ | 231 | $ | (3,413 | ) | $ | (1,201 | ) | (107 | )% | 184 | % | |||||
| (1) | Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired and income taxes attributable to these items. |
Our operating income increased in 2013, compared to 2012, primarily due to the impact of an increase in the volume of business in force, higher corporate segment net investment income and the impact of unlocking assumptions used in the calculation of amortization of deferred acquisition costs and the value of insurance in force. These increases were partially offset by an increase in death benefits. Operating income increased in 2012, compared to 2011, primarily due to the impact of an increase in the volume of business in force, partially offset by increases in the amortization of deferred acquisition costs and the value of insurance in force. Earnings in 2011benefited from refining actuarial estimates that reduced the value of insurance in force and deferred acquisition costs by $7.4 million.
The increase in operating income during 2013, along with increased realized gains from investment sales and a reduction in losses from discontinued operations, contributed to higher net income compared to 2012. The increase in operating income during 2012,
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along with a reduction in losses from discontinued operations and the loss on debt redemption, contributed to higher net income compared to 2011.
Earnings per share from continuing operations and operating income per common share benefited from the repurchase of Class A common shares in 2013 and 2012, as well as a tender offer of Class B common shares completed in the third quarter of 2013. Details regarding the share repurchases are included in Note 7 to the consolidated financial statements.
We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve for participating life insurance, variable and interest sensitive products, as applicable, through an “unlocking” process. These assumptions typically consist of withdrawal and lapse rates, earned spreads and mortality with revisions based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually. See the discussion that follows for further details of the unlocking impact to our operating segments.
| Annuity Segment | |||||||||||||||||
| Year ended December 31, | Change over prior year | ||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | |||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Operating revenues: | |||||||||||||||||
| Interest sensitive product charges and other income | $ | 1,236 | $ | 790 | $ | 666 | 56 | % | 19 | % | |||||||
| Net investment income | 196,303 | 191,211 | 181,974 | 3 | % | 5 | % | ||||||||||
| Total operating revenues | 197,539 | 192,001 | 182,640 | 3 | % | 5 | % | ||||||||||
| Benefits and expenses: | |||||||||||||||||
| Interest sensitive product benefits | 102,308 | 102,961 | 100,487 | (1 | )% | 2 | % | ||||||||||
| Underwriting, acquisition and insurance expenses: | |||||||||||||||||
| Commissions net of deferrals | 2,554 | 2,504 | 3,428 | 2 | % | (27 | )% | ||||||||||
| Amortization of deferred acquisition costs | 9,422 | 9,327 | 8,916 | 1 | % | 5 | % | ||||||||||
| Amortization of value of insurance in force | 907 | 2,473 | 244 | (63 | )% | 914 | % | ||||||||||
| Other underwriting expenses | 18,756 | 18,826 | 11,302 | — | % | 67 | % | ||||||||||
| Total underwriting, acquisition and insurance expenses | 31,639 | 33,130 | 23,890 | (5 | )% | 39 | % | ||||||||||
| Total benefits and expenses | 133,947 | 136,091 | 124,377 | (2 | )% | 9 | % | ||||||||||
| Pre-tax operating income | $ | 63,592 | $ | 55,910 | $ | 58,263 | 14 | % | (4 | )% | |||||||
28
| Annuity Segment - continued | |||||||||||||||||
| Year ended December 31, | Change over prior year | ||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | |||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Other data | |||||||||||||||||
| Annuity premiums collected, direct | $ | 259,466 | $ | 316,344 | $ | 369,156 | (18 | )% | (14 | )% | |||||||
| Policy liabilities and accruals, end of period | 3,549,477 | 3,432,137 | 3,190,985 | 3 | % | 8 | % | ||||||||||
| Average invested assets, at amortized cost | 3,576,316 | 3,435,090 | 3,184,619 | 4 | % | 8 | % | ||||||||||
| Investment fee income included in net investment income (1) | 5,544 | 4,355 | 4,283 | 27 | % | 2 | % | ||||||||||
| Average individual annuity account value | 2,399,395 | 2,260,801 | 2,078,753 | 6 | % | 9 | % | ||||||||||
| Earned spread on individual annuity products: | |||||||||||||||||
| Weighted average yield on cash and invested assets | 5.83 | % | 6.06 | % | 6.24 | % | |||||||||||
| Weighted average interest crediting rate | 2.95 | % | 3.15 | % | 3.36 | % | |||||||||||
| Spread | 2.88 | % | 2.91 | % | 2.88 | % | |||||||||||
| Individual annuity withdrawal rate | 5.1 | % | 4.8 | % | 4.6 | % | |||||||||||
| Impact on pre-tax income of unlocking deferred acquisition costs and value of insurance in force acquired | 1,436 | 234 | 631 | 514 | % | (63 | )% | ||||||||||
| (1) | Includes prepayment fee income and net discount of accretion on mortgage and asset-backed securities resulting from changing payment speed assumptions at the end of the period. |
Pre-tax operating income for the Annuity segment increased in 2013 and decreased in 2012 compared to prior periods. The increase in 2013 was primarily due to higher spread income earned from an increase in the volume of business in force, higher investment fee income and the impact of unlocking. The decrease in 2012 was primarily due an increase in expense allocations as discussed in the Corporate and Other segment and an increase in the amortization of the value of insurance in force, partially offset by an increase in spread income earned from a larger volume of business in force.
Amortization of deferred acquisition costs and the value of insurance in force changed over the three year period primarily due to changes in actual profits on the underlying business and the impact of unlocking from updating the withdrawal rate and earned spread assumptions within our amortization models. During 2012, the increase to amortization was more significant as a result of adjusting our assumptions based on an analysis of the possible impact of a continued low interest rate environment, as well as the impact of refining our projected credited rate assumption.
The average aggregate account value for individual annuity contracts in force increased in 2013 and 2012 due to continued sales and the crediting of interest. Premiums collected were lower in 2013 and 2012 as we decreased our emphasis on annuity sales and suspended sales of certain products in the third quarter of 2011 due to the low interest rate environment. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rate and perceived security of our products compared to those of competing products.
The Annuity segment also includes advances on our funding agreements with the Federal Home Loan Bank (FHLB). Outstanding funding agreements totaled $322.3 million at December 31, 2013, $328.5 million at December 31, 2012 and $268.0 million at December 30, 2011.
The weighted average yield on cash and invested assets for individual annuities decreased in 2013 and 2012 primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by continued higher investment fee income. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Decreases in the weighted average interest crediting rates are due to crediting rate actions taken on a significant portion of our annuity portfolio during 2012 and 2011 in response to the declining portfolio yield.
29
| Life Insurance Segment | |||||||||||||||||
| Year ended December 31, | Change over prior year | ||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | |||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Operating revenues: | |||||||||||||||||
| Interest sensitive product charges and other income | $ | 63,871 | $ | 54,691 | $ | 49,438 | 17 | % | 11 | % | |||||||
| Traditional life insurance premiums | 180,944 | 175,086 | 168,519 | 3 | % | 4 | % | ||||||||||
| Net investment income | 140,510 | 138,076 | 134,999 | 2 | % | 2 | % | ||||||||||
| Total operating revenues | 385,325 | 367,853 | 352,956 | 5 | % | 4 | % | ||||||||||
| Benefits and expenses: | |||||||||||||||||
| Interest sensitive product benefits: | |||||||||||||||||
| Interest credited | 31,329 | 29,252 | 29,719 | 7 | % | (2 | )% | ||||||||||
| Death benefits and other | 40,070 | 33,324 | 32,645 | 20 | % | 2 | % | ||||||||||
| Total interest sensitive product benefits | 71,399 | 62,576 | 62,364 | 14 | % | — | % | ||||||||||
| Traditional life insurance benefits: | |||||||||||||||||
| Death benefits | 70,705 | 67,331 | 69,479 | 5 | % | (3 | )% | ||||||||||
| Surrender and other benefits | 35,118 | 36,554 | 35,860 | (4 | )% | 2 | % | ||||||||||
| Increase in traditional life future policy benefits | 54,639 | 52,395 | 43,627 | 4 | % | 20 | % | ||||||||||
| Total traditional life insurance benefits | 160,462 | 156,280 | 148,966 | 3 | % | 5 | % | ||||||||||
| Distributions to participating policyholders | 13,319 | 14,275 | 17,030 | (7 | )% | (16 | )% | ||||||||||
| Underwriting, acquisition and insurance expenses: | |||||||||||||||||
| Commission expense, net of deferrals | 20,995 | 17,476 | 16,074 | 20 | % | 9 | % | ||||||||||
| Amortization of deferred acquisition costs | 15,760 | 21,216 | 18,042 | (26 | )% | 18 | % | ||||||||||
| Amortization of value of insurance in force | 1,593 | 2,984 | (4,948 | ) | (47 | )% | (160 | )% | |||||||||
| Other underwriting expenses | 52,983 | 49,305 | 44,926 | 7 | % | 10 | % | ||||||||||
| Total underwriting, acquisition and insurance expenses | 91,331 | 90,981 | 74,094 | — | % | 23 | % | ||||||||||
| Total benefits and expenses | 336,511 | 324,112 | 302,454 | 4 | % | 7 | % | ||||||||||
| Pre-tax operating income | $ | 48,814 | $ | 43,741 | $ | 50,502 | 12 | % | (13 | )% | |||||||
30
| Life Insurance Segment - continued | |||||||||||||||||
| Year ended December 31, | Change over prior year | ||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | |||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Other data | |||||||||||||||||
| Life premiums collected, net of reinsurance | $ | 307,474 | $ | 255,709 | $ | 229,468 | 20 | % | 11 | % | |||||||
| Policy liabilities and accruals, end of period | 2,454,556 | 2,301,155 | 2,197,597 | 7 | % | 5 | % | ||||||||||
| Life insurance in force, end of period | 49,055,900 | 46,139,999 | 43,717,077 | 6 | % | 6 | % | ||||||||||
| Average invested assets, at amortized cost | 2,396,368 | 2,258,593 | 2,187,603 | 6 | % | 3 | % | ||||||||||
| Investment fee income included in net investment income (1) | 1,854 | 2,831 | 548 | (35 | )% | 417 | % | ||||||||||
| Average interest sensitive life account value | 703,538 | 650,821 | 631,443 | 8 | % | 3 | % | ||||||||||
| Interest sensitive life insurance spread: | |||||||||||||||||
| Weighted average yield on cash and invested assets | 6.04 | % | 6.36 | % | 6.49 | % | |||||||||||
| Weighted average interest crediting rate | 4.11 | % | 4.14 | % | 4.19 | % | |||||||||||
| Spread | 1.93 | % | 2.22 | % | 2.30 | % | |||||||||||
| Life insurance lapse and surrender rates | 5.5 | % | 6.1 | % | 6.8 | % | |||||||||||
| Death benefits, net of reinsurance and reserves released | $ | 72,824 | $ | 65,624 | $ | 67,284 | 11 | % | (2 | )% | |||||||
| Impact on pre-tax income of unlocking deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve | (595 | ) | (3,762 | ) | (1,554 | ) | (84 | )% | 142 | % | |||||||
| (1) | Includes prepayment fee income and net discount accretion on mortgage and asset-backed securities resulting from changing payment speed assumptions at the end of the period. |
Pre-tax operating income for the Life Insurance segment increased in 2013 and decreased in 2012 compared to prior periods. The increase in 2013 was primarily due to an increase in the volume of business in force and the impact of unlocking, partially offset by increased death benefits. The decrease in 2012 was primarily due to the impact of refinements to valuation estimates during 2011 and an increase in expense allocations as discussed in the Corporate and Other segment, partially offset by increases in the volume of business in force and investment fee income.
Premiums collected were higher in 2013 and 2012 compared to the prior years due to the relative attractiveness of life insurance products. The increased sales activity, along with the overall increase in business in force, is contributing to the increase in revenues and expenses, including non-deferrable underwriting and commission related expenses.
Results for 2013 were favorably impacted by the correction of an immaterial error which increased pre-tax operating earnings by $2.8 million. The error arose and accumulated over several years, with no prior year significantly impacted. As a result of the correction, interest sensitive product charges were increased $6.3 million, interest sensitive death benefits were increased $2.5 million and amortization of deferred acquisition costs was increased $1.0 million. Results for 2012 were negatively impacted by the impact of reserve refinements which increased traditional life future policy benefits $1.8 million as a result of the impact of updates to mortality tables and lapse assumptions. The impact of refining methods and assumptions in 2011 relating to the value of insurance in force, deferred acquisition costs and certain traditional life insurance reserves decreased benefits and expenses $7.4 million.
Unlocking of deferred acquisition costs, value of insurance in force and unearned revenue reserve resulted in an increase in 2013 operating income compared to 2012, and a decrease in 2012 operating income compared to 2011. Unlocking for each year reflected changes in projected policy lapses and mortality assumptions used in the estimate of future expected gross profits. During 2012, we incurred additional amortization through unlocking as a result of our analysis of the impact of a continued low interest rate environment on projected investment and spread income, as well as withdrawal rates.
31
Death benefits, net of reinsurance and reserves released, increased in 2013 primarily due to an increase in the average size of claims.
The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in 2013 and 2012 due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by an increase in investment fee income in 2012. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our interest sensitive life insurance products were impacted by crediting rate decreases taken on various products in 2013, 2012 and 2011 in response to the declining portfolio yield, partially offset by sales of products with higher crediting rates.
| Corporate and Other Segment | |||||||||||||||||
| Year ended December 31, | Change over prior year | ||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | |||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Operating revenues: | |||||||||||||||||
| Interest sensitive product charges | $ | 46,093 | $ | 45,722 | $ | 47,283 | 1 | % | (3 | )% | |||||||
| Net investment income | 35,843 | 30,259 | 25,890 | 18 | % | 17 | % | ||||||||||
| Other income | 14,839 | 17,462 | 17,407 | (15 | )% | — | % | ||||||||||
| Total operating revenues | 96,775 | 93,443 | 90,580 | 4 | % | 3 | % | ||||||||||
| Benefits and expenses: | |||||||||||||||||
| Interest sensitive product benefits | 30,183 | 30,721 | 29,229 | (2 | )% | 5 | % | ||||||||||
| Underwriting, acquisition and insurance expenses: | |||||||||||||||||
| Commission expense, net of deferrals | 3,861 | 3,732 | 4,449 | 3 | % | (16 | )% | ||||||||||
| Amortization of deferred acquisition costs | 5,170 | 5,326 | 7,967 | (3 | )% | (33 | )% | ||||||||||
| Other underwriting expenses | 6,638 | 6,850 | 17,846 | (3 | )% | (62 | )% | ||||||||||
| Total underwriting, acquisition and insurance expenses | 15,669 | 15,908 | 30,262 | (2 | )% | (47 | )% | ||||||||||
| Interest expense | 6,863 | 7,952 | 8,532 | (14 | )% | (7 | )% | ||||||||||
| Other expenses | 18,414 | 20,513 | 20,652 | (10 | )% | (1 | )% | ||||||||||
| Total benefits and expenses | 71,129 | 75,094 | 88,675 | (5 | )% | (15 | )% | ||||||||||
| 25,646 | 18,349 | 1,905 | 40 | % | 863 | % | |||||||||||
| Net (income) loss attributable to noncontrolling interest | 165 | 83 | (6 | ) | 99 | % | (1,483 | )% | |||||||||
| Equity income (loss), before tax | (3,639 | ) | (1,576 | ) | 394 | 131 | % | (500 | )% | ||||||||
| Pre-tax operating income | $ | 22,172 | $ | 16,856 | $ | 2,293 | 32 | % | 635 | % | |||||||
32
| Corporate and Other Segment - continued | |||||||||||||||||
| Year ended December 31, | Change over prior year | ||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | |||||||||||||
| Other data | |||||||||||||||||
| Average invested assets, at amortized cost | $ | 750,918 | $ | 649,602 | $ | 515,298 | 16 | % | 26 | % | |||||||
| Investment fee income included in net investment income (1) | 366 | 185 | 372 | 98 | % | (50 | )% | ||||||||||
| Average interest sensitive life account value | 322,344 | 300,231 | 269,650 | 7 | % | 11 | % | ||||||||||
| Death benefits, net of reinsurance and reserves released | 18,526 | 20,393 | 18,823 | (9 | )% | 8 | % | ||||||||||
| Impact on pre-tax income of unlocking of deferred acquisition costs and unearned revenue reserve | (610 | ) | 115 | (278 | ) | (630 | )% | (141 | )% | ||||||||
| Estimated impact on pre-tax income from separate account performance on amortization of deferred acquisition costs | 2,630 | 790 | (2,400 | ) | 233 | % | (133 | )% | |||||||||
| (1) | Includes prepayment fee income and net discount accretion on mortgage and asset-backed securities resulting from changing payment speed assumptions at the end of the period. |
Pre-tax operating income increased in 2013 and 2012 compared prior years. The increase in 2013 was primarily due to an increase in net investment income, the impact of market performance and profits on amortization of deferred acquisition costs on our variable business and a decrease in death benefits, partially offset by an increase in pre-tax equity loss. The increase in 2012 was primarily due to a reduction in other underwriting expenses allocated to the segment, the impact of market performance and profits on amortization of deferred acquisition costs on our variable business and an increase in net investment income, partially offset by an increase in pre-tax equity loss.
Other underwriting expenses decreased in 2012 due to a reallocation of certain expenses from the Corporate and Other segment to the Annuity and Life Insurance segments due to our decision to discontinue sales of variable products, resulting in a shift of corporate overhead to the product segments. In total, other underwriting expenses increased 1.2% in 2012.
Other income in 2012 included administrative fee income of $3.5 million received from EquiTrust Life for accounting and other services rendered to support the transition of that company subsequent to its sale in December 2011. Other income in 2011 included $1.5 million in other income associated with the EquiTrust Mutual Funds merger and a $1.0 million cash settlement received from a litigation case. Other income and other expenses also includes fees and expenses from sales of brokered products and operating results of our non-insurance subsidiaries, which include management, advisory, marketing and distribution services and leasing activities.
Amortization of deferred acquisition costs and unearned revenue reserves changed over the three year period primarily due to the impact of market performance in the separate accounts.
Death benefits net of reinsurance and reserves released decreased in 2013 primarily due to a decrease in the average claim size.
Net investment income increased during 2013 and 2012 due to an increase in investments, including funds received from the sale of EquiTrust Life as discussed in Note 15 to our consolidated financial statements, as well as the impact of higher yielding securities held in the portfolio.
Equity income (loss) includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies where we exhibit some control but have a minority ownership interest. Given the timing of availability of financial information from our equity investees, we will consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of bond and equity securities held by the investment partnerships, timing and success of initial public offerings or exit strategies, and the timing of the sale of investments held by the partnerships and
33
joint ventures. We have increased our investments in low income housing tax credit partnerships which generate pre-tax losses but after tax gains as the related tax credits are realized. The timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and when tax credits are approved. Equity income, net of related income taxes, was as follows:
| Equity Income (Loss), Net of Related Income Taxes | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Equity income (loss): | ||||||||||||
| Low income housing tax credit partnerships | $ | (6,273 | ) | $ | (4,258 | ) | $ | (2,085 | ) | |||
| Other equity method investments | 2,634 | 2,682 | 2,479 | |||||||||
| (3,639 | ) | (1,576 | ) | 394 | ||||||||
| Income taxes: | ||||||||||||
| Taxes on equity income (loss) | 1,274 | 551 | (138 | ) | ||||||||
| Investment tax credits | 9,775 | 5,708 | 1,028 | |||||||||
| Equity income, net of related income taxes | $ | 7,410 | $ | 4,683 | $ | 1,284 | ||||||
Income Taxes on Operating Income
The effective tax rate on operating income was 25.3% for 2013 and 29.0% for 2012 and 2011. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of low-income housing credits from equity method investees, tax-exempt interest and dividend income and incentive stock option deductions. The 2013 effective tax rate decreased compared to the prior year primarily due to an increase in our holdings in tax-exempt municipal securities and an increase in tax credits from low income housing tax credit partnerships. See Note 5 to our consolidated financial statements for additional information on income taxes.
| Impact of Operating Adjustments on FBL Net Income | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Realized gains (losses) on investments | $ | 13,555 | $ | 452 | $ | (8,296 | ) | ||||
| Change in net unrealized gains/losses on derivatives | (1,695 | ) | 1,661 | 445 | |||||||
| Change in amortization of: | |||||||||||
| Deferred acquisition costs | 416 | (1,804 | ) | 112 | |||||||
| Value of insurance in force acquired | (65 | ) | (105 | ) | (46 | ) | |||||
| Unearned revenue reserve | 42 | 13 | 10 | ||||||||
| Loss on debt redemption | — | (33 | ) | (33,176 | ) | ||||||
| Income tax offset | (4,288 | ) | (64 | ) | 14,336 | ||||||
| Net impact of operating income adjustments on continuing operations | 7,965 | 120 | (26,615 | ) | |||||||
| Net impact of discontinued operations | — | (2,939 | ) | (11,464 | ) | ||||||
| Net impact of operating income adjustments | $ | 7,965 | $ | (2,819 | ) | $ | (38,079 | ) | |||
34
| Impact of Operating Adjustments on FBL Net Income - continued | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Summary of adjustments noted above after offsets and income taxes: | |||||||||||
| Realized gains/losses on investments | $ | 8,206 | $ | (477 | ) | $ | (5,983 | ) | |||
| Change in net unrealized gains/losses on derivatives | (241 | ) | 619 | 932 | |||||||
| Loss on debt redemption | — | (22 | ) | (21,564 | ) | ||||||
| Net impact of discontinued operations | — | (2,939 | ) | (11,464 | ) | ||||||
| Net impact of operating income adjustments | $ | 7,965 | $ | (2,819 | ) | $ | (38,079 | ) | |||
| Net impact per common share - basic | $ | 0.31 | $ | (0.10 | ) | $ | (1.24 | ) | |||
| Net impact per common share - assuming dilution | $ | 0.31 | $ | (0.10 | ) | $ | (1.22 | ) | |||
Income taxes on operating income adjustments on continuing operations are recorded at 35% as there are no permanent differences between book and taxable income relating to these adjustments.
| Realized Gains (Losses) on Investments | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Realized gains (losses) on investments: | |||||||||||
| Realized gains on sales | $ | 18,507 | $ | 18,047 | $ | 5,818 | |||||
| Realized losses on sales | (2,540 | ) | (568 | ) | (463 | ) | |||||
| Total other-than-temporary impairment charges | (6,662 | ) | (26,399 | ) | (20,206 | ) | |||||
| Net realized investment gains (losses) | 9,305 | (8,920 | ) | (14,851 | ) | ||||||
| Non-credit losses included in other comprehensive income (loss) | 4,250 | 9,372 | 6,555 | ||||||||
| Total reported in statements of operations | $ | 13,555 | $ | 452 | $ | (8,296 | ) | ||||
The level of realized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. See "Financial Condition - Investments" and Note 2 to our consolidated financial statements for details regarding our unrealized gains and losses on available-for-sale securities at December 31, 2013 and 2012.
We monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certain investment grade securities on which we have concerns regarding credit quality. If we determine that an unrealized loss is other-than-temporary, the security is written down to its fair value. A portion of the write down attributable to credit factors is recognized in net income, with the non-credit portion recognized in accumulated other comprehensive income. See additional details regarding the non-credit portion of the write downs and our methodology for evaluating investments for other-than-temporary impairment in Notes 1 and 2 to our consolidated financial statements.
35
| Investment Credit Impairment Losses Recognized in Net Income | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Corporate securities: | |||||||||||
| Energy | $ | — | $ | 6,461 | $ | 1,850 | |||||
| Finance | 421 | — | 439 | ||||||||
| Manufacturing | — | — | 1,000 | ||||||||
| Transportation | 242 | 4,382 | — | ||||||||
| Residential mortgage-backed | 618 | 3,605 | 1,259 | ||||||||
| Other asset-backed | 156 | 2,244 | 3,814 | ||||||||
| Mortgage loans | 804 | 335 | — | ||||||||
| Real estate and other assets | 171 | — | 5,289 | ||||||||
| Total other-than-temporary impairment losses reported in net income | $ | 2,412 | $ | 17,027 | $ | 13,651 | |||||
Fixed maturity other-than-temporary credit losses for 2013 were incurred within residential mortgage-backed securities due to changes in the amount and timing of future cash flows resulting in a decline in the present value. Losses within our asset-backed securities and the transportation and finance sectors were due to our intent to reduce our exposure by selling all or a portion of these securities. Losses were incurred on mortgage loans that were restructured.
Fixed maturity other-than-temporary credit impairment losses for 2012 were incurred within the energy sector due to deteriorating operating results of a geothermal operation and an oil tanker carrier. The transportation sector loss related to a global energy transportation company that reported a financial irregularity and filed for bankruptcy protection during the fourth quarter. Losses were incurred within our residential and other asset-backed securities due to weakness in underlying collateral values, reduced reliance on insurance credit support and anticipated interest shortfalls that we were not going to recover.
Fixed maturity other-than-temporary credit impairment losses for 2011 were incurred within several industry sectors. The energy sector loss related to an oil carrier with credit concerns, including a rating agency downgrade. The manufacturing sector and finance sector losses were related to companies restructuring their debt obligations due to financial difficulties. Losses were incurred within our residential and other asset-backed securities, generally due to concerns over potential defaults and weakness in underlying collateral values. Furthermore, during 2011 we recognized an other-than-temporary impairment loss of $4.7 million on an equity method investment with an uncertain future financial condition due to current class action litigation.
Income (Loss) from Discontinued Operations
As a result of the sale of EquiTrust Life, the operations of the component sold and the related loss on sale are reflected as discontinued operations for all periods presented. See Note 15 to our consolidated financial statements for additional details on income (loss) from discontinued operations.
Financial Condition
Investments
Our investment portfolio decreased 1.7% to $7,040.0 million at December 31, 2013 compared to $7,160.7 million at December 31, 2012. The portfolio decreased due to a reduction of $374.9 million of net unrealized appreciation of fixed maturities during 2013 and the execution of capital management transactions as outlined in Note 7 to the consolidated financial statements, partially offset by an increase due to positive cash flows from operating and financing activities. The reduction in net unrealized appreciation of fixed maturities is primarily attributable to an increase in market interest rates. Additional details regarding securities in an unrealized loss position at December 31, 2013 are included in the discussion that follows and in Note 2 to our consolidated financial statements included in Item 8. Details regarding investment impairments are discussed above in the "Realized Gains (Losses) on Investments" section under "Results of Operations."
We manage the investment portfolio to optimize risk-adjusted yield within the context of prudent asset-liability management. We evaluate multiple cash flow testing scenarios as part of this process. The Company's investment policy calls for investing primarily in high quality fixed maturities and commercial mortgage loans.
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| Fixed Maturity Acquisitions Selected Information | ||||||||
| Year ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| (Dollars in thousands) | ||||||||
| Cost of acquisitions: | ||||||||
| Corporate | $ | 473,599 | $ | 524,172 | ||||
| Mortgage and asset-backed | 157,266 | 446,053 | ||||||
| United States Government and agencies | 1,525 | — | ||||||
| Tax-exempt municipals | 219,399 | 96,638 | ||||||
| Taxable municipals | 29,341 | 27,013 | ||||||
| Total | $ | 881,130 | $ | 1,093,876 | ||||
| Effective annual yield | 4.48 | % | 4.43 | % | ||||
| Credit quality | ||||||||
| NAIC 1 designation | 69.5 | % | 60.7 | % | ||||
| NAIC 2 designation | 30.1 | % | 38.5 | % | ||||
| Non-investment grade | 0.4 | % | 0.8 | % | ||||
| Weighted-average life in years | 18.0 | 11.8 | ||||||
The table above summarizes selected information for fixed maturity purchases. The effective annual yield shown is the yield calculated to the "worst-call date." For noncallable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call or maturity date that produces the lowest yield. The weighted-average maturity is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average maturity is equal to the stated maturity date.
A portion of the securities acquired during 2013 and 2012 were acquired with the proceeds from advances on our funding agreements with the FHLB. The securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products, due to the shorter maturity and relatively low interest rate paid on those advances. In addition, the municipal securities acquired are exempt from federal income taxes, and accordingly have a higher actual return than reflected in the yields stated above. The average yield of the securities acquired, excluding the securities supporting the funding agreements and using a tax adjusted yield for the municipal securities, was 4.85% in 2013 and 4.87% in 2012.
Investment Portfolio Summary | |||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||
| Carrying Value | Percent | Carrying Value | Percent | ||||||||||
| (Dollars in thousands) | |||||||||||||
| Fixed maturities - available for sale: | |||||||||||||
| Public | $ | 4,630,764 | 65.8 | % | $ | 4,649,954 | 64.9 | % | |||||
| 144A private placement | 1,150,257 | 16.3 | 1,297,628 | 18.1 | |||||||||
| Private placement | 300,732 | 4.3 | 318,163 | 4.5 | |||||||||
| Total fixed maturities - available for sale | 6,081,753 | 86.4 | 6,265,745 | 87.5 | |||||||||
| Equity securities | 91,555 | 1.3 | 86,253 | 1.2 | |||||||||
| Mortgage loans | 575,861 | 8.2 | 554,843 | 7.8 | |||||||||
| Real estate | 4,084 | 0.1 | 4,668 | 0.1 | |||||||||
| Policy loans | 176,993 | 2.5 | 174,254 | 2.4 | |||||||||
| Short-term investments | 108,677 | 1.5 | 74,516 | 1.0 | |||||||||
| Other investments | 1,079 | — | 371 | — | |||||||||
| Total investments | $ | 7,040,002 | 100.0 | % | $ | 7,160,650 | 100.0 | % | |||||
As of December 31, 2013, 95.6% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities
37
(NAIC designations 3 through 6). As of December 31, 2013, no single non-investment grade holding exceeded 0.2% of total investments.
| Credit Quality by NAIC Designation and Equivalent Rating | ||||||||||||||||
| December 31, 2013 | December 31, 2012 | |||||||||||||||
| NAIC Designation | Equivalent Rating (1) | Carrying Value | Percent | Carrying Value | Percent | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 3,729,070 | 61.3 | % | $ | 3,877,173 | 61.9 | % | |||||||
| 2 | BBB | 2,086,756 | 34.3 | 2,054,260 | 32.8 | |||||||||||
| Total investment grade | 5,815,826 | 95.6 | 5,931,433 | 94.7 | ||||||||||||
| 3 | BB | 167,003 | 2.7 | 210,875 | 3.4 | |||||||||||
| 4 | B | 48,972 | 0.8 | 80,676 | 1.2 | |||||||||||
| 5 | CCC | 40,540 | 0.7 | 24,930 | 0.4 | |||||||||||
| 6 | In or near default | 9,412 | 0.2 | 17,831 | 0.3 | |||||||||||
| Total below investment grade | 265,927 | 4.4 | 334,312 | 5.3 | ||||||||||||
| Total fixed maturities - available for sale | $ | 6,081,753 | 100.0 | % | $ | 6,265,745 | 100.0 | % | ||||||||
| (1) | Equivalent ratings are based on those provided by nationally recognized rating agencies with some exceptions for certain residential mortgage, commercial mortgage and asset-backed securities where they are based on the expected loss of the security rather than the probability of default. |
See Note 2 to our consolidated financial statements for a summary of fixed maturities by contractual maturity date.
| Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification | |||||||||||||||||||
| December 31, 2013 | |||||||||||||||||||
| Total Carrying Value | Carrying Value of Securities with Gross Unrealized Gains | Gross Unrealized Gains | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Corporate securities: | |||||||||||||||||||
| Basic industrial | $ | 312,228 | $ | 190,635 | $ | 18,429 | $ | 121,593 | $ | (9,961 | ) | ||||||||
| Capital goods | 204,795 | 149,261 | 13,673 | 55,534 | (3,751 | ) | |||||||||||||
| Communications | 115,997 | 88,504 | 8,434 | 27,493 | (2,716 | ) | |||||||||||||
| Consumer cyclical | 220,163 | 154,333 | 11,163 | 65,830 | (4,148 | ) | |||||||||||||
| Consumer noncyclical | 337,491 | 188,831 | 16,029 | 148,660 | (11,381 | ) | |||||||||||||
| Energy | 398,738 | 324,422 | 31,497 | 74,316 | (4,527 | ) | |||||||||||||
| Finance | 718,477 | 599,733 | 47,628 | 118,744 | (6,632 | ) | |||||||||||||
| Transportation | 79,022 | 70,567 | 6,379 | 8,455 | (1,199 | ) | |||||||||||||
| Utilities | 860,722 | 654,570 | 72,469 | 206,152 | (20,048 | ) | |||||||||||||
| Other | 59,146 | 40,262 | 3,450 | 18,884 | (485 | ) | |||||||||||||
| Total corporate securities | 3,306,779 | 2,461,118 | 229,151 | 845,661 | (64,848 | ) | |||||||||||||
| Mortgage and asset-backed securities | 1,381,938 | 1,052,138 | 74,859 | 329,800 | (21,803 | ) | |||||||||||||
| United States Government and agencies | 43,281 | 38,874 | 4,218 | 4,407 | (198 | ) | |||||||||||||
| State, municipal and other governments | 1,349,755 | 977,470 | 60,869 | 372,285 | (29,034 | ) | |||||||||||||
| Total | $ | 6,081,753 | $ | 4,529,600 | $ | 369,097 | $ | 1,552,153 | $ | (115,883 | ) | ||||||||
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| Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification | |||||||||||||||||||
| December 31, 2012 | |||||||||||||||||||
| Total Carrying Value | Carrying Value of Securities with Gross Unrealized Gains | Gross Unrealized Gains | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Corporate securities: | |||||||||||||||||||
| Basic industrial | $ | 262,068 | $ | 250,190 | $ | 32,086 | $ | 11,878 | $ | (1,488 | ) | ||||||||
| Capital goods | 200,164 | 188,833 | 25,292 | 11,331 | (345 | ) | |||||||||||||
| Communications | 109,376 | 106,462 | 14,099 | 2,914 | (86 | ) | |||||||||||||
| Consumer cyclical | 223,885 | 198,103 | 17,576 | 25,782 | (477 | ) | |||||||||||||
| Consumer noncyclical | 317,162 | 296,401 | 35,802 | 20,761 | (297 | ) | |||||||||||||
| Energy | 397,046 | 395,372 | 56,768 | 1,674 | (27 | ) | |||||||||||||
| Finance | 801,565 | 699,674 | 68,374 | 101,891 | (6,940 | ) | |||||||||||||
| Transportation | 85,195 | 85,195 | 11,187 | — | — | ||||||||||||||
| Utilities | 836,785 | 804,200 | 131,292 | 32,585 | (516 | ) | |||||||||||||
| Other | 62,337 | 60,367 | 6,668 | 1,970 | (7 | ) | |||||||||||||
| Total corporate securities | 3,295,583 | 3,084,797 | 399,144 | 210,786 | (10,183 | ) | |||||||||||||
| Mortgage and asset-backed securities | 1,674,714 | 1,489,283 | 113,613 | 185,431 | (21,154 | ) | |||||||||||||
| United States Government and agencies | 49,009 | 49,009 | 6,930 | — | — | ||||||||||||||
| State, municipal and other governments | 1,246,439 | 1,197,279 | 142,704 | 49,160 | (2,917 | ) | |||||||||||||
| Total | $ | 6,265,745 | $ | 5,820,368 | $ | 662,391 | $ | 445,377 | $ | (34,254 | ) | ||||||||
| Non-Sovereign European Debt Exposure | |||||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Italy | $ | 19,700 | $ | 20,003 | $ | 19,694 | $ | 20,682 | |||||||
| Spain | 15,429 | 19,256 | 15,429 | 18,913 | |||||||||||
| Ireland | 13,037 | 15,155 | 8,976 | 10,701 | |||||||||||
| Subtotal | 48,166 | 54,414 | 44,099 | 50,296 | |||||||||||
| United Kingdom | 182,671 | 182,762 | 129,061 | 139,682 | |||||||||||
| Netherlands | 60,952 | 64,335 | 51,745 | 59,348 | |||||||||||
| France | 37,223 | 39,564 | 37,914 | 42,383 | |||||||||||
| Other countries | 77,471 | 78,881 | 45,936 | 50,433 | |||||||||||
| Subtotal | 358,317 | 365,542 | 264,656 | 291,846 | |||||||||||
| Total European exposure | $ | 406,483 | $ | 419,956 | $ | 308,755 | $ | 342,142 | |||||||
The table above reflects our exposure to non-sovereign European debt. This represents 6.9% of total fixed maturities as of December 31, 2013 and 5.5% of total fixed maturities as of December 31, 2012. The exposures are primarily in the industrial, finance and utility sectors. We do not own any securities issued by European governments.
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| Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses | ||||||||||||||||
| December 31, 2013 | ||||||||||||||||
| NAIC Designation | Equivalent Rating | Carrying Value of Securities with Gross Unrealized Losses | Percent of Total | Gross Unrealized Losses | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 912,892 | 58.8 | % | $ | (64,755 | ) | 55.9 | % | ||||||
| 2 | BBB | 534,998 | 34.5 | (34,998 | ) | 30.2 | ||||||||||
| Total investment grade | 1,447,890 | 93.3 | (99,753 | ) | 86.1 | |||||||||||
| 3 | BB | 81,622 | 5.3 | (10,649 | ) | 9.2 | ||||||||||
| 4 | B | 7,290 | 0.5 | (961 | ) | 0.8 | ||||||||||
| 5 | CCC | 10,104 | 0.6 | (1,444 | ) | 1.2 | ||||||||||
| 6 | In or near default | 5,247 | 0.3 | (3,076 | ) | 2.7 | ||||||||||
| Total below investment grade | 104,263 | 6.7 | (16,130 | ) | 13.9 | |||||||||||
| Total | $ | 1,552,153 | 100.0 | % | $ | (115,883 | ) | 100.0 | % | |||||||
| December 31, 2012 | ||||||||||||||||
| NAIC Designation | Equivalent Rating | Carrying Value of Securities with Gross Unrealized Losses | Percent of Total | Gross Unrealized Losses | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 176,253 | 39.5 | % | $ | (5,731 | ) | 16.7 | % | ||||||
| 2 | BBB | 134,355 | 30.2 | (3,315 | ) | 9.7 | ||||||||||
| Total investment grade | 310,608 | 69.7 | (9,046 | ) | 26.4 | |||||||||||
| 3 | BB | 67,380 | 15.1 | (3,801 | ) | 11.1 | ||||||||||
| 4 | B | 44,961 | 10.1 | (14,227 | ) | 41.5 | ||||||||||
| 5 | CCC | 13,621 | 3.1 | (1,263 | ) | 3.7 | ||||||||||
| 6 | In or near default | 8,807 | 2.0 | (5,917 | ) | 17.3 | ||||||||||
| Total below investment grade | 134,769 | 30.3 | (25,208 | ) | 73.6 | |||||||||||
| Total | $ | 445,377 | 100.0 | % | $ | (34,254 | ) | 100.0 | % | |||||||
| Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time | |||||||||||||||
| December 31, 2013 | |||||||||||||||
| Amortized Cost | Gross Unrealized Losses | ||||||||||||||
Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Three months or less | $ | — | $ | 328,708 | $ | — | $ | (6,173 | ) | ||||||
| Greater than three months to six months | — | 137,884 | — | (4,492 | ) | ||||||||||
| Greater than six months to nine months | — | 1,008,528 | — | (81,485 | ) | ||||||||||
| Greater than nine months to twelve months | — | 27,343 | — | (2,997 | ) | ||||||||||
| Greater than twelve months | 22,109 | 143,464 | (7,005 | ) | (13,731 | ) | |||||||||
| Total | $ | 22,109 | $ | 1,645,927 | $ | (7,005 | ) | $ | (108,878 | ) | |||||
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| Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time | |||||||||||||||
| December 31, 2012 | |||||||||||||||
| Amortized Cost | Gross Unrealized Losses | ||||||||||||||
Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Three months or less | $ | — | $ | 168,537 | $ | — | $ | (2,238 | ) | ||||||
| Greater than three months to six months | — | 33,622 | — | (923 | ) | ||||||||||
| Greater than six months to nine months | — | 9,276 | — | (109 | ) | ||||||||||
| Greater than nine months to twelve months | — | 18,424 | — | (369 | ) | ||||||||||
| Greater than twelve months | 51,957 | 197,815 | (18,691 | ) | (11,924 | ) | |||||||||
| Total | $ | 51,957 | $ | 427,674 | $ | (18,691 | ) | $ | (15,563 | ) | |||||
| Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date | |||||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||||
| Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Due in one year or less | $ | 129 | $ | (1 | ) | $ | — | $ | — | ||||||
| Due after one year through five years | 21,508 | (1,525 | ) | 28,999 | (3,793 | ) | |||||||||
| Due after five years through ten years | 182,126 | (8,459 | ) | 42,320 | (711 | ) | |||||||||
| Due after ten years | 1,018,590 | (84,095 | ) | 188,627 | (8,596 | ) | |||||||||
| 1,222,353 | (94,080 | ) | 259,946 | (13,100 | ) | ||||||||||
| Mortgage and asset-backed | 329,800 | (21,803 | ) | 185,431 | (21,154 | ) | |||||||||
| Total | $ | 1,552,153 | $ | (115,883 | ) | $ | 445,377 | $ | (34,254 | ) | |||||
See Note 2 to our consolidated financial statements for additional analysis of these unrealized losses.
Mortgage and Asset-Backed Securities
Mortgage and other asset-backed securities are purchased when we believe these types of investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity.
The repayment pattern on mortgage and other asset-backed securities is more variable than that of more traditional fixed maturity securities because the repayment terms are tied to underlying debt obligations that are subject to prepayments, which in the current economic environment includes defaults. The prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that cannot be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy.
At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed, to result in a constant effective yield over the life of the security. This effective yield is computed using historical principal payments and expected future principal payment patterns. Any adjustments to book value to derive the constant effective yield, which may include the reversal of premium or discount amounts previously amortized or accrued, are recorded in the current period as a component of net investment income. Accordingly, deviations in actual prepayment speeds from that originally expected or changes in expected prepayment speeds can cause a change in the yield earned on mortgage and other asset-backed securities purchased at a premium or discount and may result in adjustments that have a material positive or negative impact on reported results. Increases in prepayment speeds, which typically occur in a decreasing interest rate environment, generally increase 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 slow down the rate at which these amounts are recorded into income.
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| Mortgage and Asset-Backed Securities by Type | ||||||||||||||
| December 31, 2013 | ||||||||||||||
| Amortized Cost | Par Value | Carrying Value | Percent of Fixed Maturities | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Residential mortgage-backed securities: | ||||||||||||||
| Sequential | $ | 312,822 | $ | 374,692 | $ | 334,326 | 5.5 | % | ||||||
| Pass-through | 23,801 | 23,734 | 25,657 | 0.4 | ||||||||||
| Planned and targeted amortization class | 149,693 | 148,104 | 152,681 | 2.5 | ||||||||||
| Other | 6,674 | 9,551 | 8,064 | 0.1 | ||||||||||
| Total residential mortgage-backed securities | 492,990 | 556,081 | 520,728 | 8.5 | ||||||||||
| Commercial mortgage-backed securities | 391,845 | 399,782 | 404,667 | 6.7 | ||||||||||
| Other asset-backed securities | 444,047 | 488,803 | 456,543 | 7.5 | ||||||||||
| Total | $ | 1,328,882 | $ | 1,444,666 | $ | 1,381,938 | 22.7 | % | ||||||
| December 31, 2012 | ||||||||||||||
| Amortized Cost | Par Value | Carrying Value | Percent of Fixed Maturities | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Residential mortgage-backed securities: | ||||||||||||||
| Sequential | $ | 404,252 | $ | 468,821 | $ | 424,922 | 6.8 | % | ||||||
| Pass-through | 31,496 | 31,309 | 34,614 | 0.6 | ||||||||||
| Planned and targeted amortization class | 184,537 | 183,265 | 201,051 | 3.2 | ||||||||||
| Other | 12,670 | 15,713 | 13,595 | 0.2 | ||||||||||
| Total residential mortgage-backed securities | 632,955 | 699,108 | 674,182 | 10.8 | ||||||||||
| Commercial mortgage-backed securities | 463,504 | 470,474 | 510,819 | 8.1 | ||||||||||
| Other asset-backed securities | 485,796 | 538,489 | 489,713 | 7.8 | ||||||||||
| Total | $ | 1,582,255 | $ | 1,708,071 | $ | 1,674,714 | 26.7 | % | ||||||
The residential mortgage-backed portfolio includes government agency pass-through and collateralized mortgage obligation (CMO) securities. With a government agency pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. We primarily invest in sequential tranches which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to excessive risk.
The commercial mortgage-backed securities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less subject to refinance risk than residential mortgage-backed securities principally due to prepayment restrictions on many of the underlying commercial mortgage loans.
The other asset-backed securities are backed by both residential and non-residential collateral. The collateral for residential asset-backed securities primarily consists of second lien fixed-rate home equity loans. The cash flows of these securities are less subject to prepayment risk than residential mortgage-backed securities as the borrowers are less likely to refinance than those with only a first lien mortgage. The collateral for non-residential asset-backed securities primarily includes securities backed by credit card receivables, auto dealer receivables, auto installment loans, aircraft leases, middle market and syndicated business loans, timeshare receivables and trade and account receivables. These securities are high quality, short-duration assets with limited cash flow variability.
Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans. We also have a partnership interest in two funds at December 31, 2013 and at December 31, 2012, that own securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The funds are reported as securities and indebtedness of related parties in our consolidated balance sheets
42
with a fair value of $17.9 million at December 31, 2013 and $24.2 million at December 31, 2012. We do not own any direct investments in subprime lenders.
| Mortgage and Asset-Backed Securities by Collateral Type | |||||||||||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||||||||||
| Amortized Cost | Carrying Value | Percent of Fixed Maturities | Amortized Cost | Carrying Value | Percent of Fixed Maturities | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Government agency | $ | 199,372 | $ | 207,065 | 3.4 | % | $ | 258,461 | $ | 285,763 | 4.6 | % | |||||||||
| Prime | 166,667 | 180,236 | 2.9 | 220,925 | 232,277 | 3.7 | |||||||||||||||
| Alt-A | 178,653 | 190,217 | 3.1 | 204,712 | 206,847 | 3.3 | |||||||||||||||
| Subprime | 31,766 | 29,891 | 0.5 | 12,356 | 8,912 | 0.1 | |||||||||||||||
| Commercial mortgage | 391,845 | 404,667 | 6.7 | 463,504 | 510,819 | 8.1 | |||||||||||||||
| Non-mortgage | 360,579 | 369,862 | 6.1 | 422,297 | 430,096 | 6.9 | |||||||||||||||
| Total | $ | 1,328,882 | $ | 1,381,938 | 22.7 | % | $ | 1,582,255 | $ | 1,674,714 | 26.7 | % | |||||||||
The mortgage and asset-backed securities can be summarized into three broad categories: residential, commercial and other asset-backed securities.
| Residential Mortgage-Backed Securities by Collateral Type and Origination Year | |||||||||||||||||||||||
| December 31, 2013 | |||||||||||||||||||||||
| Government & Prime | Alt-A | Total | |||||||||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| 2013-2008 | $ | 155,539 | $ | 157,708 | $ | 855 | $ | 868 | $ | 156,394 | $ | 158,576 | |||||||||||
| 2007 | 32,825 | 38,612 | 27,979 | 28,397 | 60,804 | 67,009 | |||||||||||||||||
| 2006 | 22,704 | 26,350 | 28,801 | 32,131 | 51,505 | 58,481 | |||||||||||||||||
| 2005 | 12,822 | 14,332 | 3,823 | 4,613 | 16,645 | 18,945 | |||||||||||||||||
| 2004 and prior | 122,869 | 130,740 | 84,773 | 86,977 | 207,642 | 217,717 | |||||||||||||||||
| Total | $ | 346,759 | $ | 367,742 | $ | 146,231 | $ | 152,986 | $ | 492,990 | $ | 520,728 | |||||||||||
| December 31, 2012 | |||||||||||||||||||||||
| Government & Prime | Alt-A | Total | |||||||||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| 2012-2008 | $ | 201,055 | $ | 219,120 | $ | 1,457 | $ | 1,511 | $ | 202,512 | $ | 220,631 | |||||||||||
| 2007 | 30,133 | 33,293 | 28,154 | 27,018 | 58,287 | 60,311 | |||||||||||||||||
| 2006 | 25,436 | 27,680 | 28,090 | 28,635 | 53,526 | 56,315 | |||||||||||||||||
| 2005 | 16,976 | 18,757 | 4,110 | 4,679 | 21,086 | 23,436 | |||||||||||||||||
| 2004 and prior | 200,394 | 214,138 | 97,150 | 99,351 | 297,544 | 313,489 | |||||||||||||||||
| Total | $ | 473,994 | $ | 512,988 | $ | 158,961 | $ | 161,194 | $ | 632,955 | $ | 674,182 | |||||||||||
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| Residential Mortgage-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
| December 31, 2013 | December 31, 2012 | |||||||||||||||
| NAIC Designation | Equivalent Rating | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 473,391 | 90.9 | % | $ | 618,541 | 91.7 | % | |||||||
| 2 | BBB | 18,670 | 3.6 | 12,763 | 1.9 | |||||||||||
| 3 | BB | 17,920 | 3.4 | 21,255 | 3.2 | |||||||||||
| 4 | B | 10,747 | 2.1 | 11,356 | 1.7 | |||||||||||
| 5 | CCC | — | — | 10,267 | 1.5 | |||||||||||
| Total | $ | 520,728 | 100.0 | % | $ | 674,182 | 100.0 | % | ||||||||
| Commercial Mortgage-Backed Securities by Origination Year | |||||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| 2013 | $ | 20,421 | $ | 18,423 | $ | — | $ | — | |||||||
| 2011 | 88,494 | 90,998 | 88,483 | 101,251 | |||||||||||
| 2010 | 4,999 | 5,308 | 15,206 | 16,042 | |||||||||||
| 2009 | 13,660 | 15,593 | 20,049 | 24,445 | |||||||||||
| 2008 and prior | 264,271 | 274,345 | 339,766 | 369,081 | |||||||||||
| Total | $ | 391,845 | $ | 404,667 | $ | 463,504 | $ | 510,819 | |||||||
| Commercial Mortgage-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
| December 31, 2013 | December 31, 2012 | |||||||||||||||
| NAIC Designation | Equivalent Rating | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | GNMA | $ | 195,987 | 48.4 | % | $ | 223,311 | 43.7 | % | |||||||
| 1 | FNMA | 13,816 | 3.4 | 15,272 | 3.0 | |||||||||||
| 1 | AAA, AA, A | |||||||||||||||
| Generic | 91,797 | 22.7 | 146,143 | 28.6 | ||||||||||||
| Super Senior | 49,798 | 12.3 | 70,519 | 13.8 | ||||||||||||
| Mezzanine | 18,046 | 4.5 | 18,043 | 3.5 | ||||||||||||
| Junior | 20,418 | 5.0 | 20,398 | 4.0 | ||||||||||||
| Total AAA, AA, A | 180,059 | 44.5 | 255,103 | 49.9 | ||||||||||||
| 2 | BBB | 5,898 | 1.5 | 6,348 | 1.3 | |||||||||||
| 3 | BB | 6,855 | 1.7 | 7,863 | 1.5 | |||||||||||
| 4 | B | 2,052 | 0.5 | 2,922 | 0.6 | |||||||||||
| Total | $ | 404,667 | 100.0 | % | $ | 510,819 | 100.0 | % | ||||||||
Government National Mortgage Association (GNMA), guarantees principal and interest on mortgage backed securities. The guarantee is backed by the full faith and credit of the United States Government. The Federal National Mortgage Association (FNMA) is a government-sponsored enterprise (GSE) that was chartered by Congress to reduce borrowing costs for certain homeowners. GSE's carry an implicit backing of the U.S. Government but do not have explicit guarantees like GNMA.
The AAA, AA and A rated commercial mortgage-backed securities are broken down into categories based on subordination levels. Rating agencies disclose subordination levels, which measure the amount of credit support that the bonds (or tranches) have from subordinated bonds (or tranches). Generic is a term used for securities issued prior to 2005. The super senior securities have subordination levels greater than 27%, the mezzanine securities have subordination levels in the 17% to 27% range and the junior securities have subordination levels in the 9% to 16% range. Also included in the commercial mortgage- backed securities are military housing bonds totaling $96.6 million at December 31, 2013 and $95.1 million at December 31,
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2012. These bonds are used to fund the construction of multi-family homes on United States military bases. The bonds are backed by a first mortgage lien on residential military housing projects.
| Other Asset-Backed Securities by Collateral Type and Origination Year | |||||||||||||||||||||||||||||||||||||||
| December 31, 2013 | |||||||||||||||||||||||||||||||||||||||
| Government & Prime | Alt-A | Subprime | Non-Mortgage | Total | |||||||||||||||||||||||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
| 2013 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 56,581 | $ | 56,653 | $ | 56,581 | $ | 56,653 | |||||||||||||||||||
| 2012 | — | — | — | — | — | — | 141,400 | 143,578 | 141,400 | 143,578 | |||||||||||||||||||||||||||||
| 2011 | — | — | — | — | — | — | 36,496 | 37,536 | 36,496 | 37,536 | |||||||||||||||||||||||||||||
| 2010 | — | — | — | — | — | — | 6,198 | 6,348 | 6,198 | 6,348 | |||||||||||||||||||||||||||||
| 2008 and prior | 19,280 | 19,559 | 32,422 | 37,231 | 31,766 | 29,891 | 119,904 | 125,747 | 203,372 | 212,428 | |||||||||||||||||||||||||||||
| Total | $ | 19,280 | $ | 19,559 | $ | 32,422 | $ | 37,231 | $ | 31,766 | $ | 29,891 | $ | 360,579 | $ | 369,862 | $ | 444,047 | $ | 456,543 | |||||||||||||||||||
| December 31, 2012 | |||||||||||||||||||||||||||||||||||||||
| Government & Prime | Alt-A | Subprime | Non-Mortgage | Total | |||||||||||||||||||||||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
| 2012 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 149,056 | $ | 152,723 | $ | 149,056 | $ | 152,723 | |||||||||||||||||||
| 2011 | — | — | — | — | — | — | 47,781 | 49,416 | 47,781 | 49,416 | |||||||||||||||||||||||||||||
| 2010 | — | — | — | — | — | — | 63,316 | 63,640 | 63,316 | 63,640 | |||||||||||||||||||||||||||||
| 2009 | — | — | — | — | — | — | 2,889 | 2,888 | 2,889 | 2,888 | |||||||||||||||||||||||||||||
| 2008 and prior | 5,392 | 5,052 | 45,751 | 45,653 | 12,356 | 8,912 | 159,255 | 161,429 | 222,754 | 221,046 | |||||||||||||||||||||||||||||
| Total | $ | 5,392 | $ | 5,052 | $ | 45,751 | $ | 45,653 | $ | 12,356 | $ | 8,912 | $ | 422,297 | $ | 430,096 | $ | 485,796 | $ | 489,713 | |||||||||||||||||||
| Other Asset-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
| December 31, 2013 | December 31, 2012 | |||||||||||||||
| NAIC Designation | Equivalent Ratings | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 400,140 | 87.6 | % | $ | 434,160 | 88.7 | % | |||||||
| 2 | BBB | 14,327 | 3.1 | 21,238 | 4.3 | |||||||||||
| 3 | BB | 10,350 | 2.3 | 5,588 | 1.1 | |||||||||||
| 4 | B | 5,816 | 1.3 | 11,041 | 2.3 | |||||||||||
| 5 | CCC | 17,896 | 3.9 | 6,825 | 1.4 | |||||||||||
| 6 | In or near default | 8,014 | 1.8 | 10,861 | 2.2 | |||||||||||
| Total | $ | 456,543 | 100.0 | % | $ | 489,713 | 100.0 | % | ||||||||
State, Municipal and Other Government Securities
State, municipal and other government securities totaled $1.3 billion, or 22.2% of total fixed maturities at December 31, 2013, and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. We do not hold direct obligations of the City of Detroit, which filed for bankruptcy protection during July 2013. In addition, we do not hold any Puerto Rico related bonds, which has also been in the news recently given its financial issues. Exposure to the state of Illinois and municipalities within the state accounted for 1.7% of our total fixed maturities at December 31, 2013. As of December 31, 2013, Illinois related holdings held in the portfolio were A-rated or above, and were trading at 101.8% of amortized cost. Our municipal bond exposure had an average rating of AA and was trading at 102.4% of amortized cost at December 31, 2013.
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Equity Securities
Equity securities totaled $91.6 million at December 31, 2013 and $86.3 million at December 31, 2012. Gross unrealized gains totaled $3.9 million and gross unrealized losses totaled $2.4 million at December 31, 2013. At December 31, 2012, gross unrealized gains totaled $4.8 million and gross unrealized losses totaled $0.7 million on these securities. The unrealized losses were primarily attributable to non-redeemable perpetual preferred securities from issuers in the financial sector. See Note 2 to our consolidated financial statements for further discussion regarding our analysis of unrealized losses related to these securities.
Mortgage Loans
Mortgage loans totaled $575.9 million at December 31, 2013 and $554.8 million at December 31, 2012. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of commercial mortgage loans outstanding was 143 at December 31, 2013 and 142 at December 31, 2012. In 2013, new loans ranged from $1.9 million to $9.3 million in size, with an average loan size of $4.7 million, an average loan term of 14 years and an average yield of 4.43%. 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. The majority of our mortgage loans amortize principal, with 3.1% that are interest only loans at December 31, 2013. At December 31, 2013, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 54.9% and the weighted average debt service coverage ratio was 1.5 based on the results of our 2012 annual study. See Note 2 to our consolidated financial statements for further discussion regarding our mortgage loans.
Other Assets
Deferred acquisition costs increased 64.2% to $335.5 million at December 31, 2013, primarily due to a $116.8 million decrease in the impact of the change in unrealized appreciation/depreciation on fixed maturity securities. Assets held in separate accounts increased 12.1% to $694.0 million primarily due to market performance on the underlying investment portfolios. Securities and indebtedness of related parties increased 15.6% to $116.3 million primarily due to additional investments made in equity investees specializing in low income housing. Cash and cash equivalents decreased $71.7 million in 2013 primarily due to capital deployment actions executed during the year.
Liabilities
Future policy benefits increased 5.2% to $5,794.0 million at December 31, 2013 primarily due to an increase in the volume of annuity and life insurance business in force. Assets held in separate accounts increased 12.1% to $694.0 million primarily due to market performance on the underlying investment portfolios. Deferred income taxes decreased 41.1% to $122.8 million at December 31, 2013, primarily due to a $92.9 million decrease in the tax impact of the change in unrealized appreciation/depreciation on investments.
As discussed in Note 6 to our consolidated financial statements, during September 2013, we redeemed our $50.0 million long-term debt payable to affiliates.
Stockholders' Equity
FBL Financial Group, Inc. stockholders' equity decreased 13.8% to $1,044.7 million at December 31, 2013, compared to $1,212.2 million at December 31, 2012, primarily due to the change in unrealized appreciation of fixed maturity securities during the period and capital deployment actions, partially offset by net income. As discussed in Note 7 to our consolidated financial statements, during the year stockholders' equity was impacted by several capital deployment actions including a 36 percent increase in the quarterly cash dividend to $0.15 per share, a special cash dividend of $2.00 per share on Class A and Class B common stock and a repurchase of 1,023,948 shares of Class B common stock.
At December 31, 2013, FBL's common stockholders' equity was $1,041.7 million, or $42.08 per share, compared to $1,209.2 million, or $47.47 per share at December 31, 2012. Included in stockholders' equity per common share is $4.81 at December 31, 2013 and $11.38 at December 31, 2012 attributable to accumulated other comprehensive income.
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Market Risks of Financial Instruments
Interest Rate Risk
Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the profitability of insurance products and fair value of investments. The yield realized on new investments generally increases or decreases in direct relationship with interest rate changes. The fair value of our fixed maturity and mortgage loan portfolios generally increases when interest rates decrease and decreases when interest rates increase.
A majority of our insurance liabilities are backed by fixed maturity securities and mortgage loans. The weighted average life of the fixed maturity and mortgage loan portfolio, based on fair values, was approximately 10.4 years at December 31, 2013 and 9.4 years at December 31, 2012. 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 or decelerate during periods of increasing interest rates. |
| Expected Cash Flows from Investments | |||||||||||||||||||||
Amortized Cost December 31, 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 and Thereafter | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Fixed maturity securities | $ | 5,828,539 | $ | 324,465 | $ | 356,686 | $ | 315,122 | $ | 311,634 | $ | 399,767 | $ | 4,120,865 | |||||||
| Mortgage loans | 575,861 | 36,091 | 34,918 | 50,534 | 33,655 | 63,746 | 356,917 | ||||||||||||||
| Total | $ | 6,404,400 | $ | 360,556 | $ | 391,604 | $ | 365,656 | $ | 345,289 | $ | 463,513 | $ | 4,477,782 | |||||||
The table above summarizes cash inflows from the maturity or prepayment of fixed maturity securities and mortgage loans that will be available for benefits or reinvestment. These cash flow estimates are based on our existing investment holdings and do not anticipate the effect of new acquisitions. The estimates include assumptions for the timing of paydowns on asset-backed and other securities, and accordingly, may not represent actual amounts that will be received during the periods presented.
For a majority of our products, profitability is significantly affected by the spreads between interest yields on investments and interest crediting rates on our insurance liabilities. For variable annuities and variable universal life policies, profitability on the portion of the policyholder's account balance invested in the fixed general account option, if any, is also affected by the spreads earned. For the variable products, the policyholder assumes essentially all the investment earnings risk for the portion of the account balance invested in the separate accounts.
For a portion of our business in force, we have the ability to adjust interest or dividend crediting rates in response to changes in portfolio yield. However, the ability to adjust these rates is limited by competitive factors and contractual guarantees. 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 services 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. See "Part 1, Item 1 - Business, Segmentation of Our Business" for the ranges of guaranteed rates and where our products fall within those ranges.
A prolonged period of low interest rates may result in increased downward pressure on average earned yields for the investment portfolios supporting our annuity and universal life business as higher yielding fixed maturity securities and mortgages are sold, mature or are prepaid and replaced with lower yielding investments. Lower investment income may cause us to lower crediting rates on our spread based annuity and life insurance products, which in turn may reduce their attractiveness to potential customers. Failure to lower crediting rates as portfolio investment yields decline either by choice, to ensure our spread based insurance products are competitive within the market place, or for contractual reasons in the case of products earning guaranteed rates, will result in lower earnings.
The following is a hypothetical illustration of the potential impact to average investment yields of a static 2.00% 10-year U.S. Treasury rate during 2014 and 2015 without any corresponding change in current spreads. The level of investments maturing
47
and requiring reinvestment are based on projections of the current investment portfolios supporting these blocks of business without incorporation of new business. We estimate that this scenario would decrease average investment yields supporting our annuity business by 0.10% to 0.15% and our universal life business by 0.05% to 0.10% annually over the near term. In addition to not incorporating the impact of new business, this hypothetical illustration does not reflect the potential impact of policyholder behavior. An increase in net cash flows from that modeled will accelerate the pace at which the portfolio yield will decrease and a decrease in the net cash flows from that modeled will slow down the pace at which the portfolio yield will decrease. Accordingly, actual investment yields could differ materially from those presented. Furthermore, the impact of a decline in portfolio yield on net income is dependent on our ability and willingness to adjust crediting rates.
| Interest Crediting Rates Compared to Guarantees | ||||||
| Liabilities at December 31, 2013 | Percent Above Minimum Guarantee | |||||
| (Dollars in thousands) | ||||||
| Discretionary rate setting products with minimum guarantees: | ||||||
| Traditional annuities | $ | 2,659,187 | 38.3 | % | ||
| Universal life insurance | 741,781 | 12.6 | ||||
| Variable annuities and variable universal life insurance | 326,309 | — | ||||
| Total discretionary products | 3,727,277 | |||||
| Non-discretionary products | 551,594 | |||||
| Total interest sensitive product liabilities | $ | 4,278,871 | ||||
Non-discretionary products primarily represent funding agreements, guaranteed investment contracts and supplemental contracts involving life contingencies where we do not have the ability to adjust crediting rates.
We design our products to encourage persistency and manage our investment portfolio in a manner 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. Products such as supplementary contracts with life contingencies are not subject to surrender or discretionary withdrawal. Depending on the product, surrender charge rates on annuity contracts range up to 10.0% and surrender charge periods range up to 10 years and typically decrease 1.0% for every one-to-two years the contract is in force.
| Surrender and Discretionary Withdrawal Characteristics of Interest Sensitive Products and Supplementary Contracts Without Life Contingencies | |||
Liabilities at December 31, 2013 | |||
| (Dollars in thousands) | |||
| Surrender charge rate: | |||
| Greater than or equal to 5% | $ | 578,443 | |
| Less than 5%, but still subject to surrender charge | 666,447 | ||
| Not subject to surrender charge | 2,842,072 | ||
| Not subject to surrender or discretionary withdrawal | 541,670 | ||
| Total | $ | 4,628,632 | |
A major component of our asset-liability management program is structuring the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of our insurance liabilities. We use models to perform simulations of the cash flows generated from existing insurance policies under various interest rate scenarios. Information from these models is used in the determination of investment strategies. Effective duration is a common measure for price sensitivity to changes in interest rates. It measures the approximate percentage change in the fair value of a portfolio when interest rates change by 100 basis points. This measure includes the impact of estimated changes in portfolio cash flows from features such as bond calls and prepayments. When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is reduced because a change in the value of assets should be largely offset by a change in the value of liabilities.
48
Our exposure to interest rate risk stems largely from our annuity products as the cash flows of these products can vary significantly with changes in interest rates. We have holdings in fixed maturity and mortgage loan portfolios to offset the interest rate risk of our annuity products. We actively manage the projected cash flows and duration of these assets and liabilities by minimizing the difference between the two. While it can be difficult to maintain asset and liability durations that are perfectly matched in a dynamic environment, we have identified various strategies that can be implemented if duration mismatches exceed acceptable tolerances. The effective duration of the fixed maturity and mortgage loan portfolios backing our annuity products was 6.0 at December 31, 2013 and 5.5 at 2012. The effective duration of our annuity liabilities was approximately 6.3 at December 31, 2013 and 6.5 at December 31, 2012.
If interest rates were to increase 10% from levels at December 31, 2013 and 2012, the fair value of our fixed maturity securities and short-term investments would decrease approximately $126.8 million at December 31, 2013 and $75.8 million at December 31, 2012. These hypothetical changes in value do 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 for a portion of the underlying contracts. If interest rates were to decrease 10% from levels at December 31, 2013 and 2012 the fair value of our debt would increase $2.9 million at December 31, 2013, and $2.4 million at December 31, 2012.
The models used to estimate the impact of a 10% change in market interest rates utilize many assumptions and estimates that materially impact the fair value calculations. Key assumptions in 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 acquisition costs, value of insurance in force acquired, unearned revenue reserves, policyholder liabilities and income taxes. Due to the subjectivity of these assumptions, the actual impact of a 10% change in rates on the fair values would likely be different from that estimated.
Equity Risk
Equity price risk is limited due to the relatively small equity portfolio held at December 31, 2013. However, we are exposed to equity price risk in the following ways:
| • | We earn mortality and expense fee income based on the value of our separate accounts at annual rates ranging from 0.00% to 1.45% for 2013, 2012 and 2011. As a result, revenues from these sources do fluctuate with changes in the fair value of the equity, fixed maturity and other securities held by the separate accounts. |
| • | We have equity price risk to the extent we may owe amounts under the guaranteed minimum death benefit and guaranteed minimum income benefit provisions of our variable annuity contracts. See Note 4 to our consolidated financial statements for additional discussion of these provisions. |
| • | The amortization of deferred acquisition costs on our variable business can fluctuate with changes in the performance of the underlying separate accounts. See the Corporate and Other Segment discussion above for additional discussion of this amortization. |
Credit Risk
We have exposure to credit risk as it relates to the uncertainty associated with the continued ability of a given entity to make timely payments of principal and interest. See "Financial Condition - Investments" for additional information about credit risk in our investment portfolio.
Liquidity and Capital Resources
Cash Flows
During 2013, our operating activities generated cash flows totaling $182.3 million consisting of net income of $108.4 million adjusted for non-cash revenues and expenses netting to $73.9 million. We used cash of $278.0 million in our investing activities during 2013. The primary uses were $1,077.1 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $845.2 million in sales, maturities and repayment of investments. Our financing activities provided cash of $24.0 million during 2013. The primary financing source was $565.3 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $384.9 million for return of policyholder account balances on interest sensitive products. Also, we used $43.7 million for the net repurchase and issuance of common stock and $50.0 million for the repayment of long-term debt.
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Sources and Uses of Capital Resources
Parent company cash inflows from operations consist primarily of (i) fees that it charges the various subsidiaries and affiliates for management of their operations, (ii) expense reimbursements and tax settlements from subsidiaries and affiliates, (iii) proceeds from the exercise of employee stock options, (iv) proceeds from borrowings, (v) investment income and (vi) dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during 2013 included management fees from subsidiaries and affiliates of $3.8 million. Cash outflows are principally for salaries, taxes and other expenses related to providing these management services, dividends on outstanding stock, stock repurchases, interest and principal repayments on our parent company debt and capital contributions to subsidiaries.
During 2013, we took several steps to manage capital, including a 36 percent increase in the quarterly cash dividend to $0.15 per share, a special cash dividend of $2.00 per share on Class A and Class B common stock, a tender offer for 99 percent of Class B common shares and the repayment of $50.0 million of affiliate debt. The tender offer resulted in repurchase of 1,023,948 Class B common shares for $46.4 million. These transactions were funded with available cash resources at the parent company and a $120.0 million dividend from Farm Bureau Life.
The parent company also received proceeds from the sale of EquiTrust Life at the end of 2011, as discussed in Note 15 to our consolidated financial statements. A portion of the proceeds have been used to redeem part of our debt and to fund the repurchase of common stock pursuant to our stock repurchase plan.
In the fourth quarter of 2011, the Board of Directors approved a plan to repurchase up to $200.0 million of Class A common stock, with an additional $30.0 million approved during the fourth quarter 2012. These repurchase plans authorize us to make repurchases in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. As discussed in Note 7 to our consolidated financial statements, during 2012, we repurchased 5.5 million shares of stock for $181.9 million, including expenses, primarily due to executing stock repurchases in connection with a tender offer conducted during the first quarter 2012. During 2013, we repurchased 0.4 million shares of Class A stock for $14.2 million. At December 31, 2013, $20.3 million remains available for repurchase under these plans. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.
As discussed in Note 15 to our consolidated financial statements, in connection with the EquiTrust Life sale, we redeemed $175.0 million of Senior Notes with non-affiliates in January 2012. On December 30, 2011, we exercised the provisions of the trust indentures and deposited $211.6 million into two irrevocable debt defeasance trusts for the principal, accrued interest and estimated make-whole premium on the Senior Notes with non-affiliates. Funds of $210.9 million from the trusts were used to pay-off the Senior Notes with non-affiliates on January 30, 2012 and the remaining balance in the trusts of $0.7 million was returned to us. In September 2013, we redeemed our remaining $50.0 million in Senior Notes with affiliates. Interest payments on all debt totaled $7.1 million in 2013, $11.4 million in 2012 and $22.3 million in 2011. The 2012 interest payments include $3.5 million from the debt defeasance trusts for the Senior Notes redeemed in 2012. Interest payments on our debt outstanding at December 31, 2013 are estimated to be $4.9 million in 2014.
Farm Bureau Life's cash inflows primarily consist of premium income, deposits to policyholder account balances, income from investments, sales, maturities and calls of investments and repayments of investment principal. Farm Bureau Life's cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, current operating expenses and dividends. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. Continuing operations and financing activities from Farm Bureau Life relating to interest sensitive products provided funds totaling $361.0 million in 2013, $476.2 million in 2012 and $434.0 million in 2011.
Prior to the sale, EquiTrust Life used funds from operations and financing activities relating to interest sensitive products totaling $123.5 million in 2011, which are reported with other continuing operations in our consolidated statement of cash flows.
Farm Bureau Life's ability 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. At December 31, 2013, Farm Bureau Life’s statutory unassigned surplus
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was $359.0 million. There are certain additional limits to the amount of dividend that may be paid within a year without approval of the Insurance Division, Department of Commerce of the State of Iowa (the Iowa Insurance Division) as discussed in Note 7 to our consolidated financial statements. Due to the $120.0 million extraordinary dividend paid by Farm Bureau Life to FBL Financial Group, Inc. during the third quarter 2013, we have exceeded the annual approval limit through the third quarter 2014; accordingly, any dividends made prior to the fourth quarter of 2014 will require approval of the Iowa Insurance Division.
We paid regular cash dividends on our common and preferred stock totaling $13.4 million in 2013, $11.1 million in 2012 and $8.9 million in 2011. In addition, we paid a special $2.00 per common share cash dividend in September 2013 of $51.4 million. It is anticipated that quarterly cash dividend requirements for 2014 will be $0.0075 per Series B redeemable preferred share and $0.35 per common share. The level of common stock dividends will be analyzed quarterly and will be dependent upon our capital and liquidity positions. In addition, alternative uses of excess capital may impact future dividend levels. Assuming a quarterly dividend rate of $0.35 per common share, the common and preferred dividends would total approximately $34.8 million in 2014. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2014. The parent company had available cash and investments totaling $102.6 million at December 31, 2013. FBL Financial Group, Inc. expects to rely on available cash resources and management fee income to make dividend payments to its stockholders and interest payments on its debt, as well as fund any capital initiatives such as the stock repurchases described above. As of December 31, 2013, we had no other material commitments for capital expenditures.
We manage the amount of capital held by our insurance subsidiaries to ensure we meet regulatory requirements. State laws specify regulatory actions if an insurer's risk-based capital (RBC) ratio, a measure of solvency, falls below certain levels. The National Association of Insurance Commissioners has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against a statutory "authorized control level" RBC at which point regulators have the option to assume control of the insurance company. The company action level RBC is 200% of the authorized control level and is the first point at which any action would be triggered. As of December 31, 2013, our total adjusted capital was $558.4 million, resulting in a RBC ratio of 499%, based on company action level capital of $111.8 million.
On a consolidated basis, we anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. Our investment portfolio at December 31, 2013, included $108.7 million of short-term investments, $6.3 million of cash and cash equivalents and $459.6 million in carrying value of U.S. Government and U.S. Government agency-backed securities that could be readily converted to cash at or near carrying value. Farm Bureau Life is also a member of the FHLB, which provides a source for additional liquidity if needed. This membership allows us to utilize fixed or floating rate advances offered by the FHLB and secured by qualifying collateral. Our total capacity to utilize such advances is impacted by multiple factors including the market value of eligible collateral, level of statutory admitted assets and excess reserves, and our willingness or capacity to hold activity-based FHLB common stock.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of December 31, 2013 or 2012.
Contractual Obligations
In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments which are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2013:
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| Contractual Obligations as of December 31, 2013 | |||||||||||||||||||
| Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 year | 1 - 3 years | 4 - 5 years | After 5 years | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Insurance liabilities (1) | $ | 14,117,890 | $ | 758,613 | $ | 1,446,086 | $ | 1,211,602 | $ | 10,701,589 | |||||||||
| Subordinated note payable to Capital Trust, including interest payments (2) | 259,475 | 4,850 | 9,700 | 9,700 | 235,225 | ||||||||||||||
| Home office operating leases | 18,568 | 2,321 | 4,642 | 4,642 | 6,963 | ||||||||||||||
| Purchase obligations: | |||||||||||||||||||
| Commitments to purchase or fund investments | 41,451 | 26,384 | 14,467 | 314 | 286 | ||||||||||||||
| Commercial mortgage loan commitments | 18,100 | 18,100 | — | — | — | ||||||||||||||
| Other purchase obligations (3) | 1,852 | 1,116 | 736 | — | — | ||||||||||||||
| Other long-term liabilities (4) | 15,343 | 8,248 | 4,199 | 1,794 | 1,102 | ||||||||||||||
| Total | $ | 14,472,679 | $ | 819,632 | $ | 1,479,830 | $ | 1,228,052 | $ | 10,945,165 | |||||||||
| (1) | Amounts shown in this table are projected payments through the year 2063 which we are contractually obligated to pay to our life insurance and annuity contract holders. The payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency when applicable. These assumptions are based on our historical experience. The total of the contractual obligations relating to insurance contracts noted above differs from the liability balance on our consolidated balance sheet as follows: |
| Contractual obligations compared to balance sheet carrying value | |||||||||||
| Contractual Obligations | Balance Sheet Carrying Value | Difference | |||||||||
| (Dollars in thousands) | |||||||||||
| (a) Reserves based on account values, including separate accounts | $ | 7,940,229 | $ | 4,806,627 | $ | 3,133,602 | |||||
| (c) Supplementary contracts involving life contingencies | 234,639 | 166,199 | 68,440 | ||||||||
| 8,174,868 | 4,972,826 | 3,202,042 | |||||||||
| (b) Traditional life insurance and accident and health products | 5,300,343 | 1,515,139 | 3,785,204 | ||||||||
| (c) Supplementary contracts without life contingencies | 380,033 | 349,761 | 30,272 | ||||||||
| Total | $ | 13,855,244 | $ | 6,837,726 | $ | 7,017,518 | |||||
The more significant factors causing this difference include:
| (a) | reserves for products such as annuities and universal life products are generally based on the account values of the contracts without taking into account surrender charges, while the contractual obligations table includes projected cash payments. The following are the reconciling items between these balances (dollars in thousands): |
| Reserves based on account values, including separate accounts, per table above | $ | 4,806,627 | |
| Projected amounts pertaining to: | |||
| Accumulation of interest | 1,965,497 | ||
| Death benefits on universal life business in excess of projected account values | 1,775,794 | ||
| Net cost of insurance charges on variable and universal life business | (595,463 | ) | |
| Other, net | (12,226 | ) | |
| Contractual obligations per table above | $ | 7,940,229 | |
| (b) | traditional life reserves are computed as the present value of future benefits less the present value of future premiums while the contractual obligations table includes gross benefit payments; and |
| (c) | reserves for supplementary contracts and similar instruments are computed as the present value of future cash payments while the table above includes cash payments without the impact of discounting. |
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In addition, contractual obligations totaling $262.6 million relating to dividend accumulations and other policy claims are included in the "Other policy claims and benefits" and "Advance premiums and other deposits" lines on our consolidated balance sheet.
| (2) | Amount shown is net of $3.0 million equity investment in the Capital Trust due to the contractual right of offset upon repayment of the note. |
| (3) | Primarily related to equipment leases. |
| (4) | Includes our estimated future contributions to defined and postretirement benefit plans. Contributions related to the qualified pension plan are included through 2014. No amounts related to the qualified pension plan are included beyond 2014 as the contribution amounts will be re-evaluated based on actual results. |
We are also a party to other operating leases with total payments of approximately $0.4 million per year. Generally, these leases are renewable annually with similar terms. Although our current intention is to renew these leases, we are not obligated to do so.
Effects of Inflation
Inflation has not had a material effect on our consolidated results of operations.
Significant Accounting Policies and Estimates
The following is a brief summary of our significant accounting policies and a review of our most critical accounting estimates. For a complete description of our significant accounting policies, see Note 1 to our consolidated financial statements included in Item 8.
In accordance with GAAP, premiums and considerations received for interest sensitive products, such as ordinary annuities and universal life insurance, are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for these 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. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses. Our insurance subsidiaries receive investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in our consolidated financial statements.
Premium revenues reported for traditional life insurance products are recognized as revenues when due. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits.
For variable universal life and variable annuities, premiums received are not reported as revenues. Similar to universal life and ordinary annuities, revenues reported consist of fee income and product charges collected from the policyholders. Expenses related to these products include benefit claims incurred in excess of policyholder account balances.
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred acquisition costs, are capitalized and amortized into expense. We also record an asset, value of insurance in force acquired, for the cost assigned to insurance contracts when an insurance company is acquired. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued. For participating traditional life insurance and interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted (also known as "unlocked") when we revise our estimate of current or future gross profits or margins. For example, deferred acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year based on the level of claims incurred under insurance retention limits.
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Pension assets and liabilities are affected by the estimated fair value of plan assets, estimates of the expected return on plan assets and/or discount rates. Actual changes in the fair value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. The December 31, 2013 pension obligation was computed based on an average 4.99% discount rate, which was based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. The long-term return on plan assets is based on current and projected asset allocations. Declines in comparable bond and equity yields would increase our net pension liability. Our net pension liability could increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the discount rate.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on our consolidated financial statements. A summary of our significant accounting estimates and the hypothetical effects of changes in the material assumptions used to develop each estimate, are included in the following table. We have discussed the identification, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors.
| Balance Sheet Caption | Description of Critical Estimate | Assumptions / Approach Used | Effect if Different Assumptions / Approach Used |
| Fixed maturities - available for sale | Excluding U.S. Government treasury securities, very few of our fixed maturity securities trade on the balance sheet date. For those securities without a trade on the balance sheet date, fair values are determined using valuation processes that require judgment. | Fair values are obtained primarily from a variety of independent pricing sources, whose results we evaluate internally. Details regarding valuation techniques and processes are summarized in Notes 1 and 3 to our consolidated financial statements. | At December 31, 2013, our fixed maturity securities classified as available for sale had a fair value of $6,081.8 million, with gross unrealized gains totaling $369.1 million and gross unrealized losses totaling $115.9 million. Due to the large number of fixed maturity securities held, the unique attributes of each security and the complexity of valuation methods, it is not practical to estimate a potential range of fair values for different assumptions and methods that could be used in the valuation process. |
| Fixed maturities - available for sale and equity securities | We are required to exercise judgment to determine when a decline in the value of a security is other than temporary. Whether a realized loss needs to be recognized in earnings and the amount of the loss primarily depends on whether (1) a decline in fair value is other than temporary, (2) the extent to which a decline is related to credit versus non-credit related factors, (3) our intent to sell the security, and (4) whether or not we could be required to sell prior to recovery. The previous amortized cost is adjusted by the loss reported in earnings to provide a new cost basis for fixed maturity securities and the fair value becomes the new cost basis for equity securities. | We evaluate the operating results of the underlying issuer, near-term prospects of the issuer, general market conditions, causes for the decline in value, the length of time there has been a decline in value, other key economic measures and our intent to sell and whether or not we would be required to sell prior to recovery. | At December 31, 2013, we had 448 fixed maturity and equity securities with gross unrealized losses totaling $118.3 million. Included in the gross unrealized losses are losses attributable to both movements in market interest rates as well as temporary credit issues. Details regarding these securities are included in the "Financial Condition - Investments" section above. Due to the large number of securities within the investment portfolio and the unique credit characteristic of each, it is not practical to estimate a range of other-than-temporary impairment losses. As discussed in Note 2 to our consolidated financial statements, we believe that all other-than-temporary impairment losses within the portfolio have been recognized. |
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| Balance Sheet Caption | Description of Critical Estimate | Assumptions / Approach Used | Effect if Different Assumptions / Approach Used |
| Deferred acquisition costs | Amortization of deferred acquisition costs for participating life insurance and interest sensitive products is dependent upon estimates of future gross profits or margins on this business. Key assumptions used include the following: - amount of death and surrender benefits and the length of time the policies will stay in force, - yield on investments supporting the liabilities, - amount of interest or dividends credited to the policies, - amount of policy fees and charges, and - amount of expenses necessary to maintain the policies. | Estimates used in the calculation of amortization of deferred acquisition costs, which are revised at least annually, are based on historical results and our best estimate of future experience. | Amortization of deferred acquisition costs for participating life insurance and interest sensitive products is expected to total approximately $26.3 million for 2014, excluding the impact of new production in 2014. Based upon a historical analysis of fluctuations in estimated gross profits, we believe it is reasonably likely that a 10% change in estimated gross profits could occur. A 10% increase in estimated gross profits for 2013 would result in $1.6 million of additional amortization expense. Correspondingly, a 10% decrease in estimated gross profits would result in $1.6 million reduction of amortization expense. The information above is for illustrative purposes only and does not reflect our expectations regarding future changes in estimated gross profits. |
| Future policy benefits | Reserving for future policy benefits for traditional life insurance products requires the use of many assumptions, including the duration of the policies, mortality experience, lapse rates, surrender rates and dividend crediting rates. | These assumptions are made based upon historical experience, industry standards and a best estimate of future results and, for traditional life products, include a provision for adverse deviation. For traditional life insurance, once established for a particular series of products, these assumptions are generally held constant. | Due to the number of independent variables inherent in the calculation of traditional life insurance reserves, it is not practical to perform a sensitivity analysis on the impact of reasonable changes in the underlying assumptions. The cost of performing detailed calculations using different assumption scenarios outweighs the benefit that would be derived. We believe our assumptions are realistic and produce reserves that are fairly stated in accordance with GAAP. |
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| Balance Sheet Caption | Description of Critical Estimate | Assumptions / Approach Used | Effect if Different Assumptions / Approach Used |
| Other asset/liabilities | The determination of net periodic pension expense and related accrued/prepaid pension cost requires the use of estimates as to the expected return on plan assets, discount rate on plan liabilities and other accrual assumptions. Pension expense for 2013 totaled $6.8 million. | We assume an expected long-term rate of return on plan assets of 7.00% and a discount rate of 4.99%. Details regarding the method used to determine the discount rate are summarized in Note 8 to our consolidated financial statements. | The long-term rate of return may fluctuate over time based on asset mix and if investment returns over a long period of time significantly differ from historical returns. The discount rate changes annually as it is based on current yields for high quality corporate bonds with a maturity approximating the duration of our pension obligations. As fluctuations in the expected long-term rate of return and discount rate have been historically moderate and we have no current plans to change our investment strategy significantly, we believe a change of up to 100 basis points is reasonably likely. A 100 basis point decrease in the expected return on assets would result in a $0.8 million increase in pension expense and a 100 basis point increase would result in a $0.8 million decrease to pension expense. A 100 basis point decrease in the assumed discount rate would result in a $1.6 million increase in pension expense while a 100 basis point increase would result in a $1.2 million decrease to pension expense. The information above is for illustrative purposes only and does not reflect our expectations regarding future changes in the long-term rate of return or discount rates. |
| Deferred income taxes | The amount of deferred tax assets we hold is dependent on our estimate of the future deductibility of certain items. A valuation allowance against deferred income tax assets is established if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. No valuation allowance was recorded on deferred tax assets at December 31, 2013. | We utilize tax planning strategies, which require forward-looking assumptions and management judgment, to determine the deductibility of certain items and to assess the need for a valuation allowance. During periods in which we have deferred tax assets related to unrealized investment losses, we utilize tax planning strategies, including a buy-and-hold investment philosophy for securities experiencing unrealized losses and the sale of appreciated securities to ensure the deductibility of such losses in future periods. | At December 31, 2013, we held gross deferred tax assets totaling $56.3 million, primarily related to future policy benefits, employee benefits, and loss carryforwards. Utilization of these deferred tax assets is dependent on our future earnings. No valuation allowance has been established for these deferred tax assets, as we believe future earnings will be sufficient to ensure their utilization. If future earnings are no longer expected to be sufficient, a valuation allowance will need to be established. Given the number of variables that impact the level of future earnings, it is not practicable to estimate a range of possible outcomes to the valuation of the deferred tax assets. |
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Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements that have been implemented during the year and those that have been issued and will be implemented in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risks of Financial Instruments," for our quantitative and qualitative disclosures about market risk.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a - 15(f). Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (1992), our management concluded that our internal control over financial reporting was effective as of December 31, 2013.
We engage Ernst & Young LLP as the independent registered public accounting firm to audit our financial statements and internal control over financial reporting and express their opinion thereon. A copy of Ernst & Young LLP's audit opinions follows this letter.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Management of FBL Financial Group, Inc. (the Company) is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, FBL Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013 of FBL Financial Group, Inc. and our report dated February 20, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 20, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. 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.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FBL Financial Group, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations, comprehensive income and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 20, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 20, 2014
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FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
| December 31, | |||||||
| 2013 | 2012 | ||||||
| Assets | |||||||
| Investments: | |||||||
| Fixed maturities - available for sale, at fair value (amortized cost: 2013 - $5,828,539; 2012 - $5,637,608) | $ | 6,081,753 | $ | 6,265,745 | |||
| Equity securities - available for sale, at fair value (cost: 2013 - $90,071; 2012 - $82,140) | 91,555 | 86,253 | |||||
| Mortgage loans | 575,861 | 554,843 | |||||
| Real estate | 4,084 | 4,668 | |||||
| Policy loans | 176,993 | 174,254 | |||||
| Short-term investments | 108,677 | 74,516 | |||||
| Other investments | 1,079 | 371 | |||||
| Total investments | 7,040,002 | 7,160,650 | |||||
| Cash and cash equivalents | 6,370 | 78,074 | |||||
| Securities and indebtedness of related parties | 116,305 | 100,606 | |||||
| Accrued investment income | 75,186 | 69,965 | |||||
| Amounts receivable from affiliates | 3,145 | 3,931 | |||||
| Reinsurance recoverable | 100,001 | 98,238 | |||||
| Deferred acquisition costs | 335,514 | 204,326 | |||||
| Value of insurance in force acquired | 23,579 | 17,154 | |||||
| Current income taxes recoverable | — | 6,735 | |||||
| Other assets | 67,266 | 59,238 | |||||
| Assets held in separate accounts | 693,955 | 618,809 | |||||
| Total assets | $ | 8,461,323 | $ | 8,417,726 | |||
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FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
| December 31, | |||||||
| 2013 | 2012 | ||||||
| Liabilities and stockholders' equity | |||||||
| Liabilities: | |||||||
| Future policy benefits: | |||||||
| Interest sensitive products | $ | 4,278,871 | $ | 4,050,846 | |||
| Traditional life insurance and accident and health products | 1,515,139 | 1,457,075 | |||||
| Other policy claims and benefits | 45,530 | 39,072 | |||||
| Supplementary contracts without life contingencies | 349,761 | 361,273 | |||||
| Advance premiums and other deposits | 240,441 | 226,485 | |||||
| Amounts payable to affiliates | 408 | 1,658 | |||||
| Long-term debt payable to affiliates | — | 50,000 | |||||
| Long-term debt payable to non-affiliates | 97,000 | 97,000 | |||||
| Current income taxes | 1,499 | — | |||||
| Deferred income taxes | 122,839 | 208,433 | |||||
| Other liabilities | 71,089 | 94,828 | |||||
| Liabilities related to separate accounts | 693,955 | 618,809 | |||||
| Total liabilities | 7,416,532 | 7,205,479 | |||||
| Stockholders' equity: | |||||||
| FBL Financial Group, Inc. stockholders' equity | |||||||
| Preferred stock, without par value, at liquidation value - authorized 10,000,000 shares, issued and outstanding 5,000,000 Series B shares | 3,000 | 3,000 | |||||
| Class A common stock, without par value - authorized 88,500,000 shares, issued and outstanding 24,742,942 shares in 2013 and 24,282,184 shares in 2012 | 134,993 | 115,706 | |||||
| Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 11,413 shares in 2013 and 1,192,890 in 2012 | 72 | 7,522 | |||||
| Accumulated other comprehensive income | 119,067 | 289,853 | |||||
| Retained earnings | 787,609 | 796,110 | |||||
| Total FBL Financial Group, Inc. stockholders' equity | 1,044,741 | 1,212,191 | |||||
| Noncontrolling interest | 50 | 56 | |||||
| Total stockholders' equity | 1,044,791 | 1,212,247 | |||||
| Total liabilities and stockholders' equity | $ | 8,461,323 | $ | 8,417,726 | |||
See accompanying notes.
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FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| Revenues: | |||||||||||
| Interest sensitive product charges | $ | 111,575 | $ | 101,410 | $ | 97,103 | |||||
| Traditional life insurance premiums | 180,944 | 175,086 | 168,519 | ||||||||
| Net investment income | 370,651 | 361,324 | 343,310 | ||||||||
| Net realized capital gains on sales of investments | 15,967 | 17,479 | 5,355 | ||||||||
| Total other-than-temporary impairment losses | (6,662 | ) | (26,399 | ) | (20,206 | ) | |||||
| Non-credit portion in other comprehensive income/loss | 4,250 | 9,372 | 6,555 | ||||||||
| Net impairment losses recognized in earnings | (2,412 | ) | (17,027 | ) | (13,651 | ) | |||||
| Other income | 14,506 | 17,268 | 17,701 | ||||||||
| Total revenues | 691,231 | 655,540 | 618,337 | ||||||||
| Benefits and expenses: | |||||||||||
| Interest sensitive product benefits | 203,599 | 196,387 | 192,082 | ||||||||
| Traditional life insurance benefits | 160,471 | 156,290 | 148,959 | ||||||||
| Policyholder dividends | 13,319 | 14,275 | 17,030 | ||||||||
| Underwriting, acquisition and insurance expenses | 138,260 | 141,906 | 128,184 | ||||||||
| Interest expense | 6,863 | 7,952 | 8,532 | ||||||||
| Loss on debt redemption | — | 33 | 33,176 | ||||||||
| Other expenses | 18,414 | 20,513 | 20,652 | ||||||||
| Total benefits and expenses | 540,926 | 537,356 | 548,615 | ||||||||
| 150,305 | 118,184 | 69,722 | |||||||||
| Income taxes | (49,322 | ) | (40,071 | ) | (18,797 | ) | |||||
| Equity income, net of related income taxes | 7,410 | 4,683 | 1,284 | ||||||||
| Net income from continuing operations | 108,393 | 82,796 | 52,209 | ||||||||
| Discontinued operations: | |||||||||||
| Loss on sale of subsidiary, net of tax benefit ($1,213 in 2012 and $29,198 in 2011) | — | (2,252 | ) | (54,143 | ) | ||||||
| Income (loss) from discontinued operations, net of tax | — | (687 | ) | 42,679 | |||||||
| Total loss from discontinued operations | — | (2,939 | ) | (11,464 | ) | ||||||
| Net income | 108,393 | 79,857 | 40,745 | ||||||||
| Net loss (income) attributable to noncontrolling interest | 165 | 83 | (6 | ) | |||||||
| Net income attributable to FBL Financial Group, Inc. | $ | 108,558 | $ | 79,940 | $ | 40,739 | |||||
| Earnings per common share: | |||||||||||
| Income from continuing operations | $ | 4.25 | $ | 3.01 | $ | 1.69 | |||||
| Loss from discontinued operations | — | (0.11 | ) | (0.37 | ) | ||||||
| Earnings per common share | $ | 4.25 | $ | 2.90 | $ | 1.32 | |||||
| Earnings per common share - assuming dilution: | |||||||||||
| Income from continuing operations | $ | 4.21 | $ | 2.97 | $ | 1.67 | |||||
| Loss from discontinued operations | — | (0.10 | ) | (0.37 | ) | ||||||
| Earnings per common share - assuming dilution | $ | 4.21 | $ | 2.87 | $ | 1.30 | |||||
| Cash dividends per common share | $ | 0.5200 | $ | 0.4000 | $ | 0.2875 | |||||
| Special cash dividend per common share | $ | 2.0000 | $ | — | $ | — | |||||
See accompanying notes.
62
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| Net income | $ | 108,393 | $ | 79,857 | $ | 40,745 | |||||
| Other comprehensive income (loss) (1) | |||||||||||
| Change in net unrealized investment gains/losses | (169,894 | ) | 126,043 | 130,467 | |||||||
| Non-credit impairment losses | (2,690 | ) | (5,984 | ) | (4,261 | ) | |||||
| Change in underfunded status of postretirement benefit plans | 1,798 | (8,051 | ) | (5 | ) | ||||||
| Total other comprehensive income (loss), net of tax | (170,786 | ) | 112,008 | 126,201 | |||||||
| Total comprehensive income (loss), net of tax | (62,393 | ) | 191,865 | 166,946 | |||||||
| Comprehensive loss (income) attributable to noncontrolling interest | 165 | 83 | (6 | ) | |||||||
| Total comprehensive income (loss) applicable to FBL Financial Group, Inc. | $ | (62,228 | ) | $ | 191,948 | $ | 166,940 | ||||
(1) | Other comprehensive income is recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities. |
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
| FBL Financial Group, Inc. Stockholders' Equity | |||||||||||||||||||||||
| Series B Preferred Stock | Class A and Class B Common Stock | Accumulated Other Comprehensive Income | Retained Earnings | Non- controlling Interest | Total Stockholders' Equity | ||||||||||||||||||
| Balance at January 1, 2011 | $ | 3,000 | $ | 125,687 | $ | 51,644 | $ | 864,302 | $ | 92 | $ | 1,044,725 | |||||||||||
| Net income | — | — | — | 40,739 | 6 | 40,745 | |||||||||||||||||
| Other comprehensive income | — | — | 126,201 | — | — | 126,201 | |||||||||||||||||
| Issuance of common stock under compensation plans | — | 13,277 | — | — | — | 13,277 | |||||||||||||||||
| Purchase of common stock | — | (1,758 | ) | — | (11,861 | ) | — | (13,619 | ) | ||||||||||||||
| Dividends on preferred stock | — | — | — | (150 | ) | — | (150 | ) | |||||||||||||||
| Dividends on common stock | — | — | — | (8,767 | ) | — | (8,767 | ) | |||||||||||||||
| Receipts related to noncontrolling interest | — | — | — | — | 17 | 17 | |||||||||||||||||
| Balance at December 31, 2011 | 3,000 | 137,206 | 177,845 | 884,263 | 115 | 1,202,429 | |||||||||||||||||
| Net income | — | — | — | 79,940 | (83 | ) | 79,857 | ||||||||||||||||
| Other comprehensive income | — | — | 112,008 | — | — | 112,008 | |||||||||||||||||
| Issuance of common stock under compensation plans | — | 10,901 | — | — | — | 10,901 | |||||||||||||||||
| Purchase of common stock | — | (24,879 | ) | — | (157,011 | ) | — | (181,890 | ) | ||||||||||||||
| Dividends on preferred stock | — | — | — | (150 | ) | — | (150 | ) | |||||||||||||||
| Dividends on common stock | — | — | — | (10,932 | ) | — | (10,932 | ) | |||||||||||||||
| Receipts related to noncontrolling interest | — | — | — | — | 24 | 24 | |||||||||||||||||
| Balance at December 31, 2012 | 3,000 | 123,228 | 289,853 | 796,110 | 56 | 1,212,247 | |||||||||||||||||
| Net income | — | — | — | 108,558 | (165 | ) | 108,393 | ||||||||||||||||
| Other comprehensive income (loss) | — | — | (170,786 | ) | — | — | (170,786 | ) | |||||||||||||||
| Issuance of common stock under compensation plans | — | 20,156 | — | — | — | 20,156 | |||||||||||||||||
| Purchase of common stock | — | (8,319 | ) | — | (52,284 | ) | — | (60,603 | ) | ||||||||||||||
| Dividends on preferred stock | — | — | — | (150 | ) | — | (150 | ) | |||||||||||||||
| Dividends on common stock | — | — | — | (64,625 | ) | — | (64,625 | ) | |||||||||||||||
| Receipts related to noncontrolling interest | — | — | — | — | 159 | 159 | |||||||||||||||||
| Balance at December 31, 2013 | $ | 3,000 | $ | 135,065 | $ | 119,067 | $ | 787,609 | $ | 50 | $ | 1,044,791 | |||||||||||
See accompanying notes.
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FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| Operating activities (1) | |||||||||||
| Net income | $ | 108,393 | $ | 79,857 | $ | 40,745 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Interest credited to account balances | 144,906 | 141,490 | 449,164 | ||||||||
| Charges for mortality, surrenders and administration | (100,820 | ) | (95,437 | ) | (111,881 | ) | |||||
| Net realized gains on investments | (13,555 | ) | (452 | ) | (30,096 | ) | |||||
| Change in fair value of derivatives | (955 | ) | 259 | (64,940 | ) | ||||||
| Increase in liabilities for traditional life and accident and health benefits | 58,064 | 55,081 | 39,585 | ||||||||
| Deferral of acquisition costs | (43,452 | ) | (47,552 | ) | (109,803 | ) | |||||
| Amortization of deferred acquisition costs and value of insurance in force | 33,076 | 43,466 | 139,784 | ||||||||
| Change in reinsurance recoverable | (1,763 | ) | (3,553 | ) | 12,195 | ||||||
| Provision for deferred income taxes | 6,058 | 48,789 | (35,865 | ) | |||||||
| Loss on sale of subsidiary | — | 2,252 | 54,143 | ||||||||
| Loss on debt redemption | — | 33 | 33,176 | ||||||||
| Other | (7,677 | ) | (17,754 | ) | (56,781 | ) | |||||
| Net cash provided by operating activities | 182,275 | 206,479 | 359,426 | ||||||||
| Investing activities (1) | |||||||||||
| Sales, maturities or repayments: | |||||||||||
| Fixed maturities - available for sale | 720,316 | 653,067 | 1,267,355 | ||||||||
| Equity securities - available for sale | 12,810 | 12,860 | 2,505 | ||||||||
| Mortgage loans | 64,215 | 71,544 | 87,847 | ||||||||
| Derivative instruments | 506 | 161 | 55,349 | ||||||||
| Policy loans | 34,946 | 35,907 | 38,344 | ||||||||
| Securities and indebtedness of related parties | 10,381 | 302 | 86 | ||||||||
| Other investments | 30 | — | — | ||||||||
| Real estate | 1,957 | — | 1,331 | ||||||||
| Acquisitions: | |||||||||||
| Fixed maturities - available for sale | (893,555 | ) | (1,086,107 | ) | (1,769,476 | ) | |||||
| Equity securities - available for sale | (26,740 | ) | (38,994 | ) | (4,643 | ) | |||||
| Mortgage loans | (87,568 | ) | (75,780 | ) | (49,303 | ) | |||||
| Derivative instruments | (607 | ) | (223 | ) | (63,478 | ) | |||||
| Policy loans | (37,685 | ) | (37,793 | ) | (40,371 | ) | |||||
| Securities and indebtedness of related parties | (30,960 | ) | (38,153 | ) | (26,680 | ) | |||||
| Short-term investments, net change | (34,161 | ) | (32,760 | ) | 306,839 | ||||||
| Purchases and disposals of property and equipment, net | (11,846 | ) | (3,422 | ) | (5,008 | ) | |||||
| Proceeds received (returned) from sale of subsidiary | — | (9,315 | ) | 471,431 | |||||||
| Net cash provided by (used in) investing activities | (277,961 | ) | (548,706 | ) | 272,128 | ||||||
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FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| Financing activities (1) | |||||||||||
| Contract holder account deposits | $ | 565,255 | $ | 629,700 | $ | 1,327,043 | |||||
| Contract holder account withdrawals | (384,914 | ) | (361,189 | ) | (1,391,312 | ) | |||||
| Transfer from (to) restricted debt defeasance trusts | — | 211,627 | (211,627 | ) | |||||||
| Repayments of debt | (50,000 | ) | (174,258 | ) | (50,000 | ) | |||||
| Receipts related to noncontrolling interests, net | 159 | 24 | 17 | ||||||||
| Excess tax deductions on stock-based compensation | 1,964 | 2,393 | 656 | ||||||||
| Repurchase of common stock, net | (43,707 | ) | (173,253 | ) | (5,869 | ) | |||||
| Dividends paid | (64,775 | ) | (11,082 | ) | (8,917 | ) | |||||
| Net cash provided by (used in) financing activities | 23,982 | 123,962 | (340,009 | ) | |||||||
| Increase (decrease) in cash and cash equivalents | (71,704 | ) | (218,265 | ) | 291,545 | ||||||
| Cash and cash equivalents at beginning of year | 78,074 | 296,339 | 4,794 | ||||||||
| Cash and cash equivalents at end of year | $ | 6,370 | $ | 78,074 | $ | 296,339 | |||||
| Supplemental disclosures of cash flow information (1) | |||||||||||
| Cash paid (received) during the year for: | |||||||||||
| Interest | $ | 7,104 | $ | 11,383 | $ | 22,298 | |||||
| Income taxes | 21,001 | (27,957 | ) | 52,852 | |||||||
| Non-cash operating activity: | |||||||||||
| Deferral of sales inducements | 1,477 | 1,872 | 51,502 | ||||||||
| Net assets of subsidiary sold | — | — | (543,990 | ) | |||||||
| Non-cash financing activity: | |||||||||||
| Refinancing of debt payable to affiliates | — | — | 100,000 | ||||||||
| (1) | Our consolidated statements of cash flows combine the cash flows from discontinued operations with the cash flows from continuing operations within each major category (operating, investing and financing) of the statements and supplemental disclosures. |
See accompanying notes.
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FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Nature of Business
FBL Financial Group, Inc. (we or the Company) operates predominantly in the life insurance industry through its principal subsidiary, Farm Bureau Life Insurance Company (Farm Bureau Life). Farm Bureau Life markets individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in the Midwestern and Western sections of the United States through an exclusive agency force. Greenfields Life Insurance Company (Greenfields), a subsidiary of Farm Bureau Life, was launched in early 2013 and offers life and annuity products in the state of Colorado. Several subsidiaries support various functional areas of Farm Bureau Life and other affiliates by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.
See Note 15 for information on the sale of our former subsidiary, EquiTrust Life Insurance Company (EquiTrust Life). Financial results of this business component have been reclassified to discontinued operations in the prior period financial statements and excluded from the notes to the consolidated financial statements, unless otherwise noted.
Consolidation
Our consolidated financial statements include the financial statements of the Company and its direct and indirect subsidiaries. All significant intercompany transactions have been eliminated.
Future Adoption of Recent Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (FASB) issued guidance related to accounting for investments in low income housing tax credit limited partnerships. Presently, we account for these investments under the equity method and include related tax benefits as a component of equity income. The new guidance requires us to account for these partnerships using the proportional amortization method, which amortizes the acquisition cost of the partnership in proportion to the recognition of the tax credits associated with these projects. The tax credits, net of the amortization of the partnership interest, will be recognized as a component of income taxes. This guidance must be applied retrospectively and will be effective for fiscal years beginning after December 15, 2014, with early adoption permitted. We are currently evaluating the impact of this new guidance.
Investments
Fixed Maturities and Equity Securities
Fixed maturities, comprised of bonds, redeemable preferred stock and certain non-redeemable preferred stock, which may be sold, are designated as "available for sale." Available-for-sale securities are reported at fair value and unrealized gains and losses on these securities, with the exception of unrealized gains and losses relating to synthetic collateralized debt obligations, are included directly in stockholders' equity as a component of accumulated other comprehensive income. Unrealized gains and losses relating to synthetic collateralized debt obligations are recorded as a component of net investment income in the consolidated statements of operations. The unrealized gains and losses are reduced by a provision for deferred income taxes and adjustments to deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve that would have been required as a charge or credit to income had such amounts been realized.
Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on mortgage and asset-backed securities incorporates prepayment assumptions to estimate the securities' expected lives.
Equity securities, comprised of mutual funds and common and non-redeemable preferred stocks, are designated as "available for sale" and are reported at fair value. The change in unrealized gains and losses of equity securities is included directly in stockholders' equity, net of any related deferred income taxes, as a component of accumulated other comprehensive income.
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Mortgage Loans
Mortgage loans are reported at cost adjusted for amortization of premiums and accrual of discounts. If we determine that the value of any mortgage loan is impaired (i.e., when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to its fair value, which may be based upon the present value of expected future cash flows from the loan, or the fair value of the underlying collateral. The carrying value of impaired loans is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. Interest income is accrued on impaired loans to the extent it is deemed collectible (generally delinquent less than 90 days) and the loan continues to perform under its original or restructured contractual terms. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured to where the collection of interest is considered likely.
Real Estate
Real estate is reported at cost less allowances for depreciation, as applicable. The carrying value of these assets is subject to regular review. For properties not held for sale, if indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying value, an impairment loss is recognized and the property's cost basis is reduced to fair value. If the fair value, less estimated sales costs, of real estate held for sale decreases to an amount lower than its carrying value, the carrying value of the real estate is reduced by the establishment of a valuation allowance recognized as a realized loss on investments. There was one property held for investment with a valuation allowance of less than $0.1 million as of December 31, 2013 and 2012. There were no properties held for sale as of December 31, 2013 and no properties held for sale with a valuation allowance as of 2012.
Other Investments
Policy loans are reported at unpaid principal balance. Short-term investments, which include investments with remaining maturities of one year or less, but greater than three months at the time of acquisition, are reported at cost adjusted for amortization of premiums and accrual of discounts. Other investments include call options, which are carried at fair value, and our ownership interest in aircraft acquired in a troubled debt restructuring with a bond issuer that filed for bankruptcy. The ownership interest in the aircraft is reported at cost, less accumulated depreciation.
We have embedded derivatives associated with modified coinsurance contracts, which are included within reinsurance recoverable. These instruments are carried at fair value with changes reflected in net investment income. See Note 2 for more information regarding our derivative instruments.
Securities and indebtedness of related parties include investments in corporations and partnerships over which we may exercise significant influence and those investments for which we are required to use the equity method of accounting. These corporations and partnerships operate predominately in the investment company, insurance, broker/dealer and real estate industries and include low income housing tax credit generating partnerships. Such investments are accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees. For partnerships operating in the investment company industry, this income or loss includes changes in unrealized gains and losses in the partnerships' investment portfolios.
Accrued Investment Income
We discontinue the accrual of investment income on invested assets when it is determined that it is probable that we will not collect the income.
Realized Gains and Losses on Investments
Realized gains and losses on sales of investments are determined on the basis of specific identification. The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. When our review indicates a decline in fair value for a fixed maturity security is other-than-temporary and we do not intend to sell or believe we will be required to sell the security before recovery of our amortized cost, a specific write down is charged to earnings for the credit loss and a specific charge is recognized in accumulated other comprehensive income for the non-credit loss component. If we intend to sell or believe we will be required to sell a fixed maturity security before its recovery, the full amount of the impairment write down to fair value is charged to earnings. For all equity securities, the full amount of an other-than-temporary impairment write down is
67
recognized as a realized loss on investments in the consolidated statements of operations and the new cost basis for the security is equal to its fair value.
We monitor the financial condition and operations of the issuers of fixed maturities and equity securities that could potentially have a credit impairment that is other-than-temporary. In determining whether or not an unrealized loss is other-than-temporary, we review factors such as:
| • | historical operating trends; |
| • | business prospects; |
| • | status of the industry in which the company operates; |
| • | analyst ratings on the issuer and sector; |
| • | quality of management; |
| • | size of unrealized loss; |
| • | level of current market interest rates compared to market interest rates when the security was purchased; and |
| • | length of time the security has been in an unrealized loss position. |
In order to determine the credit and non-credit impairment loss for fixed maturities, every quarter we estimate the future cash flows we expect to receive over the remaining life of the instrument as well as review our plans to hold or sell the instrument. Significant assumptions regarding the present value of expected cash flows for each security are used when an other-than-temporary impairment occurs and there is a non-credit portion of the unrealized loss that won't be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities include collateral pledged, guarantees, vintage, anticipated principal and interest payments, prepayments, default levels, severity assumptions, delinquency rates and the level of nonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturities include anticipated principal and interest payments and an estimated recovery value, generally based on a percentage return of the current fair value.
After an other-than-temporary write down of all equity securities and any fixed maturities with a credit-only impairment, the cost basis is not adjusted for subsequent recoveries in fair value. For fixed maturities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the remaining life of the security. Amortization in this instance is computed using the prospective method and the current estimate of the amount and timing of future cash flows.
Fair Values
Fair values of fixed maturities are based on quoted market prices in active markets when available. Fair values of fixed maturities that are not actively traded are estimated using valuation methods that vary by asset class. Fair values of redeemable preferred stocks, equity securities and derivative investments are based on the latest quoted market prices, or for those items not readily marketable, generally at values which are representative of the fair values of comparable issues. Fair values for all securities are reviewed for reasonableness by considering overall market conditions and values for similar securities. See Note 3 for more information on our fair value policies, including assumptions and the amount of securities priced using the valuation models.
Cash and Cash Equivalents
For purposes of our consolidated statements of cash flows, we consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Reinsurance Recoverable
We use reinsurance to manage certain risks associated with our insurance operations. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential risks arising from large claims and provide additional capacity for growth. For business ceded to other companies, reinsurance recoverable includes the reinsurers' share of policyholder liabilities, claims and expenses, net of amounts due the reinsurers for premiums. For business assumed from other companies, reinsurance recoverable includes premium receivable, net of our share of benefits and expenses we owe to the ceding company.
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Fair values for the embedded derivatives in our modified coinsurance contracts are based on the difference between the fair value and the cost basis of the underlying investments. See Note 2 for more information regarding derivatives and Note 4 for additional details on our reinsurance agreements.
Deferred Acquisition Costs and Value of Insurance In Force Acquired
Deferred acquisition costs include certain costs of successfully acquiring new insurance business, including commissions and other expenses related to the production of new business, to the extent recoverable from future policy revenues and gross profits. Also included are premium bonuses and bonus interest credited to contracts during the first contract year only. The value of insurance in force acquired represents the cost assigned to insurance contracts when an insurance company is acquired. The initial value is determined by an actuarial study using expected future gross profits as a measurement of the net present value of the insurance acquired. Interest accrued on the unamortized balance at a weighted average rate of 4.56% in 2013, 4.70% in 2012 and 4.72% in 2011.
For participating traditional life insurance and interest sensitive products, these costs are being amortized generally in proportion to expected gross margins or gross profits. That amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of investment gains and losses) to be realized from a group of products are revised. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits.
All insurance and investment contract modifications and replacements are reviewed to determine if the internal replacement results in a substantially changed contract. If so, the acquisition costs, sales inducements and unearned revenue associated with the new contract are deferred and amortized over the lifetime of the new contract. In addition, the existing deferred policy acquisition costs, sales inducement costs and unearned revenue balances associated with the replaced contract are written off. If an internal replacement results in a substantially unchanged contract, the acquisition costs, sales inducements and unearned revenue associated with the new contract are immediately recognized in the period incurred. In addition, the existing deferred policy acquisition costs, sales inducement costs or unearned revenue balance associated with the replaced contract is not written off, but instead is carried over to the new contract.
Effective January 1, 2012, we retroactively adopted guidance issued by the FASB that narrowed the definition of deferrable acquisition costs associated with acquiring or renewing insurance contracts. In addition, during 2011, refinements were made to the methods and assumptions used to calculate the amortization of value of insurance in force and deferred acquisition costs, which increased net income from continuing operations $4.8 million ($0.15 per basic and diluted common share).
Other Assets
Other assets include property and equipment, primarily comprised of capitalized software costs and furniture and equipment, which are reported at cost less allowances for depreciation and amortization. We expense costs incurred in the preliminary stages of developing internal-use software as well as costs incurred post-implementation for maintenance. Capitalization of internal-use software costs occurs after management has authorized the project and it is probable that the software will be used as intended. Amortization of software costs begins after the software has been placed in production. Depreciation and amortization expense is computed primarily using the straight-line method over the estimated useful lives of the assets, which range from two to twenty years. Property and equipment had a carrying value of $25.8 million at December 31, 2013 and $18.6 million at December 31, 2012, and accumulated depreciation and amortization of $50.3 million at December 31, 2013 and $65.9 million at December 31, 2012. Depreciation and amortization expense for property and equipment was $4.6 million in 2013, $4.8 million in 2012 and $3.5 million in 2011.
Other assets at December 31, 2013 and 2012, also includes goodwill of $9.9 million related to the excess of the amounts paid to acquire companies over the fair value of the net assets acquired. Goodwill is not amortized but is subject to annual impairment testing. We evaluate our goodwill balance by comparing the fair value of our reporting units to the carrying value of the goodwill. We conduct our impairment review at least annually as well as when circumstances suggest an impairment may have occurred. Such circumstances include changes in the competitive or overall economic environment or other business condition changes that may negatively impact the value of the underlying business. On a periodic basis, as well as in the event circumstances indicate the value of the business may have declined significantly, we will estimate the value of the business using discounted cash flow techniques. In the event that we were to dispose of a reporting unit, a discounted cash flow approach would be used to estimate the fair value of that reporting unit. We believe this approach better approximates the fair value of
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our goodwill than a market capitalization approach. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including future premiums, product lapses, investment yields and discount rate. Underlying assumptions are based on historical experience and our best estimates given information available at the time of testing. As a result of our impairment review, we have determined our goodwill was not impaired as of December 31, 2013 or 2012.
Future Policy Benefits
Future policy benefit reserves for interest sensitive products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for our interest sensitive products ranged from 1.00% to 5.50% in 2013, 2012 and 2011.
The liability for future policy benefits for direct participating traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality and other factors underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 2.00% to 6.00%. The average rate of assumed investment yields used in estimating gross margins was 5.84% in 2013 and 2012 and 6.04% in 2011. The liability for future policy benefits for non-participating traditional life insurance is computed using a net level method, including assumptions as to mortality, persistency and interest and includes provisions for possible unfavorable deviations.
The liabilities for future policy benefits for accident and health insurance are computed using a net level (or an equivalent) method, including assumptions as to morbidity, mortality and interest and include provisions for possible unfavorable deviations. Policy benefit claims are charged to expense in the period that the claims are incurred.
Other Policy Claims and Benefits
We have unearned revenue reserves that reflect the unamortized balance of charges assessed to interest sensitive contract holders to compensate us for services to be performed over future periods (policy initiation fees). These charges have been deferred and are being recognized in income over the period benefited using the same assumptions and factors used to amortize deferred acquisition costs.
We have accrued dividends for participating business that are established for anticipated amounts earned to date that have not been paid. The declaration of future dividends for participating business is at the discretion of the Board of Directors of Farm Bureau Life. Participating business accounted for 30% of receipts from policyholders during 2013 (2012 - 35% and 2011 - 38%) and represented 11% of life insurance in force at December 31, 2013, and 12% in 2012 and 2011.
Deferred Income Taxes
Deferred income tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. A valuation allowance against deferred income tax assets is established if it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
Separate Accounts
The separate account assets and liabilities reported in our accompanying consolidated balance sheets represent funds that are separately administered for the benefit of certain policyholders that bear the underlying investment risk. The separate account assets are carried at fair value and separate account liabilities represent policy account balances before applicable surrender charges. 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 operations.
Recognition of Premium Revenues and Costs
Revenues for interest sensitive and variable products consist of policy charges for the cost of insurance, asset charges, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. The timing of revenue recognition as it relates to these charges and fees is determined based on the nature of such charges and fees. Policy charges for the cost of insurance, asset charges and policy administration charges are assessed on a
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daily or monthly basis and are recognized as revenue when assessed and earned. Certain policy initiation fees that represent compensation for services to be provided in the future are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are determined based upon contractual terms and are recognized upon surrender of a contract. Policy benefits and claims charged to expense include interest amounts credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances during the period. Amortization of deferred acquisition costs is recognized as expense over the life of the policy.
Traditional life insurance premiums are recognized as revenues over the premium-paying period. Future policy benefits and policy acquisition costs are recognized as expenses over the life of the policy by means of the provision for future policy benefits and amortization of deferred acquisition costs.
All insurance-related revenues, benefits and expenses are reported net of reinsurance ceded. The cost of reinsurance ceded is recognized over the contract periods of the reinsurance agreements. Policies and contracts assumed are accounted for in a manner similar to that followed for direct business.
| Underwriting, Acquisition and Insurance Expenses | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Underwriting, acquisition and insurance expenses: | |||||||||||
| Commission expense, net of deferrals | $ | 27,410 | $ | 23,712 | $ | 23,950 | |||||
| Amortization of deferred acquisition costs | 29,908 | 37,651 | 34,819 | ||||||||
| Amortization of value of insurance in force acquired | 2,565 | 5,562 | (4,658 | ) | |||||||
| Other underwriting, acquisition and insurance expenses, net of deferrals | 78,377 | 74,981 | 74,073 | ||||||||
| Total | $ | 138,260 | $ | 141,906 | $ | 128,184 | |||||
Other Income and Other Expenses
Other income and other expenses primarily consist of revenue and expenses generated by our various non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing services. They also include revenues and expenses generated by our parent company for management services. Certain of these activities are performed on behalf of our affiliates. Lease income from leases with affiliates totaled $2.2 million in 2013, $2.4 million in 2012 and $1.8 million in 2011. Investment advisory fee income from affiliates totaled $1.7 million in 2013, $1.5 million in 2012 and $1.2 million in 2011. In addition, Farm Bureau Life has certain items reported as other income and other expense, which netted to $3.0 million in 2013, $3.3 million in 2012 and $3.2 million in 2011. During 2012, we also received fees of $3.5 million from the acquirer of EquiTrust Life to provide administrative support and transition services. We expense legal costs associated with a loss contingency as incurred.
Discontinued Operations
Upon the sale of EquiTrust Life our independent distribution business segment was discontinued. Discontinued operations are those in which we no longer have any significant continuing involvement in the operations after the disposal transaction. The results of discontinued operations are segregated from our continuing operations and reported as income (loss) from discontinued operations in the consolidated statements of operations for current and prior periods. The loss recognized on the disposal is also reported as a component of discontinued operations. Components of the income (loss) from discontinued operations are separately disclosed in Note 15.
Debt required to be redeemed due to selling a significant component of our business remains a liability until we have been legally released from the entire obligation and all conditions for extinguishment have been met. In addition, any gain or loss on the extinguishment is recognized when we are relieved of the entire obligation. Changes in fair value of embedded derivatives related to make-whole redemption provisions are reported as loss on debt redemption in the Consolidated Statements of Operations.
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If the debt is not specific to the disposed component, the liability is not classified as held for sale and any related gain or loss is reported as part of continuing operations. However, interest on any debt required to be redeemed as a result of the disposal transaction is reported in income from discontinued operations for current and prior periods commencing in the period in which the business is either disposed of or accounted for as a disposal group.
Significant accounting policies related to the results from discontinued operations which are not discussed above include:
| • | Derivative instruments, which include call options used to fund index credits on index annuities, are measured at fair value, with changes in fair value reflected in our results of discontinued operations. |
| • | Deferred sales inducements represent premium bonuses and bonus interest credited to contracts during the first contract year only. These costs are amortized similar to other deferred acquisition costs discussed above. |
| • | Future policy benefit reserves for index annuities are equal to the sum of the fair value of the embedded index options, accumulated index credits and the host contract reserve computed using a method similar to that used for interest sensitive products. Fair value of the index options are calculated using discounted cash flow valuation techniques based on current interest rates adjusted to reflect our credit risk and an additional provision for adverse deviation. |
| • | Changes in reserves for the embedded derivatives in the index annuities and amortization of deferred sales inducements are recognized as expenses over the life of the policy. |
Retirement and Compensation Plans
We participate with several affiliates in several defined benefit pension plans, including a multiemployer plan. We employ a long-term investment strategy of maintaining diversified plan assets. The expected return on plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the plans for assets at the end of the reporting period.
We have a Cash-Based Restricted Stock Unit Plan. Performance and non-performance units are awarded under this plan. In addition to meeting the performance goals, the performance units are subject to a five-year vesting schedule. The non-performance units awarded under this plan vest over five years. The amount payable per unit awarded is equal to the price per share of the Company's common stock at settlement of the award, and as such, we measure the value of the award each reporting period based on the current stock price. The expense related to the performance units is based on the number of units expected to vest and is recognized over the required service period. The expense related to the non-performance units is recognized over the five-year vesting schedule. The impact of forfeitures is estimated and compensation expense is recognized only for those units expected to vest.
We also have share-based payment arrangements under our Class A Common Stock Compensation Plan, although no new awards have been made since 2011. We recognize compensation expense for all share-based payments granted, modified or settled. The stock option non-performance related stock-based expense is recognized over the shorter of our five-year vesting schedule or the period ending when the employee becomes eligible for retirement using the straight-line method. The performance related stock-based expense is based on the number of shares expected to vest and is recognized over the required service period. The impact of forfeitures is estimated and compensation expense is recognized only for those stock-based instruments expected to vest. We report tax deductions related to stock-based instruments in excess of recognized compensation expense as a financing cash flow.
See Note 8 for additional details on these plans.
Comprehensive Income
Comprehensive income includes net income, as well as other comprehensive income items not recognized through net income. Other comprehensive income includes unrealized gains and losses on our available-for-sale securities and certain interest rate swaps held in prior years, as well as the unfunded obligation for postretirement benefit plans. These items are included in accumulated other comprehensive income, net of tax and other offsets, in stockholders' equity. The changes in unrealized gains and losses reported in our Statement of Comprehensive Income, excludes net investment gains and losses included in net income which represent transfers from unrealized to realized gains and losses. These transfers are further discussed in Note 7. The components of the unfunded obligation for postretirement benefit plans are provided in Note 8.
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Dividend Restriction
We have agreed that we will not pay dividends on the Class A or Class B Common Stock, nor on the Series B Preferred Stock, if we are in default of the Subordinated Deferrable Interest Note Agreement dated May 30, 1997 with FBL Financial Group Capital Trust. We are compliant with all terms of this agreement at December 31, 2013. See Note 6 for additional information regarding this agreement.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. For example, significant estimates and assumptions are utilized in the valuation of investments, determination of other-than-temporary impairments of investments, amortization of deferred acquisition costs, calculation of policyholder liabilities and accruals and determination of pension expense. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the consolidated financial statements.
2. Investment Operations
Fixed Maturity and Equity Securities
| Available-For-Sale Fixed Maturity and Equity Securities by Investment Category | |||||||||||||||||||
| December 31, 2013 | |||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Non-credit losses on other-than-temporary impairments (1) | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||
| Corporate (2) | $ | 3,142,476 | $ | 229,151 | $ | (64,848 | ) | $ | 3,306,779 | $ | 329 | ||||||||
| Residential mortgage-backed | 492,990 | 35,676 | (7,938 | ) | 520,728 | (4,155 | ) | ||||||||||||
| Commercial mortgage-backed | 391,845 | 20,014 | (7,192 | ) | 404,667 | — | |||||||||||||
| Other asset-backed | 444,047 | 19,169 | (6,673 | ) | 456,543 | 1,725 | |||||||||||||
| United States Government and agencies | 39,261 | 4,218 | (198 | ) | 43,281 | — | |||||||||||||
| State, municipal and other governments | 1,317,920 | 60,869 | (29,034 | ) | 1,349,755 | — | |||||||||||||
| Total fixed maturities | $ | 5,828,539 | $ | 369,097 | $ | (115,883 | ) | $ | 6,081,753 | $ | (2,101 | ) | |||||||
| Equity securities: | |||||||||||||||||||
| Non-redeemable preferred stocks | $ | 65,692 | $ | 3,141 | $ | (2,383 | ) | $ | 66,450 | $ | — | ||||||||
| Common stocks | 24,379 | 726 | — | 25,105 | — | ||||||||||||||
| Total equity securities | $ | 90,071 | $ | 3,867 | $ | (2,383 | ) | $ | 91,555 | $ | — | ||||||||
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| Available-For-Sale Fixed Maturity and Equity Securities by Investment Category | |||||||||||||||||||
| December 31, 2012 | |||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Non-credit losses on other-than-temporary impairments (1) | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||
| Corporate (2) | $ | 2,906,622 | $ | 399,144 | $ | (10,183 | ) | $ | 3,295,583 | $ | (2,913 | ) | |||||||
| Residential mortgage-backed | 632,955 | 47,459 | (6,232 | ) | 674,182 | (5,164 | ) | ||||||||||||
| Commercial mortgage-backed | 463,504 | 49,173 | (1,858 | ) | 510,819 | — | |||||||||||||
| Other asset-backed | 485,796 | 16,981 | (13,064 | ) | 489,713 | (4,788 | ) | ||||||||||||
| United States Government and agencies | 42,079 | 6,930 | — | 49,009 | — | ||||||||||||||
| State, municipal and other governments | 1,106,652 | 142,704 | (2,917 | ) | 1,246,439 | — | |||||||||||||
| Total fixed maturities | $ | 5,637,608 | $ | 662,391 | $ | (34,254 | ) | $ | 6,265,745 | $ | (12,865 | ) | |||||||
| Equity securities: | |||||||||||||||||||
| Non-redeemable preferred stocks | $ | 56,909 | $ | 4,251 | $ | (668 | ) | $ | 60,492 | $ | — | ||||||||
| Common stocks | 25,231 | 530 | — | 25,761 | — | ||||||||||||||
| Total equity securities | $ | 82,140 | $ | 4,781 | $ | (668 | ) | $ | 86,253 | $ | — | ||||||||
| (1) | Non-credit losses subsequent to the initial impairment measurement date on other-than-temporary impairments are included in the gross unrealized gains and losses column above. The non-credit loss component of OTTI losses for corporate and other asset-backed securities were in an unrealized gain position at December 31, 2013 due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities. |
| (2) | Corporate securities include hybrid preferred securities with a carrying value of $76.3 million at December 31, 2013 and $99.6 million at December 31, 2012. Corporate securities also include redeemable preferred stock with a carrying value of $17.1 million at December 31, 2013 and $5.6 million at December 31, 2012. |
Short-term investments have been excluded from the above schedules as amortized cost approximates fair value for these securities.
| Available-For-Sale Fixed Maturities by Maturity Date | |||||||
| December 31, 2013 | |||||||
Amortized Cost | Fair Value | ||||||
| (Dollars in thousands) | |||||||
| Due in one year or less | $ | 75,383 | $ | 76,935 | |||
| Due after one year through five years | 691,894 | 764,826 | |||||
| Due after five years through ten years | 1,014,618 | 1,085,568 | |||||
| Due after ten years | 2,717,762 | 2,772,486 | |||||
| 4,499,657 | 4,699,815 | ||||||
| Mortgage-backed and other asset-backed | 1,328,882 | 1,381,938 | |||||
| Total fixed maturities | $ | 5,828,539 | $ | 6,081,753 | |||
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed maturities not due at a single maturity date have been included in the above table in the year of final contractual maturity.
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| Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income | |||||||
| December 31, | |||||||
| 2013 | 2012 | ||||||
| (Dollars in thousands) | |||||||
| Net unrealized appreciation on: | |||||||
| Fixed maturities - available for sale | $ | 253,214 | $ | 628,137 | |||
| Equity securities - available for sale | 1,484 | 4,113 | |||||
| 254,698 | 632,250 | ||||||
| Adjustments for assumed changes in amortization pattern of: | |||||||
| Deferred acquisition costs | (55,550 | ) | (172,320 | ) | |||
| Value of insurance in force acquired | (6,356 | ) | (15,346 | ) | |||
| Unearned revenue reserve | 2,790 | 13,554 | |||||
| Adjustments for assumed changes in policyholder liabilities | (2,957 | ) | — | ||||
| Provision for deferred income taxes | (67,404 | ) | (160,333 | ) | |||
| Net unrealized investment gains | $ | 125,221 | $ | 297,805 | |||
| Change in Unrealized Appreciation/Depreciation of Investments - Recorded in Accumulated Other Comprehensive Income | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Fixed maturities - available for sale | $ | (374,923 | ) | $ | 247,581 | $ | 278,142 | ||||
| Equity securities - available for sale | (2,629 | ) | 2,378 | 161 | |||||||
| Interest rate swaps | — | — | 121 | ||||||||
| Change in unrealized appreciation/depreciation of investments | $ | (377,552 | ) | $ | 249,959 | $ | 278,424 | ||||
The changes in net unrealized investment gains and losses are recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities. Subsequent changes in fair value of securities for which a previous non-credit other-than-temporary impairment loss was recognized in accumulated other comprehensive income are reported along with changes in fair value for which no other-than-temporary impairment losses were previously recognized.
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| Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time | |||||||||||||||||||||||||||
| December 31, 2013 | |||||||||||||||||||||||||||
| Less than one year | One year or more | Total | |||||||||||||||||||||||||
| Description of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Percent of Total | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||
| Corporate | $ | 802,161 | $ | (60,138 | ) | $ | 43,500 | $ | (4,710 | ) | $ | 845,661 | $ | (64,848 | ) | 56.0 | % | ||||||||||
| Residential mortgage-backed | 92,020 | (3,548 | ) | 20,948 | (4,390 | ) | 112,968 | (7,938 | ) | 6.8 | |||||||||||||||||
| Commercial mortgage-backed | 53,647 | (4,454 | ) | 28,054 | (2,738 | ) | 81,701 | (7,192 | ) | 6.2 | |||||||||||||||||
| Other asset-backed | 101,961 | (1,109 | ) | 33,170 | (5,564 | ) | 135,131 | (6,673 | ) | 5.8 | |||||||||||||||||
| United States Government and agencies | 4,407 | (198 | ) | — | — | 4,407 | (198 | ) | 0.2 | ||||||||||||||||||
| State, municipal and other governments | 353,120 | (25,700 | ) | 19,165 | (3,334 | ) | 372,285 | (29,034 | ) | 25.0 | |||||||||||||||||
| Total fixed maturities | $ | 1,407,316 | $ | (95,147 | ) | $ | 144,837 | $ | (20,736 | ) | $ | 1,552,153 | $ | (115,883 | ) | 100.0 | % | ||||||||||
| Equity securities: | |||||||||||||||||||||||||||
| Non-redeemable preferred stocks | $ | 31,639 | $ | (1,756 | ) | $ | 4,373 | $ | (627 | ) | $ | 36,012 | $ | (2,383 | ) | ||||||||||||
| Total equity securities | $ | 31,639 | $ | (1,756 | ) | $ | 4,373 | $ | (627 | ) | $ | 36,012 | $ | (2,383 | ) | ||||||||||||
| December 31, 2012 | |||||||||||||||||||||||||||
| Less than one year | One year or more | Total | |||||||||||||||||||||||||
| Description of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Percent of Total | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||
| Corporate | $ | 123,610 | $ | (2,120 | ) | $ | 87,176 | $ | (8,063 | ) | $ | 210,786 | $ | (10,183 | ) | 29.7 | % | ||||||||||
| Residential mortgage-backed | 10,560 | (85 | ) | 32,884 | (6,147 | ) | 43,444 | (6,232 | ) | 18.2 | |||||||||||||||||
| Commercial mortgage-backed | 27,073 | (380 | ) | 32,697 | (1,478 | ) | 59,770 | (1,858 | ) | 5.4 | |||||||||||||||||
| Other asset-backed | 31,749 | (512 | ) | 50,468 | (12,552 | ) | 82,217 | (13,064 | ) | 38.1 | |||||||||||||||||
| State, municipal and other governments | 33,228 | (542 | ) | 15,932 | (2,375 | ) | 49,160 | (2,917 | ) | 8.6 | |||||||||||||||||
| Total fixed maturities | $ | 226,220 | $ | (3,639 | ) | $ | 219,157 | $ | (30,615 | ) | $ | 445,377 | $ | (34,254 | ) | 100.0 | % | ||||||||||
| Equity securities: | |||||||||||||||||||||||||||
| Non-redeemable preferred stocks | $ | 3,858 | $ | (32 | ) | $ | 7,364 | $ | (636 | ) | $ | 11,222 | $ | (668 | ) | ||||||||||||
| Total equity securities | $ | 3,858 | $ | (32 | ) | $ | 7,364 | $ | (636 | ) | $ | 11,222 | $ | (668 | ) | ||||||||||||
Included in fixed maturities in the above table are 440 securities from 366 issuers at December 31, 2013 and 140 securities from 116 issuers at December 31, 2012. The unrealized losses in fixed maturities are generally due to an increase in risk free rates relative to the risk free rates when the securities were purchased. We do not intend to sell or believe we will be required to sell any of our impaired fixed maturities before recovery of their amortized cost basis. The following summarizes the more significant unrealized losses of fixed maturities and equity securities by investment category as of December 31, 2013.
Corporate securities: The largest unrealized losses are in the utilities sector ($206.2 million carrying value and $20.0 million unrealized loss). The largest unrealized losses in the utilities sector were in the electric ($141.6 million carrying value and $14.2 million unrealized loss) and the gas-pipeline ($50.4 million carrying value and $4.5 million unrealized loss) sub-sectors. The majority of losses in the sector are primarily attributable to general changes in market interest rates for corporate securities.
Residential mortgage-backed securities: The unrealized losses on residential mortgage-backed securities were primarily due to continued uncertainty regarding mortgage defaults on Alt-A loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.
Commercial mortgage-backed securities: The unrealized losses on commercial mortgage-backed securities were primarily due to spread widening and concerns regarding the potential for future defaults. The contractual cash flows of these investments are
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based on mortgages backing the securities. Unrealized losses on military housing bonds were mainly attributable to spread widening relative to spreads at which we acquired the bonds. Insured military housing bonds have also been impacted by the removal of their ratings following downgrades of the insurance providers.
Other asset-backed securities: The unrealized losses on other asset-backed securities were primarily due to market concerns regarding defaults on subprime mortgages and home equity loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.
State, municipal and other governments: The unrealized losses on state, municipal and other governments were primarily due to general spread widening relative to spreads at which we acquired the bonds.
Equity securities: Our gross unrealized losses were on investment grade non-redeemable perpetual preferred securities within the finance sector. These securities provide periodic cash flows, contain call features and are similarly rated and priced like other long-term callable bonds and are evaluated for other-than-temporary impairment similar to fixed maturities. The decline in fair value is primarily due to market concerns regarding the sector. We have evaluated the near-term prospects of our equity securities in relation to the severity and duration of their impairment and based on that evaluation have the intent and ability to hold these investments until recovery of fair value.
Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $1.8 million at December 31, 2013, with the largest unrealized loss from an insurance carrier in the financial sector. With respect to mortgage and asset-backed securities not backed by the United States Government, no securities from the same issuer had an aggregate unrealized loss in excess of $4.0 million at December 31, 2013, which consists of two different securities from the same issuer that are backed by different pools of Alt-A residential mortgage loans. Both securities are rated non-investment grade and the largest unrealized loss totaled $2.1 million.
Mortgage Loans
Our mortgage loan portfolio consists principally of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to- value ratio that provides sufficient excess collateral to absorb losses should we be required to foreclose and take possession of the collateral. In order to identify impairment losses timely, management maintains and reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and establish an allowance as needed for possible losses against our mortgage loan portfolio. An allowance is needed for loans for which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements.
Any loan delinquent on contractual payments is considered non-performing. At December 31, 2013, there were no non-performing loans over 90 days past due on contractual payments. At December 31, 2012, there were two non-performing loans over 90 days past due on contractual payments with a carrying value of $16.4 million. Interest income is accrued on impaired loans to the extent it is deemed collectible (delinquent less than 90 days) and the loan continues to perform under its original or restructured contractual terms. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured to where the collection of interest is considered likely. We did not accrue interest on the two loans at December 31, 2012.
| Mortgage Loans by Collateral Type | ||||||||||||||
| December 31, 2013 | December 31, 2012 | |||||||||||||
| Collateral Type | Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
| (Dollars in thousands) | ||||||||||||||
| Office | $ | 241,951 | 42.0 | % | $ | 218,837 | 39.4 | % | ||||||
| Retail | 194,053 | 33.7 | 184,135 | 33.2 | ||||||||||
| Industrial | 126,151 | 21.9 | 133,149 | 24.0 | ||||||||||
| Other | 13,706 | 2.4 | 18,722 | 3.4 | ||||||||||
| Total | $ | 575,861 | 100.0 | % | $ | 554,843 | 100.0 | % | ||||||
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| Mortgage Loans by Geographic Location within the United States | ||||||||||||||
| December 31, 2013 | December 31, 2012 | |||||||||||||
| Region of the United States | Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
| (Dollars in thousands) | ||||||||||||||
| South Atlantic | $ | 170,529 | 29.6 | % | $ | 164,294 | 29.6 | % | ||||||
| Pacific | 92,538 | 16.1 | 81,333 | 14.7 | ||||||||||
| West North Central | 85,629 | 14.9 | 77,798 | 14.0 | ||||||||||
| East North Central | 79,128 | 13.7 | 81,015 | 14.6 | ||||||||||
| Mountain | 53,460 | 9.3 | 48,881 | 8.8 | ||||||||||
| West South Central | 39,780 | 6.9 | 42,141 | 7.6 | ||||||||||
| Other | 54,797 | 9.5 | 59,381 | 10.7 | ||||||||||
| Total | $ | 575,861 | 100.0 | % | $ | 554,843 | 100.0 | % | ||||||
| Mortgage Loans by Loan-to-Value Ratio | |||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||
Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
| (Dollars in thousands) | |||||||||||||
| 0% - 50% | $ | 149,719 | 26.0 | % | $ | 173,040 | 31.2 | % | |||||
| 50% - 60% | 202,025 | 35.1 | 156,633 | 28.2 | |||||||||
| 60% - 70% | 204,460 | 35.5 | 186,738 | 33.7 | |||||||||
| 70% - 80% | 15,559 | 2.7 | 36,857 | 6.6 | |||||||||
| 80% - 90% | 4,098 | 0.7 | 1,575 | 0.3 | |||||||||
| Total | $ | 575,861 | 100.0 | % | $ | 554,843 | 100.0 | % | |||||
The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically including when there is indication of a possible significant collateral decline or loan modification and refinance requests.
| Mortgage Loans by Year of Origination | |||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||
| Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
| (Dollars in thousands) | |||||||||||||
| 2013 | $ | 84,478 | 14.7 | % | — | — | % | ||||||
| 2012 | 72,792 | 12.6 | 75,173 | 13.6 | |||||||||
| 2011 | 48,190 | 8.4 | 47,405 | 8.5 | |||||||||
| 2010 | 26,173 | 4.5 | 27,422 | 4.9 | |||||||||
| 2008 | 68,323 | 11.9 | 70,346 | 12.7 | |||||||||
| 2007 and prior | 275,905 | 47.9 | 334,497 | 60.3 | |||||||||
| Total | $ | 575,861 | 100.0 | % | $ | 554,843 | 100.0 | % | |||||
| Impaired Mortgage Loans | |||||||
| December 31, | |||||||
| 2013 | 2012 | ||||||
| (Dollars in thousands) | |||||||
| Unpaid principal balance | $ | 22,100 | $ | 10,046 | |||
| Less: | |||||||
| Related allowance | 888 | 1,694 | |||||
| Discount | 429 | — | |||||
| Carrying value of impaired mortgage loans | $ | 20,783 | $ | 8,352 | |||
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| Allowance on Mortgage Loans | |||||||
| Year ended December 31, | |||||||
| 2013 | 2012 | ||||||
| (Dollars in thousands) | |||||||
| Balance at beginning of period | $ | 1,694 | $ | 1,759 | |||
| Allowances established | 804 | 335 | |||||
| Charge offs | (1,610 | ) | (400 | ) | |||
| Balance at end of period | $ | 888 | $ | 1,694 | |||
| Components of Net Investment Income | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Fixed maturities - available for sale | $ | 328,979 | $ | 318,364 | $ | 302,272 | |||||
| Equity securities - available for sale | 4,295 | 3,508 | 3,368 | ||||||||
| Mortgage loans | 32,447 | 32,369 | 34,619 | ||||||||
| Real estate | 331 | — | 367 | ||||||||
| Policy loans | 8,502 | 8,997 | 9,235 | ||||||||
| Short-term investments, cash and cash equivalents | 102 | 215 | 50 | ||||||||
| Prepayment fee income and other | 5,098 | 6,737 | 2,238 | ||||||||
| 379,754 | 370,190 | 352,149 | |||||||||
| Less investment expenses | (9,103 | ) | (8,866 | ) | (8,839 | ) | |||||
| Net investment income | $ | 370,651 | $ | 361,324 | $ | 343,310 | |||||
Realized Gains (Losses) - Recorded in Income | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Realized gains (losses) on sales of investments | |||||||||||
| Fixed maturities: | |||||||||||
| Gross gains | $ | 18,495 | $ | 16,982 | $ | 5,715 | |||||
| Gross losses | (2,374 | ) | (541 | ) | (368 | ) | |||||
| Equity securities | — | 309 | (5 | ) | |||||||
| Mortgage loans | — | 767 | — | ||||||||
| Real estate | 12 | (25 | ) | — | |||||||
| Other | (166 | ) | (13 | ) | 13 | ||||||
| Impairment losses recognized in earnings: | |||||||||||
| Credit-related portion of fixed maturity losses (1) | (618 | ) | (5,264 | ) | (1,454 | ) | |||||
| Other credit-related (2) | (1,794 | ) | (11,763 | ) | (12,197 | ) | |||||
| Realized gains (losses) on investments recorded in income | $ | 13,555 | $ | 452 | $ | (8,296 | ) | ||||
| (1) | Amount represents the credit-related losses recognized for fixed maturities which were not written down to fair value. As discussed above the non-credit portion of the losses have been recognized in other comprehensive income (loss). |
| (2) | Amount represents credit-related losses for mortgage loans, real estate and fixed maturities written down to fair value. |
Proceeds from sales of fixed maturities were $138.4 million in 2013, $156.3 million in 2012 and $70.7 million in 2011.
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Included in the net impairment loss recognized in earnings in 2011 is an other than temporary impairment of $4.7 million related to an equity method investment held as Securities and Indebtedness of related parties, which was undergoing financial difficulties as a result of class action litigation.
Realized losses on sales were on securities that we did not intend to sell at the prior balance sheet date or on securities that were impaired in a prior period, but decreased in value during the year. Realized gains and losses on sales of investments are determined on the basis of specific identification.
Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
The following table sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which a portion of the other-than-temporary impairment was recognized in other comprehensive income (loss) and corresponding changes in such amounts.
| Year ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| (Dollars in thousands) | ||||||||
| Balance at beginning of period | $ | (27,712 | ) | $ | (22,746 | ) | ||
| Increases for which an impairment was not previously recognized | — | (3,815 | ) | |||||
| Increases to previously impaired investments | (618 | ) | (1,449 | ) | ||||
| Reductions due to investments sold | 5,944 | 215 | ||||||
| Reductions due to change of intent to not hold investments | 794 | 83 | ||||||
| Balance at end of period | $ | (21,592 | ) | $ | (27,712 | ) | ||
Variable Interest Entities
We evaluate our variable interest entity (VIE) investees to determine whether the level of our direct ownership interest, our rights to manage operations or our obligation to provide ongoing financial support are such that we are the primary beneficiary of the entity, and are then required to consolidate it for financial reporting purposes. None of our VIE investees were required to be consolidated during 2013, 2012 or 2011. Our VIE investments are as follows:
| December 31, 2013 | December 31, 2012 | ||||||||||||||
| Carrying Value | Maximum Exposure to Loss | Carrying Value | Maximum Exposure to Loss | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Real estate limited partnerships | $ | 17,646 | $ | 17,646 | $ | 16,914 | $ | 16,914 | |||||||
The real estate limited partnerships had revenues totaling $4.3 million for 2013, $4.1 million for 2012 and $4.9 million for 2011. We may make commitments to fund partnership investments in the normal course of business. We did not have any other commitments to investees designated as VIE's during the years ended December 31, 2013, 2012 or 2011.
Derivative Instruments
We are not significantly involved in hedging activities and have limited exposure to derivatives. We do not apply hedge accounting to any of our derivative positions. Derivative assets, which are primarily reported in reinsurance recoverable and other investments, totaled $3.7 million at December 31, 2013 and $5.6 million at December 31, 2012. Our derivative assets consist of derivatives embedded within our modified coinsurance agreements and call options which provide an economic hedge for a small block of index annuity contracts. Derivative liabilities totaled $0.3 million at December 31, 2013 and $0.5 million at December 31, 2012 and include derivatives embedded within our index annuity contracts and derivatives embedded within our modified coinsurance agreements. The net gain (loss) recognized on these derivatives was included in net investment income and interest sensitive benefits and totaled ($1.5) million in 2013, $1.6 million in 2012 and ($0.5) million in 2011.
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Other
At December 31, 2013, affidavits of deposits covering investments with a carrying value totaling $6,480.9 million were on deposit with state agencies to meet regulatory requirements. Fixed maturities with a carrying value of $356.0 million were on deposit with the Federal Home Loan Bank (FHLB) as collateral for funding agreements.
At December 31, 2013, we had committed to provide additional funds for investments in limited partnerships. The amounts of these unfunded commitments totaled $38.3 million.
The carrying value of investments which have been non-income producing for the twelve months preceding December 31, 2013 includes fixed maturities, real estate, short-term and equity securities totaling $3.8 million.
No investment in any entity or its affiliates (other than bonds issued by agencies of the United States Government) exceeded 10.0% of stockholders' equity at December 31, 2013.
3. Fair Value
The carrying and estimated fair values of our financial instruments are as follows:
| Fair Values and Carrying Values | |||||||||||||||
| December 31, | |||||||||||||||
| 2013 | 2012 | ||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Assets | |||||||||||||||
| Fixed maturities - available for sale | $ | 6,081,753 | $ | 6,081,753 | $ | 6,265,745 | $ | 6,265,745 | |||||||
| Equity securities - available for sale | 91,555 | 91,555 | 86,253 | 86,253 | |||||||||||
| Mortgage loans | 575,861 | 594,451 | 554,843 | 600,448 | |||||||||||
| Policy loans | 176,993 | 210,401 | 174,254 | 227,161 | |||||||||||
| Other investments | 993 | 993 | 247 | 247 | |||||||||||
| Cash, cash equivalents and short-term investments | 115,047 | 115,047 | 152,590 | 152,590 | |||||||||||
| Reinsurance recoverable | 2,678 | 2,678 | 5,326 | 5,326 | |||||||||||
| Assets held in separate accounts | 693,955 | 693,955 | 618,809 | 618,809 | |||||||||||
| Liabilities | |||||||||||||||
| Future policy benefits | $ | 3,360,519 | $ | 3,371,706 | $ | 3,226,765 | $ | 3,352,252 | |||||||
| Supplemental contracts without life contingencies | 349,761 | 320,195 | 361,273 | 350,187 | |||||||||||
| Advance premiums and other deposits | 230,819 | 230,819 | 216,857 | 216,857 | |||||||||||
| Long-term debt | 97,000 | 63,343 | 147,000 | 116,359 | |||||||||||
| Other liabilities | — | — | 131 | 131 | |||||||||||
| Liabilities related to separate accounts | 693,955 | 686,387 | 618,809 | 609,704 | |||||||||||
Fair value is based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As not all financial instruments are actively traded, various valuation methods may be used to estimate fair value. These methods rely on observable market data and where observable market data is not available, the best information available. Significant judgment may be required to interpret the data and select the assumptions used in the valuation estimates, particularly when observable market data is not available.
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In the discussion that follows, we have ranked our financial instruments by the level of judgment used in the determination of the fair values presented above. The levels are defined as follows:
| • | Level 1 - Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities. |
| • | Level 2 - Fair values are based on inputs, other than quoted prices from active markets, that are observable for the asset or liability, either directly or indirectly. |
| • | Level 3 - Fair values are based on significant unobservable inputs for the asset or liability. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. From time to time there may be movements between levels as inputs become more or less observable, which may depend on several factors including the activity of the market for the specific security, the activity of the market for similar securities, the level of risk spreads and the source of the information from which we obtain the information. Transfers in or out of any level are measured as of the beginning of the period.
The following methods and assumptions were used in estimating the fair value of our financial instruments:
Fixed maturities:
Level 1 fixed maturities consist of U.S. Treasury issues that are actively traded, allowing us to use current market prices as an estimate of their fair value.
Level 2 fixed maturities consist of corporate, mortgage and other asset-backed, United States Government agencies and private placement securities with observable market data, and in some circumstances recent trade activity. When quoted prices of identical assets in active markets are not available, our first priority is to obtain prices from third party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2.
Also included in Level 2 are corporate bonds where quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread.
Level 3 fixed maturities include private placements as well as corporate, mortgage and other asset-backed and state and municipal securities for which there is little or no current market data available. We use external pricing sources, or if prices are not available, we will estimate fair value internally. Fair values of private investments in Level 3 are determined by reference to public market, private transactions or valuations for comparable companies or assets in the relevant asset class when such amounts are available. For other securities where an exit price based on relevant observable inputs is not obtained, the fair value is determined using a matrix calculation. Fair values estimated through use of matrix pricing methods rely on an estimate of credit spreads to a risk free U.S. Treasury yield. Selecting the credit spread requires judgment based on an understanding of the security and may include a market liquidity premium. Our selection of comparable companies as well as the level of spread requires significant judgment. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.
We obtain fixed maturity fair values from a variety of external independent pricing services, including brokers, with access to observable data including recent trade information, if available. In certain circumstances in which an external price is not available for a Level 3 security, we will internally estimate its fair value. Our process for evaluation and selection of the fair values includes:
82
| • | We follow a “pricing waterfall” policy, which establishes the pricing source preference for a particular security or security type. The order of preference is based on our evaluation of the valuation methods used, the source's knowledge of the instrument and the reliability of the prices we have received from the source in the past. Our valuation policy dictates that fair values are initially sought from third party pricing services. If our review of the prices received from our preferred source indicates an inaccurate price, we will use an alternative source within the waterfall and document the decision. In the event that fair values are not available from one of our external pricing services or upon review of the fair values provided it is determined that they may not be reflective of market conditions, those securities are submitted to brokers familiar with the security to obtain non-binding price quotes. Broker quotes tend to be used in limited circumstances such as for newly issued, private placement and other instruments that are not widely traded. For those securities for which an externally provided fair value is not available we use cash flow modeling techniques to estimate fair value. |
| • | We evaluate third party pricing source estimation methodologies to assess whether they will provide a fair value which approximates a market exit price. |
| • | We perform an overall analysis of portfolio fair value movement against general movements in interest rates and spreads. |
| • | We compare month-to-month price trends to detect unexpected price fluctuation based on our knowledge of the market and the particular instrument. As fluctuations are noted, we will perform further research which may include discussions with the original pricing source or other external sources to ensure we are in agreement with the valuation. |
| • | We compare prices between different pricing sources for unusual disparity. |
| • | We meet at least quarterly with our Investment Committee, the group that oversees our valuation process, to discuss valuation practices and observations during the pricing process. |
Equity securities:
Level 1 equity securities consist of listed common stocks and mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value.
Level 2 equity securities consist of common stock issued by the FHLB, with estimated fair value based on the current redemption value of the shares and non-redeemable preferred stock with estimated fair value obtained from external pricing sources using a matrix pricing approach.
Level 3 equity securities consist of non-redeemable preferred stock for which no active market exists, and fair value estimates for these securities is based on the values of comparable securities which are actively traded. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.
In the case where external pricing services are used for certain Level 1 and Level 2 equity securities, our review process is consistent with the process used to determine the fair value of fixed maturities discussed above.
Mortgage loans:
Mortgage loans are not measured at fair value on a recurring basis. Mortgage loans are a Level 3 measurement as there is no current market for the loans. The fair value of our mortgage loans is estimated internally using a matrix pricing approach. Along with specific loan terms, two key management assumptions are required including the risk rating of the loan (our current rating system A-highest quality, B-moderate quality, C-low quality and W-watch or F-foreclosure) and estimated spreads for new loans over the U.S. Treasury yield curve. Spreads are updated quarterly and loans are reviewed and rated annually with quarterly adjustments should significant changes occur. Our determination of each loan's risk rating as well as selection of the credit spread requires significant judgment. A higher risk rating, as well as an increase in spreads, would result in a decrease in discounted cash flows used, and accordingly the fair value of the loan.
83
Policy loans:
Policy loans are not measured at fair value on a recurring basis. Policy loans are a Level 3 measurement as there is no current market since they are specifically tied to the underlying insurance policy. The loans are relatively risk free as they cannot exceed the cash surrender value of the insurance policy. Fair values are estimated by discounting expected cash flows using a risk-free interest rate based on the U.S. Treasury curve. An increase in the risk-free interest rate would result in a decrease in discounted cash flows used, and accordingly the fair value of the loan.
Other investments:
Level 2 other investments include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty.
Cash, cash equivalents and short-term investments:
Level 1 cash, cash equivalents and short-term investments are highly liquid instruments for which historical cost approximates fair value.
Reinsurance recoverable:
Level 2 reinsurance recoverable includes embedded derivatives in our modified coinsurance contracts under which we cede or assume business. Fair values of these embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturities, which are valued consistent with the discussion of fixed maturities above.
Assets held in separate accounts:
Level 1 assets held in separate accounts consist of mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value.
Future policy benefits, supplemental contracts without life contingencies and advance premiums and other deposits:
Level 3 policy related financial instruments of investment-type contracts are those not involving significant mortality or morbidity risks. No active market exists for these contracts and they are not measured at fair value on a recurring basis. Fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed. Fair values for our investment-type contracts with expected maturities, including deferred annuities, funding agreements and supplementary contracts, are determined using discounted cash flow valuation techniques based on current interest rates adjusted to reflect our credit risk and an additional provision for adverse deviation. For certain deposit liabilities with no defined maturities and no surrender charges, including pension related deposit administration funds, advance premiums and other deposits, fair value is the account value or amount payable on demand. Significant judgment is required in selecting the assumptions used to estimate the fair values of these financial instruments. For contracts with known maturities, increases in current rates will result in a decrease in discounted cash flows and a decrease in the estimated fair value of the policy obligation.
Certain annuity contracts include embedded derivatives, which are measured at fair value on a recurring basis. These embedded derivatives are a Level 3 measurement. The fair value of the embedded derivatives is based on the discounted excess of projected account values (including a risk margin) over projected guaranteed account values. The key unobservable inputs required in the projection of future values which require management judgment include the risk margin as well as the credit risk of our company. Should the risk margin increase or the credit risk decrease the discounted cash flows and the estimated fair value of the obligation will increase.
84
Long-term debt:
Long-term debt is not measured at fair value on a recurring basis. Long-term debt is a Level 3 measurement. The fair value of our outstanding debt is estimated using a discounted cash flow method based on the market's assessment or our current incremental borrowing rate for similar types of borrowing arrangements adjusted, as needed, to reflect our credit risk. Our selection of the credit spread requires significant judgment. A decrease in the spread will increase the estimated fair value of the outstanding debt.
Other liabilities:
Level 2 other liabilities include the embedded derivatives in our modified coinsurance contracts under which we cede business. Fair values for the embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturities.
Level 3 other liabilities include an embedded derivative related to the make-whole redemption feature of our unaffiliated Senior Notes. Fair value was determined using a discounted cash flow valuation analysis based on applicable U.S. Treasury rates and make-whole spread.
Liabilities related to separate accounts:
Separate account liabilities are not measured at fair value on a recurring basis. Level 3 separate account liabilities' fair value is based on the cash surrender value of the underlying contract, which is the cost we would incur to extinguish the liability.
| Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels | |||||||||||||||
| December 31, 2013 | |||||||||||||||
Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Assets | |||||||||||||||
| Corporate securities | $ | — | $ | 3,224,785 | $ | 81,994 | $ | 3,306,779 | |||||||
| Residential mortgage-backed securities | — | 520,728 | — | 520,728 | |||||||||||
| Commercial mortgage-backed securities | — | 332,955 | 71,712 | 404,667 | |||||||||||
| Other asset-backed securities | — | 370,708 | 85,835 | 456,543 | |||||||||||
| United States Government and agencies | 15,291 | 19,946 | 8,044 | 43,281 | |||||||||||
| State, municipal and other governments | — | 1,349,755 | — | 1,349,755 | |||||||||||
| Non-redeemable preferred stocks | — | 58,655 | 7,795 | 66,450 | |||||||||||
| Common stocks | 3,295 | 21,810 | — | 25,105 | |||||||||||
| Other investments | — | 993 | — | 993 | |||||||||||
| Cash, cash equivalents and short-term investments | 115,047 | — | — | 115,047 | |||||||||||
| Reinsurance recoverable | — | 2,678 | — | 2,678 | |||||||||||
| Assets held in separate accounts | 693,955 | — | — | 693,955 | |||||||||||
| Total assets | $ | 827,588 | $ | 5,903,013 | $ | 255,380 | $ | 6,985,981 | |||||||
| Liabilities | |||||||||||||||
| Future policy benefits - index annuity embedded derivatives | $ | — | $ | — | $ | 286 | $ | 286 | |||||||
| Total liabilities | $ | — | $ | — | $ | 286 | $ | 286 | |||||||
85
| Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels | |||||||||||||||
| December 31, 2012 | |||||||||||||||
Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Assets | |||||||||||||||
| Corporate securities | $ | — | $ | 3,195,120 | $ | 100,463 | $ | 3,295,583 | |||||||
| Residential mortgage-backed securities | — | 674,182 | — | 674,182 | |||||||||||
| Commercial mortgage-backed securities | — | 434,538 | 76,281 | 510,819 | |||||||||||
| Other asset-backed securities | — | 393,957 | 95,756 | 489,713 | |||||||||||
| United States Government and agencies | 14,884 | 25,570 | 8,555 | 49,009 | |||||||||||
| State, municipal and other governments | — | 1,246,216 | 223 | 1,246,439 | |||||||||||
| Non-redeemable preferred stocks | — | 53,101 | 7,391 | 60,492 | |||||||||||
| Common stocks | 2,773 | 22,988 | — | 25,761 | |||||||||||
| Other investments | — | 247 | — | 247 | |||||||||||
| Cash, cash equivalents and short-term investments | 152,590 | — | — | 152,590 | |||||||||||
| Reinsurance recoverable | — | 5,326 | — | 5,326 | |||||||||||
| Assets held in separate accounts | 618,809 | — | — | 618,809 | |||||||||||
| Total assets | $ | 789,056 | $ | 6,051,245 | $ | 288,669 | $ | 7,128,970 | |||||||
| Liabilities | |||||||||||||||
| Future policy benefits - index annuity embedded derivatives | $ | — | $ | — | $ | 307 | $ | 307 | |||||||
| Other liabilities | — | 131 | — | 131 | |||||||||||
| Total liabilities | $ | — | $ | 131 | $ | 307 | $ | 438 | |||||||
| Level 3 Fixed Maturity Securities on a Recurring Basis by Valuation Source | |||||||||||
| December 31, 2013 | |||||||||||
| Third-party vendors | Priced internally | Total | |||||||||
| (Dollars in thousands) | |||||||||||
| Corporate securities | $ | 59,812 | $ | 22,182 | $ | 81,994 | |||||
| Commercial mortgage-backed securities | 71,712 | — | 71,712 | ||||||||
| Other asset-backed securities | 65,003 | 20,832 | 85,835 | ||||||||
| United States Government and agencies | 8,044 | — | 8,044 | ||||||||
| Total | $ | 204,571 | $ | 43,014 | $ | 247,585 | |||||
| Percent of total | 82.6 | % | 17.4 | % | 100.0 | % | |||||
| December 31, 2012 | |||||||||||
| Third-party vendors | Priced internally | Total | |||||||||
| (Dollars in thousands) | |||||||||||
| Corporate securities | $ | 70,975 | $ | 29,488 | $ | 100,463 | |||||
| Commercial mortgage-backed securities | 76,281 | — | 76,281 | ||||||||
| Other asset-backed securities | 79,320 | 16,436 | 95,756 | ||||||||
| United States Government and agencies | 8,555 | — | 8,555 | ||||||||
| State, municipal and other governments | 223 | — | 223 | ||||||||
| Total | $ | 235,354 | $ | 45,924 | $ | 281,278 | |||||
| Percent of total | 83.7 | % | 16.3 | % | 100.0 | % | |||||
86
| Quantitative Information about Level 3 Fair Value Measurements | ||||||
| December 31, 2013 | ||||||
| Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||
| (Dollars in thousands) | ||||||
| Assets | ||||||
| Corporate securities | $ | 46,023 | Discounted cash flow | Credit spread | 0.91% - 17.08% (7.84%) | |
| Commercial mortgage-backed | 71,712 | Discounted cash flow | Credit spread | 1.75% - 4.50% (2.95%) | ||
| Other asset-backed securities | 38,305 | Discounted cash flow | Credit spread | 0.74% - 5.06% (3.55%) | ||
| Non-redeemable preferred stocks | 7,795 | Discounted cash flow | Credit spread | 3.81% (3.81%) | ||
| Total Assets | $ | 163,835 | ||||
| Liabilities | ||||||
| Future policy benefits - index annuity embedded derivatives | $ | 286 | Discounted cash flow | Credit risk Risk margin | 0.30% - 1.70% (1.05%) 0.15% - 0.40% (0.25%) | |
| December 31, 2012 | ||||||
| Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||
| (Dollars in thousands) | ||||||
| Assets | ||||||
| Corporate securities | $ | 54,538 | Discounted cash flow | Credit spread | 0.78% - 9.21% (5.72%) | |
| Commercial mortgage-backed | 76,264 | Discounted cash flow | Credit spread | 1.95% - 4.80% (3.35%) | ||
| Other asset-backed securities | 43,119 | Discounted cash flow | Credit spread | 1.24% - 6.07% (4.28%) | ||
| State, municipal and other governments | 223 | Discounted cash flow | Credit spread | 1.75% (1.75%) | ||
| Non-redeemable preferred stocks | 7,391 | Discounted cash flow | Credit spread | 6.00% (6.00%) | ||
| Total Assets | $ | 181,535 | ||||
| Liabilities | ||||||
| Future policy benefits - index annuity embedded derivatives | $ | 307 | Discounted cash flow | Credit risk Risk margin | 1.00% - 2.50% (1.80%) 0.15% - 0.40% (0.25%) | |
The table above excludes certain securities for which the fair value was based on non-binding broker quotes where we could not reasonably obtain the quantitative unobservable inputs.
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| Level 3 Financial Instruments Changes in Fair Value Recurring Basis | |||||||||||||||||||||||||||||||||||
| December 31, 2013 | |||||||||||||||||||||||||||||||||||
| Realized and unrealized gains (losses), net | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2012 | Purchases | Disposals | Included in net income | Included in other compre-hensive income | Transfers into Level 3 (1) | Transfers out of Level 3 (1) | Amort-ization included in net income | Balance, December 31, 2013 | |||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Corporate securities | $ | 100,463 | $ | 2,157 | $ | (7,946 | ) | $ | — | $ | (1,945 | ) | $ | — | $ | (10,798 | ) | $ | 63 | $ | 81,994 | ||||||||||||||
| Commercial mortgage-backed securities | 76,281 | — | (660 | ) | — | (3,996 | ) | — | — | 87 | 71,712 | ||||||||||||||||||||||||
| Other asset-backed securities | 95,756 | 38,468 | (13,583 | ) | — | (971 | ) | 4,062 | (39,155 | ) | 1,258 | 85,835 | |||||||||||||||||||||||
| United States Government and agencies | 8,555 | — | — | — | (517 | ) | — | — | 6 | 8,044 | |||||||||||||||||||||||||
| State, municipal and other governments | 223 | — | (218 | ) | — | (5 | ) | — | — | — | — | ||||||||||||||||||||||||
| Non-redeemable preferred stocks | 7,391 | — | — | — | 71 | 5,208 | (4,875 | ) | — | 7,795 | |||||||||||||||||||||||||
| Total | $ | 288,669 | $ | 40,625 | $ | (22,407 | ) | $ | — | $ | (7,363 | ) | $ | 9,270 | $ | (54,828 | ) | $ | 1,414 | $ | 255,380 | ||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Future policy benefits - index annuity embedded derivatives | $ | 307 | $ | — | $ | (28 | ) | $ | — | $ | 7 | $ | — | $ | — | $ | — | $ | 286 | ||||||||||||||||
| Total Liabilities | $ | 307 | $ | — | $ | (28 | ) | $ | — | $ | 7 | $ | — | $ | — | $ | — | $ | 286 | ||||||||||||||||
| December 31, 2012 | |||||||||||||||||||||||||||||||||||
| Realized and unrealized gains (losses), net | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2011 | Purchases | Disposals | Included in net income | Included in other compre-hensive income | Transfers into Level 3 (2) | Transfers out of Level 3 (2) | Amort-ization included in net income | Balance, December 31, 2012 | |||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Corporate securities | $ | 106,412 | $ | — | $ | (15,504 | ) | $ | (9 | ) | $ | 3,113 | $ | 21,654 | $ | (15,295 | ) | $ | 92 | $ | 100,463 | ||||||||||||||
| Residential mortgage-backed securities | 7,711 | — | — | — | — | — | (7,711 | ) | — | — | |||||||||||||||||||||||||
| Commercial mortgage-backed securities | 27,899 | 5,105 | (3,101 | ) | — | 1,251 | 59,096 | (14,055 | ) | 86 | 76,281 | ||||||||||||||||||||||||
| Other asset-backed securities | 113,458 | 68,811 | (11,351 | ) | (44 | ) | 3,820 | 22,092 | (102,192 | ) | 1,162 | 95,756 | |||||||||||||||||||||||
| Collateralized debt obligation | 270 | — | (27 | ) | (243 | ) | — | — | — | — | — | ||||||||||||||||||||||||
| United States Government and agencies | 12,588 | — | — | — | (28 | ) | — | (4,010 | ) | 5 | 8,555 | ||||||||||||||||||||||||
| State, municipal and other governments | 12,044 | — | (4,221 | ) | — | (316 | ) | — | (7,845 | ) | 561 | 223 | |||||||||||||||||||||||
| Non-redeemable preferred stocks | 14,447 | — | (5,105 | ) | 105 | 749 | — | (2,805 | ) | — | 7,391 | ||||||||||||||||||||||||
| Total | $ | 294,829 | $ | 73,916 | $ | (39,309 | ) | $ | (191 | ) | $ | 8,589 | $ | 102,842 | $ | (153,913 | ) | $ | 1,906 | $ | 288,669 | ||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Future policy benefits - index annuity embedded derivatives | $ | 302 | $ | — | $ | (37 | ) | $ | — | $ | 42 | $ | — | $ | — | $ | — | $ | 307 | ||||||||||||||||
| Make-whole redemption feature on Senior Notes | 33,144 | — | (33,144 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||
| Total Liabilities | $ | 33,446 | $ | — | $ | (33,181 | ) | $ | — | $ | 42 | $ | — | $ | — | $ | — | $ | 307 | ||||||||||||||||
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| (1) | Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using non-binding broker quotes. Transfers out of Level 3 include those assets that we are now able to obtain pricing from a third party pricing vendor that uses observable inputs. There were no transfers between Level 1 and Level 2 during 2013. |
| (2) | Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using non-binding broker quotes. During 2012, we began using an external pricing service with access to observable inputs for a portion of our Level 3 investments for which non-binding broker quotes were previously used to estimate fair value. We believe the change in pricing sources is appropriate and consistent with our pricing waterfall policy to use higher level valuation methods when available. There were no transfers between Level 1 and Level 2 during 2012. |
| Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels | |||||||||||||||
| December 31, 2013 | |||||||||||||||
Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Assets | |||||||||||||||
| Mortgage loans | $ | — | $ | — | $ | 594,451 | $ | 594,451 | |||||||
| Policy loans | — | — | 210,401 | 210,401 | |||||||||||
| Total assets | $ | — | $ | — | $ | 804,852 | $ | 804,852 | |||||||
| Liabilities | |||||||||||||||
| Future policy benefits | $ | — | $ | — | $ | 3,371,420 | $ | 3,371,420 | |||||||
| Supplemental contracts without life contingencies | — | — | 320,195 | 320,195 | |||||||||||
| Advance premiums and other deposits | — | — | 230,819 | 230,819 | |||||||||||
| Long-term debt | — | — | 63,343 | 63,343 | |||||||||||
| Liabilities related to separate accounts | — | — | 686,387 | 686,387 | |||||||||||
| Total liabilities | $ | — | $ | — | $ | 4,672,164 | $ | 4,672,164 | |||||||
| December 31, 2012 | |||||||||||||||
Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Assets | |||||||||||||||
| Mortgage loans | $ | — | $ | — | $ | 600,448 | $ | 600,448 | |||||||
| Policy loans | — | — | 227,161 | 227,161 | |||||||||||
| Total assets | $ | — | $ | — | $ | 827,609 | $ | 827,609 | |||||||
| Liabilities | |||||||||||||||
| Future policy benefits | $ | — | $ | — | $ | 3,351,945 | $ | 3,351,945 | |||||||
| Supplemental contracts without life contingencies | — | — | 350,187 | 350,187 | |||||||||||
| Advance premiums and other deposits | — | — | 216,857 | 216,857 | |||||||||||
| Long-term debt | — | — | 116,359 | 116,359 | |||||||||||
| Liabilities related to separate accounts | — | — | 609,704 | 609,704 | |||||||||||
| Total liabilities | $ | — | $ | — | $ | 4,645,052 | $ | 4,645,052 | |||||||
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Level 3 Financial Instruments Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate which have been deemed to be impaired during the reporting period. During 2013, one real estate property was impaired to a fair value totaling $1.9 million which resulted in an impairment charge of $0.2 million. During 2012, one mortgage loan was impaired to a fair value totaling $1.6 million which resulted in an impairment charge of $0.3 million.
4. Reinsurance and Policy Provisions
Reinsurance
In the normal course of business, we seek to limit our exposure to loss on any single insured or event and to recover a portion of benefits paid by ceding a portion of our exposure to other insurance companies. Our reinsurance coverage for life insurance varies according to the age and risk classification of the insured with retention limits ranging up to $1.5 million of coverage per individual life. New sales of certain term life products are reinsured on a first dollar quota share basis. We do not use financial or surplus relief reinsurance.
We participate in a reinsurance pool with various unaffiliated life insurance companies to mitigate the impact of a catastrophic event on our financial position and results of operations. Members of the pool share in the eligible catastrophic losses based on their size and contribution to the pool. The maximum loss we could incur as a result of losses assumed from other pool members is $7.7 million per event. As of the date of this filing, there have been no claims on the reinsurance pool.
In addition, Farm Bureau Life may cede certain losses under an annual 100% quota share accidental death reinsurance agreement. Coverage includes all acts of terrorism including those of a nuclear, chemical or biological origin. Coverage is subject to an annual aggregate retention of $13.0 million. A maximum occurrence limit of $50.0 million applies to policies written on agents of the Company who are participating in company-sponsored incentive trips. Additionally, a $200.0 million occurrence limit applies to employees in the home office building, net of reinsurance on group life policies. All other occurrence catastrophes are unlimited in amount.
Life insurance in force ceded totaled $13,220.0 million (24.2% of life insurance in force) at December 31, 2013 and $11,999.3 million (23.1% of life insurance in force) at December 31, 2012. Insurance premiums and product charges have been reduced by $29.4 million in 2013, $28.9 million in 2012 and $30.8 million in 2011 and insurance benefits have been reduced by $21.7 million in 2013, $20.5 million in 2012 and $15.5 million in 2011 as a result of cession agreements.
Reinsurance contracts do not relieve us of our obligations to policyholders. To the extent that reinsuring companies are later unable to meet obligations under reinsurance agreements, our insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in losses. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. No allowance for uncollectible amounts has been established against our asset for reinsurance recoverable since none of our receivables are deemed to be uncollectible.
We have assumed closed blocks of certain life and annuity business through coinsurance and modified coinsurance agreements. Life insurance in force assumed totaled $613.3 million (1.5% of total life insurance in force) at December 31, 2013 and $612.9 million (1.5% of total life insurance in force) at December 31, 2012. Premiums and product charges assumed totaled $0.8 million in 2013, $0.6 million in 2012 and $0.4 million in 2011. Insurance benefits assumed totaled $1.7 million in 2013, $0.3 million in 2012 and less than $0.1 million in 2011.
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Policy Provisions
Analysis of the Value of Insurance In Force Acquired
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Excluding impact of net unrealized investment gains and losses: | |||||||||||
| Balance at beginning of year | $ | 32,500 | $ | 38,062 | $ | 33,403 | |||||
| Accretion of interest during the year | 902 | 1,068 | 1,266 | ||||||||
| Amortization of asset | (3,467 | ) | (6,630 | ) | 3,393 | ||||||
| Balance prior to impact of net unrealized investment gains and losses | 29,935 | 32,500 | 38,062 | ||||||||
| Impact of net unrealized investment gains and losses | (6,356 | ) | (15,346 | ) | (12,281 | ) | |||||
| Balance at end of year | $ | 23,579 | $ | 17,154 | $ | 25,781 | |||||
We periodically revise key assumptions used in the calculation of the value of insurance in force acquired through an “unlocking” process, which increased amortization $2.6 million in 2012. As described in Note 1, during 2011 refinements were made to the methods and assumptions used to calculate the amortization of value of insurance in force acquired, resulting in a $6.9 million reduction in amortization. Net amortization, based on expected future gross profits/margins, for the next five years is expected to be as follows: 2014 - $2.8 million; 2015 - $2.8 million; 2016 - $2.5 million; 2017 - $2.5 million; and 2018 - $2.4 million.
Certain variable annuity and variable universal life contracts in our separate accounts and in separate accounts of reinsurance partners have minimum interest guarantees on funds deposited in our general account. In addition, we have certain variable annuity contracts that include a) guaranteed minimum death benefits (GMDBs), b) an incremental death benefit (IDB) rider that pays a percentage of the gain on the contract upon death of the contract holder, and/or c) a guaranteed minimum income benefit (GMIB) that provides monthly income to the contract holder after the eighth policy year.
| GMDB, IDB and GMIB Net Amount at Risk by Type of Guarantee | |||||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||||
Separate Account Balance | Net Amount at Risk | Separate Account Balance | Net Amount at Risk | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Guaranteed minimum death benefit: | |||||||||||||||
| Return of net deposits | $ | 195,593 | $ | 791 | $ | 178,443 | $ | 1,346 | |||||||
| Return the greater of highest anniversary value or net deposits | 315,176 | 3,150 | 282,973 | 7,177 | |||||||||||
| Incremental death benefit | 283,556 | 57,964 | 252,925 | 35,502 | |||||||||||
| Guaranteed minimum income benefit | 42,850 | — | 38,072 | — | |||||||||||
| Total | $ | 61,905 | $ | 44,025 | |||||||||||
The separate account assets are principally comprised of stock and bond mutual funds. The net amount at risk for these contracts is based on the amount by which GMDB, IDB or GMIB exceeds account value. The reserve for GMDBs, IDBs or GMIBs, determined using modeling techniques and industry mortality assumptions, that is included in future policy benefits, totaled $2.4 million at December 31, 2013 and $1.9 million at December 31, 2012. The weighted average age of the contract holders with GMDB, IDB or GMIB rider exposure was 63 years at December 31, 2013 and 60 years at December 31, 2012. Benefits paid for GMDBs, IDBs and GMIBs totaled $0.3 million for 2013, $0.2 million for 2012 and $0.3 million for 2011.
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5. Income Taxes
We file a consolidated federal income tax return with Farm Bureau Life and FBL Financial Services, Inc. and certain of their subsidiaries. The companies included in the consolidated federal income tax return each report current income tax expense as allocated under a consolidated tax allocation agreement. This allocation typically results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing a benefit to the extent their losses contribute to reduce consolidated taxes.
Deferred income taxes have been established based upon the temporary differences between the financial statement and income tax bases of assets and liabilities. The reversal of the temporary differences will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance we considered the scheduled reversal of deferred tax assets, projected future taxable income, taxable income from prior years available for recovery and tax planning strategies. Our tax planning strategies assume deferred tax assets related to unrealized losses on our investments are temporary as we have the ability to hold the investments until maturity, at which time, the existing temporary difference is expected to reverse. As such, we have determined that the establishment of a valuation allowance was not necessary at December 31, 2013 and 2012.
| Income Tax Expenses (Credits) | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Taxes provided in consolidated statements of operations on: | |||||||||||
| Income from continuing operations before noncontrolling interest and equity income (loss): | |||||||||||
| Current | $ | 43,264 | $ | (8,717 | ) | $ | 27,637 | ||||
| Deferred | 6,058 | 48,788 | (8,840 | ) | |||||||
| 49,322 | 40,071 | 18,797 | |||||||||
| Equity income (loss) - current | (11,050 | ) | (6,260 | ) | (890 | ) | |||||
| Discontinued operations | — | (382 | ) | 23,003 | |||||||
| Loss on sale of subsidiary | — | (1,213 | ) | (29,198 | ) | ||||||
| Taxes provided in consolidated statements of changes in stockholders' equity: | |||||||||||
| Accumulated other comprehensive income | (91,961 | ) | 60,309 | 67,964 | |||||||
| Class A and Class B common stock | (1,657 | ) | (2,167 | ) | (164 | ) | |||||
| (93,618 | ) | 58,142 | 67,800 | ||||||||
| $ | (55,346 | ) | $ | 90,358 | $ | 79,512 | |||||
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| Effective Tax Rate Reconciliation to Federal Income Tax Rate | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Income from continuing operations before income taxes, noncontrolling interest and equity income (loss) | $ | 150,305 | $ | 118,184 | $ | 69,722 | |||||
| Income tax at federal statutory rate (35%) | $ | 52,607 | $ | 41,364 | $ | 24,400 | |||||
| Tax effect (decrease) of: | |||||||||||
| Tax-exempt dividend and interest income | (2,802 | ) | (1,741 | ) | (2,393 | ) | |||||
| Impact of incentive stock options | (594 | ) | (341 | ) | (1,029 | ) | |||||
| Other items | 111 | 789 | (2,181 | ) | |||||||
| Income tax expense | $ | 49,322 | $ | 40,071 | $ | 18,797 | |||||
| Tax Effect of Temporary Differences Giving Rise to Deferred Income Tax Assets and Liabilities | |||||||
| December 31, | |||||||
| 2013 | 2012 | ||||||
| (Dollars in thousands) | |||||||
| Deferred income tax assets: | |||||||
| Future policy benefits | $ | 22,754 | $ | 20,865 | |||
| Accrued benefit and compensation costs | 12,048 | 11,957 | |||||
| Loss carryforwards | 17,041 | 18,259 | |||||
| Other | 4,478 | 1,632 | |||||
| 56,321 | 52,713 | ||||||
| Deferred income tax liabilities: | |||||||
| Fixed maturity and equity securities | 90,360 | 219,372 | |||||
| Deferred acquisition costs | 66,583 | 24,826 | |||||
| Other | 22,217 | 16,948 | |||||
| 179,160 | 261,146 | ||||||
| Net deferred income tax liability | $ | 122,839 | $ | 208,433 | |||
We recognize the benefits of uncertain tax positions in accordance with the provisions of the FASB interpretation on accounting for uncertainty in income taxes. At December 31, 2013 and 2012, our reserve for uncertain tax positions of less than $0.5 million. Unrecognized tax benefits included in our reserve, if recognized, would impact our effective tax rate, although we do not expect these impacts to be material. We recognized interest related to unrecognized tax benefits in interest expense and related penalties in other expenses. We do not expect any significant increases or decreases in the amount of our reserve for uncertain tax positions within the next twelve months. Other than 2007, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years prior to 2010.
At December 31, 2013, we had non-life net operating loss carryforwards for federal income tax purposes totaling $48.7 million which expire beginning in 2029 through 2032.
We are continuing to invest in low income housing tax credit partnerships which generate pre-tax losses but after tax gains as the related tax credits are realized. The timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and when tax credits are approved. These tax credits, which are reported in equity income, totaled $9.8 million in 2013, $5.7 million in 2012 and $1.0 million in 2011. In addition, in 2011 we reported $0.5 million of tax credits in tax expense.
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6. Credit Arrangements
Long-term debt includes $97.0 million of our subordinated debt obligation to FBL Financial Group Capital Trust (the Trust). We issued 5% Subordinated Deferrable Interest Notes due June 30, 2047 (the Notes) with a principal amount of $100.0 million to support $97.0 million of 5% Preferred Securities issued by the Trust. We also have a $3.0 million equity investment in the Trust, which is netted against the Notes on the consolidated balance sheets due to a contractual right of offset. The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes. As of December 31, 2013 and 2012, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
On September 26, 2013, we redeemed the Senior Notes payable to affiliates that had a balance of $50.0 million at December 31, 2012. These 6.10% Senior Notes were due May 3, 2015 and prepayable anytime at par. These notes were issued to Farm Bureau Property & Casualty Insurance Company (Farm Bureau Property & Casualty), an affiliate, and an investment affiliate of the Iowa Farm Bureau Federation (IFBF), our majority stockholder.
As described in Note 15, during the first quarter of 2012 we completed the required redemption of $175.0 million of our long term debt in accordance with the mandatory redemption provisions of the underlying notes at the make-whole redemption price of $210.9 million.
7. Stockholders' Equity
The IFBF 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 with the exception that each Series B share is entitled to two votes while each Class A share is entitled to one vote. 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.
| Reconciliation of Outstanding Common Stock | ||||||||||||||||||||
| Class A | Class B | Total | ||||||||||||||||||
| Shares | Dollars | Shares | Dollars | Shares | Dollars | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Outstanding at January 1, 2011 | 29,749,068 | $ | 118,165 | 1,192,990 | $ | 7,522 | 30,942,058 | $ | 125,687 | |||||||||||
| Issuance of common stock under compensation plans | 121,551 | 13,277 | — | — | 121,551 | 13,277 | ||||||||||||||
| Purchase of common stock | (412,975 | ) | (1,758 | ) | — | — | (412,975 | ) | (1,758 | ) | ||||||||||
| Outstanding at December 31, 2011 | 29,457,644 | 129,684 | 1,192,990 | 7,522 | 30,650,634 | 137,206 | ||||||||||||||
| Issuance of common stock under compensation plans | 353,140 | 10,901 | — | — | 353,140 | 10,901 | ||||||||||||||
| Purchase of common stock | (5,528,700 | ) | (24,879 | ) | — | — | (5,528,700 | ) | (24,879 | ) | ||||||||||
| Conversion of Class B to Class A common stock | 100 | — | (100 | ) | — | — | $ | — | ||||||||||||
| Outstanding at December 31, 2012 | 24,282,184 | $ | 115,706 | 1,192,890 | $ | 7,522 | 25,475,074 | $ | 123,228 | |||||||||||
| Issuance of common stock under compensation plans | 666,659 | 20,156 | — | — | 666,659 | 20,156 | ||||||||||||||
| Purchase of common stock | (363,430 | ) | (1,862 | ) | (1,023,948 | ) | (6,457 | ) | (1,387,378 | ) | (8,319 | ) | ||||||||
| Conversion of Class B to Class A common stock | 157,529 | 993 | (157,529 | ) | (993 | ) | — | — | ||||||||||||
| Outstanding at December 31, 2013 | 24,742,942 | $ | 134,993 | 11,413 | $ | 72 | 24,754,355 | $ | 135,065 | |||||||||||
Holders of the Class A common stock and Series B preferred stock vote together as a group in the election of Class A Directors (four to ten). The Class B common stock votes as a separate class to elect the Class B Directors (five to seven). Voting for the Directors is noncumulative. Ownership aspects of our Class B common stock are governed by a Class B Shareholder Agreement. The IFBF's ownership in the three classes of stock results in IFBF owning 71% of our voting stock as of
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December 31, 2013, and having the ability to control the Company. Holders of Class A common stock and Class B common stock receive equal per-share common stock dividends.
Share Repurchases
On August 21, 2013, the Board of Directors authorized a tender offer to repurchase 99 percent of all Class B common shares outstanding. The tender price of $45.33 was based upon the average of the closing price of FBL’s Class A common stock for the seven consecutive business days preceding the tender closing date of September 25, 2013. All Class B shareholders participated with 1,023,948 Class B common shares repurchased for $46.4 million and 105,930 shares of Class B common stock converted to Class A common stock.
During 2011 and 2012, the Board of Directors approved a plan to repurchase up to $230.0 million of Class A common stock. These repurchase plans authorize us to make repurchases in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. In connection with the Class A repurchase plans, we repurchased 0.4 million shares of stock for $14.2 million in 2013, 5.5 million shares of stock for $181.9 million in 2012 and 0.4 million shares of stock for $13.6 million in 2011. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.
During February 2014, the Board of Directors approved a plan to repurchase up to $50.0 million of Class A common stock. This repurchase plan will commence upon the earlier of the completion of the current repurchase plan or its expiration on March 31, 2014.
Dividend Restrictions
The amount of dividends we have available to pay our common shareholders is limited to a certain extent by the amount of dividends our primary operating subsidiary, Farm Bureau Life, is able to pay to its parent, FBL Financial Group, Inc. Farm Bureau Life's ability to pay dividends to FBL Financial Group, Inc. is limited by Iowa 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. Further, Farm Bureau Life’s dividends are required to be approved by the Insurance Division, Department of Commerce, State of Iowa (Insurance Division) if the dividend plus all dividend distributions for the preceding twelve months exceed the greater of ten percent of its statutory surplus or its statutory net gain from operations for the twelve-month period ended December 31st of the preceding year. At December 31, 2013, Farm Bureau Life’s statutory unassigned surplus was $359.0 million. The 2013 net gain from operations, which exceeds 10% of statutory surplus, was $93.3 million. Farm Bureau Life obtained approval from the Insurance Division prior to paying a $120.0 million extraordinary dividend during the third quarter of 2013 and will be required to obtain approval for any dividends paid prior to the fourth quarter of 2014.
Special Dividend
On August 21, 2013, the Board of Directors approved a special $2.00 per share cash dividend to Class A and B common shareholders of record as of September 6, 2013. The aggregate dividend totaling $51.4 million was paid on September 13, 2013.
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| Accumulated Other Comprehensive Income, Net of Tax and Other Offsets | |||||||||||||||
Unrealized Net Investment Gains (Losses) (1) | Accumulated Non-Credit Impairment Losses | Underfunded Status of Postretirement Benefit Plans | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Balance at January 1, 2011 | $ | 67,777 | $ | (16,237 | ) | $ | 104 | $ | 51,644 | ||||||
| Other comprehensive income before reclassifications | 125,548 | 7,795 | — | 133,343 | |||||||||||
| Reclassification adjustments | (2,876 | ) | (4,261 | ) | (5 | ) | (7,142 | ) | |||||||
| Balance at December 31, 2011 | 190,449 | (12,703 | ) | 99 | 177,845 | ||||||||||
| Other comprehensive income before reclassifications | 125,948 | 10,325 | — | 136,273 | |||||||||||
| Reclassification adjustments | (10,230 | ) | (5,984 | ) | (8,051 | ) | (24,265 | ) | |||||||
| Balance at December 31, 2012 | 306,167 | (8,362 | ) | (7,952 | ) | 289,853 | |||||||||
| Other comprehensive income before reclassifications | (169,627 | ) | 9,686 | — | (159,941 | ) | |||||||||
| Reclassification adjustments | (9,953 | ) | (2,690 | ) | 1,798 | (10,845 | ) | ||||||||
| Balance at December 31, 2013 | $ | 126,587 | $ | (1,366 | ) | $ | (6,154 | ) | $ | 119,067 | |||||
| (1) | Unrealized net investment gains (losses) relate to available-for-sale securities and includes the impact of taxes, deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves and policyholder liabilities. See Note 2 for further information. |
| Accumulated Other Comprehensive Income Reclassification Adjustments | |||||||||||||||
| Year ended December 31, 2013 | |||||||||||||||
Unrealized Net Investment Gains (Losses) (1) | Accumulated Non-Credit Impairment Losses (1) | Underfunded Status of Postretirement Benefit Plans (2) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Realized capital gains on sales of investments | $ | (16,121 | ) | $ | — | $ | — | $ | (16,121 | ) | |||||
| Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities | 809 | 112 | — | 921 | |||||||||||
| Other than temporary impairment losses | — | (4,250 | ) | — | (4,250 | ) | |||||||||
| Other expenses: Amortization of unrecognized postretirement items: | |||||||||||||||
| Prior service costs | — | — | (11 | ) | (11 | ) | |||||||||
| Net actuarial loss | — | — | 2,777 | 2,777 | |||||||||||
| Reclassifications before income taxes | (15,312 | ) | (4,138 | ) | 2,766 | (16,684 | ) | ||||||||
| Income taxes | 5,359 | 1,448 | (968 | ) | 5,839 | ||||||||||
| Reclassification adjustments | $ | (9,953 | ) | $ | (2,690 | ) | $ | 1,798 | $ | (10,845 | ) | ||||
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| Accumulated Other Comprehensive Income Reclassification Adjustments | |||||||||||||||
| Year ended December 31, 2012 | |||||||||||||||
Unrealized Net Investment Gains (Losses) (1) | Accumulated Non-Credit Impairment Losses (1) | Underfunded Status of Postretirement Benefit Plans (2) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Realized capital gains on sales of investments | $ | (16,750 | ) | $ | — | $ | — | $ | (16,750 | ) | |||||
| Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities | 1,012 | 166 | — | 1,178 | |||||||||||
| Other than temporary impairment losses | — | (9,372 | ) | — | (9,372 | ) | |||||||||
| Other expenses: Amortization of unrecognized postretirement items: | |||||||||||||||
| Prior service costs | — | — | 35 | 35 | |||||||||||
| Net actuarial loss | — | — | (12,421 | ) | (12,421 | ) | |||||||||
| Reclassifications before income taxes | (15,738 | ) | (9,206 | ) | (12,386 | ) | (37,330 | ) | |||||||
| Income taxes | 5,508 | 3,222 | 4,335 | 13,065 | |||||||||||
| Reclassification adjustments | $ | (10,230 | ) | $ | (5,984 | ) | $ | (8,051 | ) | $ | (24,265 | ) | |||
| Year ended December 31, 2011 | |||||||||||||||
Unrealized Net Investment Gains (Losses) (1) | Accumulated Non-Credit Impairment Losses (1) | Unfunded Status of Postretirement Benefit Plans (2) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Realized capital gains on sales of investments | $ | (5,342 | ) | $ | — | $ | — | $ | (5,342 | ) | |||||
| Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities | 918 | — | — | 918 | |||||||||||
| Other than temporary impairment losses | — | (6,555 | ) | — | (6,555 | ) | |||||||||
| Other expenses: Amortization of unrecognized postretirement items: | |||||||||||||||
| Net actuarial loss | — | — | (8 | ) | (8 | ) | |||||||||
| Reclassifications before income taxes | (4,424 | ) | (6,555 | ) | (8 | ) | (10,987 | ) | |||||||
| Income taxes | 1,548 | 2,294 | 3 | 3,845 | |||||||||||
| Reclassification adjustments | $ | (2,876 | ) | $ | (4,261 | ) | $ | (5 | ) | $ | (7,142 | ) | |||
| (1) | See Note 2 for further information. |
| (2) | See Note 8 discussion on Defined Benefit Plans and Other Retirement Plans for further information. |
8. Retirement and Compensation Plans
Defined Benefit Pension Plans
We participate in various defined benefit pension plans (the Plans), including a multiemployer plan. The multiemployer plan is considered qualified under Internal Revenue Service regulations, and covers our employees and the employees of the other participating companies who have attained age 21, have one year of service, and were employed prior to January 1, 2013. We also have a plan which provides supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified limits imposed by federal law and started prior to January 1, 2013. Benefits of these plans are based on years of service and the employee's compensation. The plans are discussed below.
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Multiemployer Defined Benefit Plan
The FBL Financial Group Retirement Plan (the Multiemployer Plan) is considered a multiemployer plan, with the participation of unaffiliated and affiliated organizations along with FBL Financial Group, Inc. and its subsidiaries. Under the multiemployer plan structure, our contributions are commingled with those of the other employers to fund the plan benefit obligations. Should a participating employer be unable to provide funding, the remaining employers would be required to continue funding all future obligations. If an employer elects to discontinue participation, prior to departure they will be required to contribute their portion of the unfunded pension obligation associated with their employees. This required contribution will be based on an actuarial estimate of future benefit obligations, which as an estimate may not ultimately be sufficient to fund future actual benefits. None of the participating employers have provided notice that they would be discontinuing participation in the Multiemployer Plan or would otherwise be unable to continue providing their share of required funding as of December 31, 2013.
Contributions are made each year, resulting in the Multiemployer Plan being partially funded for payment of projected future benefit obligations. Beginning in 2013, no new participants entered the Multiemployer Plan and those participants who had not attained age 40 and 10 years of service as of December 31, 2012 no longer accrued additional years of service in the Multiemployer Plan.
| Multiemployer Plan name | FBL Financial Group Retirement Plan | |
| Employer identification number | 42-1411715 | |
| Plan number | 1 | |
| FBL's contributions (in thousands) | ||
| 2013 | $22,500 | |
| 2012 | $15,000 | |
| 2011 | $15,000 | |
Net periodic pension cost of the Multiemployer Plan is allocated between participating employers on a basis of time incurred by the respective employees for each employer. Such allocations are reviewed annually. This Multiemployer Plan was not subject to collective bargaining agreements, a financial improvement plan or a rehabilitation plan. No surcharges were required to be paid to the Multiemployer Plan during 2013, 2012 or 2011. We are the primary employer in the Multiemployer Plan, providing more than 5 percent of the total contributions during 2013, 2012 or 2011.
Other Defined Benefit Plans
The other defined benefit plans (the Other Plans) provide benefits in addition to those offered under the Multiemployer Plan to certain of our employees or those of our affiliates. These non-qualified benefit plans are unfunded, with contributions provided as necessary to fund current benefit obligations. Net periodic pension cost of the Other Plans is allocated between the subsidiaries of FBL Financial Group, Inc. and the Farm Bureau affiliated property-casualty companies on a basis of time incurred by the respective employees for each company.
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Funding Status and Net Periodic Pension Costs
| Multiemployer Plan | Other Plans | |||||||||||||||
As of and for the year ended December 31, | As of and for the year ended December 31, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Change in projected benefit obligation: | ||||||||||||||||
| Net benefit obligation at beginning of the year | $ | 330,320 | $ | 283,613 | $ | 26,664 | $ | 26,562 | ||||||||
| Service cost | 6,472 | 8,117 | 252 | 442 | ||||||||||||
| Interest cost | 13,384 | 12,706 | 1,035 | 1,160 | ||||||||||||
| Actuarial (gain) loss | (41,794 | ) | 43,015 | (1,305 | ) | 1,890 | ||||||||||
| Benefits paid | (15,933 | ) | (17,131 | ) | (3,381 | ) | (3,390 | ) | ||||||||
| Projected benefit obligation | 292,449 | 330,320 | 23,265 | 26,664 | ||||||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets at beginning of the year | 220,000 | 205,054 | — | — | ||||||||||||
| Actual return on plan assets | 24,253 | — | 17,077 | — | — | |||||||||||
| Employer contributions | 22,500 | 15,000 | 3,381 | 3,390 | ||||||||||||
| Benefits paid | (15,933 | ) | (17,131 | ) | (3,381 | ) | (3,390 | ) | ||||||||
| Fair value of plan assets at end of the year | 250,820 | 220,000 | — | — | ||||||||||||
| Underfunded status at end of the year | $ | (41,629 | ) | $ | (110,320 | ) | $ | (23,265 | ) | $ | (26,664 | ) | ||||
| Accumulated benefit obligation | $ | 266,891 | $ | 291,728 | $ | 21,944 | $ | 24,642 | ||||||||
For all the Plans we participate in, the accumulated benefit obligation exceeds the fair value of plan assets. The projected benefit obligations, accumulated benefit obligation and fair value of plan assets are included above.
Net Periodic Pension Costs Incurred by the Plans
| Multiemployer Plan | Other Plans | ||||||||||||||||||||||
As of and for the year ended December 31, | As of and for the year ended December 31, | ||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Service cost | $ | 6,472 | $ | 8,117 | $ | 7,938 | $ | 252 | $ | 442 | $ | 258 | |||||||||||
| Interest cost | 13,384 | 12,706 | 12,620 | 1,035 | 1,160 | 1,215 | |||||||||||||||||
| Expected return on assets | (15,666 | ) | (14,081 | ) | (13,845 | ) | — | — | — | ||||||||||||||
| Amortization of prior service cost | 144 | 424 | 1,724 | (11 | ) | (11 | ) | (225 | ) | ||||||||||||||
| Amortization of actuarial loss | 12,468 | 9,467 | 7,003 | 1,267 | 1,108 | 890 | |||||||||||||||||
| Net periodic pension cost | $ | 16,802 | $ | 16,633 | $ | 15,440 | $ | 2,543 | $ | 2,699 | $ | 2,138 | |||||||||||
| FBL Financial Group, Inc. share of net periodic pension cost | $ | 5,363 | $ | 5,437 | $ | 5,758 | $ | 1,436 | $ | 1,533 | $ | 1,131 | |||||||||||
The Plans' prior service costs are amortized using a straight-line amortization method over the average remaining service period of the employees. For actuarial gains and losses, we use a corridor to determine the amounts to amortize. For the Multiemployer Plan it is expected that net periodic pension cost in 2014 will include $5.4 million for amortization of the actuarial loss and $0.1 million of prior service cost amortization. For the Other Plans it is expected that net periodic pension cost in 2014, included in accumulated other comprehensive income at December 31, 2013, will include $1.1 million for amortization of the actuarial loss and less than ($0.1) million of prior service cost (credit) amortization.
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We expect contributions to be paid to the Multiemployer Plan by us and affiliates for 2014 to be approximately $15.0 million, of which $4.9 million is expected to be contributed by us. We expect contributions to be paid to the Other Plans by us and affiliates for 2014 to be approximately $3.4 million, of which $1.7 million is expected to be contributed by us. Expected benefits to be paid under the Multiemployer Plan are as follows: 2014 - $23.0 million, 2015 - $24.1 million, 2016 - $23.1 million, 2017 - $19.7 million, 2018 - $21.4 million and 2019 through 2023 - $102.5 million. Expected benefits to be paid under the Other Plans are as follows: 2014 - $3.4 million, 2015 - $3.6 million, 2016 - $3.1 million, 2017 - $2.0 million, 2018 - $2.0 million and 2019 through 2023 - $9.1 million.
FBL's Proportionate Share of Prepaid or Accrued Pension Cost
| Multiemployer Plan | Other Plans | ||||||||||||||
As of and for the year ended December 31, | As of and for the year ended December 31, | ||||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Amount recognized in FBL's statement of financial position | |||||||||||||||
| Prepaid benefit cost | $ | 16,330 | $ | 14,511 | $ | 1,284 | $ | 696 | |||||||
| Accrued benefit cost | — | — | (17,302 | ) | (19,608 | ) | |||||||||
| Net amount recognized | $ | 16,330 | $ | 14,511 | $ | (16,018 | ) | $ | (18,912 | ) | |||||
| Amount recognized in FBL's accumulated other comprehensive income, before taxes (1) (2) | |||||||||||||||
| Net actuarial loss | $ | 9,701 | $ | 12,274 | |||||||||||
| Prior service cost | (24 | ) | (35 | ) | |||||||||||
| Net amount recognized | $ | 9,677 | $ | 12,239 | |||||||||||
| (1) | For multiemployer plans, the funded status is not required to be recognized as an asset or liability in the consolidated balance sheets. The unrecognized liability for the underfunded status of our Multiemployer Plan totaled $41.6 million at December 31, 2013 and $110.3 million at December 31, 2012. |
| (2) | During 2012, we determined that our nonqualified employee benefit plans should apply single employer plan accounting. The change had no impact on earnings, although it resulted in an immaterial reduction of accumulated other comprehensive income. |
| Weighted Average Assumptions Used to Determine Benefit Obligation | |||||
| December 31 | |||||
| 2013 | 2012 | ||||
| Discount rate | 4.99 | % | 4.18 | % | |
| Annual salary increases | 3.00 | % | 3.00 | % | |
We estimate the discount rate by projecting and discounting future benefit payments inherent in the projected benefit obligation using a commercially available "spot" yield curve constructed using techniques and a bond universe specifically selected to meet the accounting standard requirements.
Our expected long-term return on plan assets represents the rate of earnings expected in the funds invested to provide for anticipated benefit payments. We have analyzed the expected rates of return on assets and determined that a long-term return of
7.00% is reasonable based on the current and expected asset allocations and on the Multiemployer Plan's historical investment performance and best estimates for future investment performance.
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| Weighted Average Assumptions Used to Determine Net Periodic Pension Cost | ||||||||
| Year Ended December 31, | ||||||||
| 2013 | 2012 | 2011 | ||||||
| Discount rate | 4.18 | % | 4.67 | % | 5.09 | % | ||
| Expected long-term return on plan assets | 7.00 | % | 7.00 | % | 7.00 | % | ||
| Annual salary increases | 3.00 | % | 4.00 | % | 4.00 | % | ||
Multiemployer Plan Assets
The Multiemployer Plan assets are primarily invested in annuity products and insurance company pooled separate accounts that invest predominately in equity securities and real estate. We have certain pension obligations that are fully funded through annuity contracts with Farm Bureau Life which are presented as funded annuity contracts below. For 2013, excluding the funded annuity contracts, we employed a long-term investment strategy of diversifying the Multiemployer Plan assets with 55% in fixed income investments, 40% in equities and 5% in alternative investments. At December 31, 2013, the Multiemployer Plan assets were invested approximately 57% in fixed income investments, 42% in diversified equities and 1% in alternative investments. The fixed income investments consist primarily of the group annuity contract and fixed income securities held in pooled separate accounts. The equity securities are in pooled separate accounts and mutual funds. The alternative investments consist of interests in limited partnerships that own various liquid and illiquid assets. Our investment strategy is to (1) achieve a long-term return sufficient to satisfy all Multiemployer Plan obligations, (2) assume a prudent level of risk and (3) maintain adequate liquidity. The expected return on Multiemployer Plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the Multiemployer Plan. In estimating the expected rate of return for each asset class, we take into account factors such as historical rates of return, expected future risk free rates of return and anticipated returns expected given the risk profile of each asset class.
The valuation methodologies used for assets measured at fair value are:
| • | Group and funded annuity contracts: contract value is equivalent to fair value, as the interest-crediting rates are periodically reset to market at the discretion of the issuer. |
| • | Pooled separate accounts: the net asset value of our separate account shares is based on the latest quoted market price of the underlying investments or in the case of a real estate separate account, estimates of the current market value of the underlying property held. |
| • | Mutual funds: the net asset value of our mutual funds is based on quoted market prices available in active markets. |
| • | Alternative investments: the carrying value of the limited partnership interests reflects the Plan’s proportionate share of the net asset value of those partnerships which is derived from the fair value of the underlying holdings. |
The pension financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 - Unadjusted quoted prices in active markets for identical assets that are accessible to us at the measurement date.
Level 2 - Inputs other than quoted prices in active markets for identical assets that are either directly or indirectly observable for substantially the full term of the asset or liability.
Level 3 - Inputs are unobservable and require management's judgment about the assumptions that market participants would use in pricing the assets.
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| Fair Values of the Multiemployer Plan Assets by Asset Category and Hierarchy Levels | |||||||||||||||
| December 31, 2013 | |||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Mutual funds: (1) | |||||||||||||||
| U.S. equity funds | $ | 31,325 | $ | — | $ | — | $ | 31,325 | |||||||
| International funds | 30,884 | — | — | 30,884 | |||||||||||
| Pooled separate accounts: (1) | |||||||||||||||
| Short-term fixed income funds | — | 6,904 | — | 6,904 | |||||||||||
| Fixed income funds | — | 12,166 | — | 12,166 | |||||||||||
| U.S. equity funds | — | 24,934 | — | 24,934 | |||||||||||
| Real estate fund | — | 12,253 | — | 12,253 | |||||||||||
| Annuities: (2) | |||||||||||||||
| Group annuity contract | — | — | 117,226 | 117,226 | |||||||||||
| Funded annuity contracts | — | — | 12,932 | 12,932 | |||||||||||
| Alternative investments: (3) | |||||||||||||||
| Limited partnerships | — | — | 2,196 | 2,196 | |||||||||||
| Total | $ | 62,209 | $ | 56,257 | $ | 132,354 | $ | 250,820 | |||||||
| December 31, 2012 | |||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Mutual funds: (1) | |||||||||||||||
| U.S. equity funds | $ | 30,535 | $ | — | $ | — | $ | 30,535 | |||||||
| International equity funds | 20,506 | — | — | 20,506 | |||||||||||
| Pooled separate accounts: (1) | |||||||||||||||
| Short-term fixed income funds | — | 520 | — | 520 | |||||||||||
| Fixed income funds | — | 10,504 | — | 10,504 | |||||||||||
| U.S. equity funds | — | 25,495 | — | 25,495 | |||||||||||
| Real estate fund | — | 9,930 | — | 9,930 | |||||||||||
| Annuities: (2) | |||||||||||||||
| Group annuity contract | — | — | 109,275 | 109,275 | |||||||||||
| Funded annuity contracts | — | — | 13,235 | 13,235 | |||||||||||
| Total | $ | 51,041 | $ | 46,449 | $ | 122,510 | $ | 220,000 | |||||||
| (1) | Represents mutual funds and pooled separate account investments with Principal Life Insurance Company. |
| (2) | Represents group annuity contracts with Farm Bureau Life. |
| (3) | Represents interests in several limited partnerships. |
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| Level 3 Multiemployer Plan Asset Changes in Fair Value | |||||||||||||||||||||||
| December 31, 2013 | |||||||||||||||||||||||
| Return on assets | |||||||||||||||||||||||
| December 31, 2012 | Purchases (disposals), net | Held at year end | Sold during year | Transfers into (out) of level 3 | December 31, 2013 | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Group annuity contract | $ | 109,275 | $ | 2,793 | $ | 5,158 | $ | — | $ | — | $ | 117,226 | |||||||||||
| Funded annuity contracts | 13,235 | (1,103 | ) | 800 | — | — | 12,932 | ||||||||||||||||
| Limited partnerships | — | 2,258 | (62 | ) | — | — | 2,196 | ||||||||||||||||
| Total | $ | 122,510 | $ | 3,948 | $ | 5,896 | $ | — | $ | — | $ | 132,354 | |||||||||||
| December 31, 2012 | |||||||||||||||||||||||
| Return on assets | |||||||||||||||||||||||
| December 31, 2011 | Purchases (disposals), net | Held at year end | Sold during year | Transfers into (out) of level 3 | December 31, 2012 | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Group annuity contract | $ | 101,970 | $ | 2,838 | $ | 4,467 | $ | — | $ | — | $ | 109,275 | |||||||||||
| Funded annuity contracts | 14,010 | (1,621 | ) | 846 | — | — | 13,235 | ||||||||||||||||
| Total | $ | 115,980 | $ | 1,217 | $ | 5,313 | $ | — | $ | — | $ | 122,510 | |||||||||||
Other Retirement Plans
We participate with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. We contributed cash in an amount equal to 100% of an employee's contributions up to 2% or 4% of the eligible compensation contributed by the employee and an amount equal to 50% of an employee's contributions on the next 2% of the eligible compensation contributed by the employee. As shown in the table below, certain employees will also receive an annual discretionary employer contribution based on age plus years of service ranging from 2.75% to 5.75% as a percent of pay. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Our expense related to the plan totaled $1.8 million in 2013 and $0.9 million in 2012 and in 2011.
Attained age 40 and 10 years of service at December 31, 2012 | Accruing years of service in the Multiemployer Plan | 100% Employer Match | 50% Employer Match | Discretionary Employer Contribution |
| Yes | Yes | first 2% of employee's contributions | employee contributions between 2% and 4% | No |
| No | No | first 4% of employee's contributions | employee contributions between 4% and 6% | 2.75% to 5.75% |
We have established deferred compensation plans for certain key current and former employees and have certain other benefit plans which provide for retirement and other benefits. Liabilities for these plans are accrued as the related benefits are earned.
Certain of the assets related to these plans are on deposit with us and amounts relating to these plans are included in our financial statements. In addition, certain amounts included in the policy liabilities for interest sensitive products relate to deposit administration funds maintained by us on behalf of affiliates.
In addition to benefits offered under the aforementioned benefit plans, we and several other affiliates sponsor a plan that provides group term life insurance benefits to retirees who have worked full-time for ten years and attained age 55 while in service. Postretirement benefit expense for this plan is allocated in a manner consistent with pension expense discussed above. We also have two single employer plans that provide health and medical benefits to a small group of retirees. Postretirement benefit expense totaled $0.1 million in 2013, 2012 and 2011. Changes in the underfunded status of these plans, reported in other comprehensive income, aggregated $0.2 million in 2013, ($0.1) million in 2012 and less than ($0.1) million in 2011.
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Share-based Compensation Plans
We have three share-based payment arrangements under our Class A Common Stock Compensation Plan, which are described below. Compensation expense for these arrangements totaled $0.3 million for 2013, $2.1 million for 2012 and $5.0 million for 2011. The income tax benefit recognized in the statements of operations for these arrangements totaled less than $0.1 million for 2013, $0.9 million for 2012 and $1.9 million for 2011.
In 2011, we introduced a Cash-Based Restricted Stock Unit Plan. Compensation expense for arrangements under this plan totaled $1.0 million for 2013, $0.2 million for 2012 and $0.6 million for 2011. The income tax benefit recognized in the statements of operations for this arrangement totaled $0.6 million in 2013, $0.1 million in 2012 and $0.3 million in 2011.
Stock Option Awards
In 2011 and prior years, we granted stock options for Class A common stock to officers and employees, which have a contractual term of 10 years and vest over a period up to five years, contingent upon continued employment with us. Prior to 2009, we also granted stock options for Class A common stock to directors, which were fully vested upon grant and had a contractual term that varied with the length of time the director remained on the Board, up to 10 years. The share price for all options is equal to the fair value of the common stock on the grant date. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model.
Assumptions Used in our Valuation Model
Year ended December 31, 2011 | ||
| Weighted average risk-free interest rate | 2.01 | % |
| Dividend yield | 1.30 | % |
| Weighted average volatility factor of the expected market price | 0.67 | |
| Weighted average expected term | 5.2 years | |
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. We use the historical realized volatility of our stock for the expected volatility assumption within the valuation model. The weighted average expected term for the majority of our options was calculated using average historical behavior.
| Stock Option Activity | |||||||||||||
| Number of Shares | Weighted-Average Exercise Price per Share | Weighted-Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value (1) | ||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||
| Shares under option at January 1, 2013 | 1,311,668 | $ | 28.67 | ||||||||||
| Exercised | (652,308 | ) | 29.73 | ||||||||||
| Forfeited or expired | (7,863 | ) | 28.55 | ||||||||||
| Shares under option at December 31, 2013 | 651,497 | 27.61 | 3.95 | $ | 11,193 | ||||||||
| Vested at December 31, 2013 or expected to vest in the future | 650,555 | $ | 27.61 | 3.95 | $ | 11,175 | |||||||
| Exercisable options at December 31, 2013 | 495,443 | $ | 29.54 | 3.24 | $ | 7,557 | |||||||
| (1) | Represents the difference between the share price and exercise price for each option, excluding options where the exercise price is above the share price, at December 31, 2013. |
The weighted average grant-date fair value of options granted per common share was $14.90 for 2011. The intrinsic value of options exercised during the year totaled $6.6 million for 2013, $5.4 million for 2012 and $3.5 million for 2011.
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Unrecognized compensation expense related to nonvested share-based compensation granted under the stock option arrangement totaled $0.1 million as of December 31, 2013. This expense is expected to be recognized over a weighted-average period of 1.0 years.
We issue new shares to satisfy stock option exercises. Beginning in 2014, conditional upon market conditions, we intend to repurchase Class A common shares on the open market for shares issued upon the exercise of stock options. Cash received from stock options exercised totaled $19.4 million for 2013, $9.7 million for 2012 and $7.5 million for 2011. The actual tax benefit realized from stock options exercised totaled $2.3 million for 2013, $1.8 million for 2012 and $1.1 million for 2011.
Nonvested Stock Awards
In 2011 and prior years, we granted nonvested Class A common shares to certain executives. The restrictions on these shares lapsed and the shares vested if we met or exceeded operating goals, such as earnings per share, book value and expense targets, within or during a three year period. Depending on performance, the actual amount of shares issued could range from zero to 100% of the granted amount. The value of the awards was based on the grant date fair value of the nonvested stock adjusted for expected forfeitures and an estimate of the number of shares expected to vest. The estimate for the number of shares to vest was reviewed each period and the impact of any changes in the estimate on expense was recorded in the current period. These awards were charged to expense using the straight-line method over the required service period. Dividends on the restricted stock during the restriction period were contingent upon vesting.
| Nonvested Stock Activity | ||||||
| Number of Shares | Weighted-Average Grant-Date Fair Value per Share | |||||
| Nonvested stock at January 1, 2013 | 142.648 | $ | 19.96 | |||
| Released | (142.438 | ) | 19.96 | |||
| Forfeited or canceled | (210 | ) | 19.96 | |||
| Nonvested stock at December 31, 2013 | — | — | ||||
The expense related to the unvested share-based compensation granted under the nonvested stock arrangement has been fully recognized at December 31, 2013. The tax benefit realized from nonvested stock released to employees was $1.7 million in 2013, $1.6 million in 2012 and less than $0.1 million in 2011. We have a policy of withholding shares to cover estimated future tax payments.
Other Stock Awards
Directors were awarded nonrestricted Class A common shares totaling 24,806 during 2011. The value of the stock was based on the fair value on the date of the grant. The tax benefit realized from the shares awarded to directors was $0.3 million in 2011.
Shares of Class A common stock available for grant as additional awards under the Class A Common Stock Compensation Plan totaled 3,430,142 at December 31, 2013.
Cash-Based Restricted Stock Units
We annually grant cash-based restricted stock units to certain executives beginning in 2012. The restricted stock units will vest and be paid out in cash over 5 years, contingent on continued employment with us. Cash-based restricted stock units were also granted to certain executives in 2012 that will vest and be paid out in cash after a two-year required service period.
The amount payable per unit awarded is equal to the price per share of the Company's common stock at settlement of the award, and as such, we measure the value of the award each reporting period based on the current stock price. The effects of changes in the stock price during the service period are recognized as compensation cost over the service period.
We also issued performance cash-based restricted stock units to an executive in 2013. These units will vest and be paid out in cash over 5 years, contingent upon meeting an earnings per share goal as well as continued employment with the Company.
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| Restricted Stock Unit Activity | ||||||
| Number of Units | Weighted-Average Grant-Date Fair Value per Unit | |||||
| Restricted stock units at January 1, 2013 | 85,559 | $ | 34.91 | |||
| Granted | 61,140 | 34.94 | ||||
| Vested | (20,277 | ) | 34.94 | |||
| Forfeited or canceled | (8,456 | ) | 35.01 | |||
| Restricted stock units at December 31, 2013 | 117,966 | 34.92 | ||||
The weighted average grant-date fair value per common share of restricted stock units granted was $34.94 in 2013 and $35.10 in 2012. Unrecognized compensation expense related to unvested restricted stock units based on the stock price at December 31, 2013 totaled $3.5 million. This expense is expected to be recognized over a weighted-average period of 2.31 years. Dividends are paid on restricted stock units upon vesting. Cash payments including dividends for restricted stock units totaled $0.5 million in 2013.
Other
We have a Director Compensation Plan under which non-employee directors on our Board may elect to receive a portion of their compensation in the form of cash or deferred cash-based stock units. Cash-based stock units outstanding total 17,295 at December 31, 2013 and 12,073 at December 31, 2012. Prior to 2012, deferred stock units were used instead of deferred cash-based stock units. Under this plan, we have deferred stock units outstanding totaling 58,159 at December 31, 2013 and 110,971 at December 31, 2012. At December 31, 2013, there were 119,234 shares of Class A common stock available for future issuance under the Director Compensation Plan. We also have an Executive Salary and Bonus Deferred Compensation Plan under which certain officers of the Company are allowed to use their base salary and annual cash bonus to purchase deferred cash-based stock units. Cash-based stock units outstanding total 13,308 at December 31, 2013 and 3,189 at December 31, 2012. Prior to 2012, deferred stock units were used instead of deferred cash-based stock units. Under this plan, we have deferred stock units outstanding totaling 98,630 at December 31, 2013 and 97,903 at December 31, 2012. At December 31, 2013, shares of Class A common stock available for future issuance under this plan totaled 111,047. This plan was frozen to future deferrals on December 31, 2013. We also have an Executive Excess 401(k) Plan under which officers of the Company who meet salary guidelines and 401(k) contribution guidelines are allowed to purchase unregistered deferred cash-based stock units. Cash based stock units outstanding total 93 at December 31, 2013 and 44 at December 31, 2012. Prior to 2012, deferred stock units were used instead of deferred cash-based stock units. Under this plan, we have deferred stock units outstanding totaling 4,355 at December 31, 2013 and 4,122 at December 31, 2012. This plan was frozen to future deferrals on December 31, 2013.
9. Management and Other Agreements
We share certain office facilities and services with the IFBF and its affiliated companies. These expenses are allocated on the basis of cost and time studies that are updated annually and primarily consist of rent, salaries and related expenses, travel and other operating costs. We also have an expense allocation agreement with Farm Bureau Property & Casualty for the use of property and equipment. Expense relating to this agreement totaled $1.1 million in 2013 and 2012 and $1.0 million in 2011.
We have management agreements, which include Farm Bureau Property & Casualty and other affiliates, under which we provide general business, administrative and management services. Fee income for these services totaled $1.8 million in 2013, $1.9 million in 2012 and $3.7 million in 2011. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the IFBF, provides certain services to us under a separate arrangement. We incurred related expenses totaling $0.9 million in 2013, and $1.0 million in 2012 and 2011.
We have service agreements with the Farm Bureau-affiliated property-casualty companies operating within our marketing territory, including Farm Bureau Property & Casualty and another affiliate. Under the service agreements, the property-casualty companies are responsible for development and management of our agency force for a fee. We incurred expenses totaling $9.7 million in 2013, $10.0 million in 2012 and $9.7 million in 2011 relating to these arrangements.
We are licensed by the IFBF to use the "Farm Bureau" and "FB" designations in Iowa. In connection with this license, we incurred royalty expense totaling $0.5 million in 2013, 2012 and 2011. We have similar arrangements with other state Farm Bureau organizations in our market territory. Total royalty expense to Farm Bureau organizations other than the IFBF totaled
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$1.8 million in 2013, $1.4 million in 2012 and $1.5 million in 2011. The royalty agreement with the IFBF provides them an option to terminate the agreement when the quarterly common stock dividend is below $0.10 per share.
10. Commitments and Contingencies
Legal Proceedings
In the normal course of business, we may be involved in litigation where damages are alleged that are substantially in excess of contractual policy benefits or certain other agreements. In recent years, companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We are not aware of any such matters threatened or pending against FBL Financial Group, Inc. or any of its subsidiaries.
Other
We self-insure our employee health and dental claims. However, claims in excess of our self-insurance limits are fully insured. We fund insurance claims through a self-insurance trust. Deposits to the trust are made at an amount equal to our best estimate of claims to be paid during the period and a liability is established at each balance sheet date for any unpaid claims. Adjustments, if any, resulting in changes in the estimate of claims incurred will be reflected in operations in the periods in which such adjustments are known.
We lease our home office properties under a 10-year operating lease from a wholly-owned subsidiary of the IFBF. Future remaining minimum lease payments under this lease, as of December 31, 2013, are as follows: 2014 - $2.3 million, 2015 - $2.3 million, 2016 - $2.3 million, 2017 - $2.3 million, 2018 - $2.3 million and thereafter, through 2021 - $7.0 million. Rent expense for the lease totaled $4.3 million in 2013, $4.5 million in 2012 and $3.6 million in 2011. These amounts are net of $0.2 million in 2013 and 2012 and $1.4 million in 2011 in amortization of a deferred gain on the exchange of our home office properties for common stock in 1998. The remaining unamortized deferred gain totaled $1.4 million at December 31, 2013 and $1.6 million at December 31, 2012.
From time to time, assessments are levied on our insurance subsidiaries by guaranty associations in most states in which the subsidiaries are licensed. These assessments, which are accrued for, are to cover losses of policyholders of insolvent or rehabilitated companies. In some states, these assessments can be partially recovered through a reduction in future premium taxes. Recoveries (expenses) for guaranty fund assessments, net of related premium tax offsets, totaled less than ($0.1) million in 2013, less than $0.1 million in 2012 and $0.1 million in 2011.
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11. Earnings per Share
| Computation of Earnings Per Common Share | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands, except per share data) | |||||||||||
| Numerator: | |||||||||||
| Net income attributable to FBL Financial Group, Inc. | $ | 108,558 | $ | 79,940 | $ | 40,739 | |||||
| Less: Net income (loss) from discontinued operations | — | (2,939 | ) | (11,464 | ) | ||||||
| Less: Dividends on Series B preferred stock | 150 | 150 | 150 | ||||||||
| Income available to common stockholders from continuing operations | $ | 108,408 | $ | 82,729 | $ | 52,053 | |||||
| Denominator: | |||||||||||
| Weighted-average shares - basic | 25,508,522 | 27,497,146 | 30,726,009 | ||||||||
| Effect of dilutive securities - stock-based compensation | 265,893 | 341,402 | 489,014 | ||||||||
| Weighted-average shares - diluted | 25,774,415 | 27,838,548 | 31,215,023 | ||||||||
| Earnings per common share: | |||||||||||
| Income from continuing operations | $ | 4.25 | $ | 3.01 | $ | 1.69 | |||||
| Income (loss) from discontinued operations | — | (0.11 | ) | (0.37 | ) | ||||||
| Total earnings per share | $ | 4.25 | $ | 2.90 | $ | 1.32 | |||||
| Earnings per common share - assuming dilution: | |||||||||||
| Income from continuing operations | $ | 4.21 | $ | 2.97 | $ | 1.67 | |||||
| Income (loss) from discontinued operations | — | (0.10 | ) | (0.37 | ) | ||||||
| Total earnings per share | $ | 4.21 | $ | 2.87 | $ | 1.30 | |||||
| Antidilutive stock options excluded from diluted earnings per share | — | 790,216 | 1,042,587 | ||||||||
12. Statutory Insurance Information
The statutory financial statements of Farm Bureau Life are prepared in accordance with the accounting practices prescribed or permitted by the Insurance Division. The Insurance Division has adopted the accounting guidance contained in the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual (the “Manual”) as the prescribed accounting practice for insurance companies domiciled in Iowa. The Insurance Division may permit accounting practices which differ from those prescribed by the Manual. None of our statutory accounting practices differed materially from those prescribed by the Manual. Several differences exist between GAAP and statutory accounting practices. Principally, under statutory accounting, deferred acquisition costs are not capitalized, fixed maturity securities are generally carried at amortized cost, insurance liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted.
Farm Bureau Life has a subsidiary, Greenfields, which launched in 2013 and regulated by the Colorado Division of Insurance. Greenfields' operations are immaterial and implicitly included in the financial results of Farm Bureau Life below.
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| Farm Bureau Life Statutory Information | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Net gain from operations (excludes impact of realized gains and losses on investments) | $ | 93,306 | $ | 92,988 | $ | 87,792 | |||||
| Net income | 94,583 | 86,589 | 72,653 | ||||||||
| December 31, | |||||||
| 2013 | 2012 | ||||||
| (Dollars in thousands) | |||||||
| Capital and surplus | $ | 492,450 | $ | 547,398 | |||
State laws specify regulatory actions if an insurer's risk-based capital (RBC) ratio, a measure of solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against a statutory "authorized control level" RBC at which point regulators have the option to assume control of the insurance company. The company action level RBC is 200% of the authorized control level and is the first point at which any action would be triggered. As of December 31, 2013, our total adjusted capital was $558.4 million, resulting in a RBC ratio of 499%, based on company action level capital of $111.8 million.
Farm Bureau Life's ability to pay dividends to the parent company is restricted by the Iowa Insurance Holding Company Act to earned surplus arising from its business. In addition, prior approval of the Iowa Insurance Commissioner is required for a dividend distribution of cash or other property whose fair value, together with that of other dividends made within the preceding 12 months, exceeds the greater of (i) 10% of policyholders' surplus as of the preceding year end, or (ii) the statutory net gain from operations of the insurer for the preceding calendar year. At December 31, 2013, Farm Bureau Life’s statutory unassigned surplus was $359.0 million. The 2013 net gain from operations, which exceeds 10% of statutory surplus, was $93.3 million. Farm Bureau Life obtained approval from the Insurance Division prior to paying a $120.0 million extraordinary dividend during the third quarter of 2013 and will be required to obtain approval for any dividends paid prior to the fourth quarter of 2014.
13. Segment Information
We analyze operations by reviewing financial information regarding our primary products that are aggregated into the Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company.
The Annuity segment primarily consists of fixed rate annuities and supplementary contracts (some of which involve life contingencies). Fixed rate annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest. Fixed rate annuities primarily consist of flexible premium deferred annuities, but also include single premium deferred and immediate contracts. With fixed rate annuities, we bear the underlying investment risk and credit interest to the contracts at rates we determine, subject to interest rate guarantees.
The Life Insurance segment consists of whole life, term life and universal life policies. These policies provide benefits upon the death of the insured and may also allow the customer to build cash value on a tax-deferred basis.
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The Corporate and Other segment consists of the following corporate items and products/services that do not meet the quantitative threshold for separate segment reporting:
| • | investments and related investment income not specifically allocated to our product segments, |
| • | interest expense, |
| • | closed blocks of variable annuity, variable universal life insurance and accident and health insurance products, |
| • | advisory services for the management of investments and other companies, |
| • | marketing and distribution services for the sale of mutual funds and insurance products not issued by us, and |
| • | leasing services with affiliates. |
We analyze our segment results based on pre-tax operating income. Accordingly, income taxes are not allocated to the segments. In addition, operating results are reported net of transactions between the segments. Operating income for the three years ended December 31, 2013 represents net income excluding, as applicable, the impact of:
| • | realized gains and losses on investments, |
| • | changes in net unrealized gains and losses on derivatives, |
| • | discontinued operations and |
| • | loss on debt redemption associated with disposed operations. |
We use operating income, in addition to net income, to measure our performance since realized gains and losses on investments and the change in net unrealized gains and losses on derivatives can fluctuate greatly from year to year. Also, the discontinued operations and related loss on debt redemption are nonrecurring items. A view of our operating performance without the impact of these items enhances the analysis of our results. We use operating income for goal setting, determining short-term incentive compensation and evaluating performance on a basis comparable to that used by many in the investment community.
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| Financial Information Concerning our Operating Segments | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Operating revenues: | |||||||||||
| Annuity | $ | 197,539 | $ | 192,001 | $ | 182,640 | |||||
| Life Insurance | 385,325 | 367,853 | 352,956 | ||||||||
| Corporate and Other | 96,775 | 93,443 | 90,580 | ||||||||
| 679,639 | 653,297 | 626,176 | |||||||||
| Realized gains (losses) on investments (1) | 13,597 | 465 | (8,286 | ) | |||||||
| Change in net unrealized gains/losses on derivatives (1) | (2,005 | ) | 1,778 | 447 | |||||||
| Consolidated revenues | $ | 691,231 | $ | 655,540 | $ | 618,337 | |||||
| Net investment income: | |||||||||||
| Annuity | $ | 196,303 | 191,211 | 181,974 | |||||||
| Life Insurance | 140,510 | 138,076 | 134,999 | ||||||||
| Corporate and Other | 35,843 | 30,259 | 25,890 | ||||||||
| 372,656 | 359,546 | 342,863 | |||||||||
| Change in net unrealized gains/losses on derivatives (1) | (2,005 | ) | 1,778 | 447 | |||||||
| Consolidated net investment income | $ | 370,651 | $ | 361,324 | $ | 343,310 | |||||
| Depreciation and amortization: | |||||||||||
| Annuity | $ | 7,186 | $ | 8,271 | $ | 8,469 | |||||
| Life Insurance | 19,430 | 25,727 | 14,981 | ||||||||
| Corporate and Other | 2,157 | 5,225 | 8,668 | ||||||||
| 28,773 | 39,223 | 32,118 | |||||||||
| Realized gains/losses on investments (1) | 973 | 1,200 | 919 | ||||||||
| Change in net unrealized gains/losses on derivatives (1) | (1,324 | ) | 709 | (987 | ) | ||||||
| Consolidated depreciation and amortization | $ | 28,422 | $ | 41,132 | $ | 32,050 | |||||
| Pre-tax operating income: | |||||||||||
| Annuity | $ | 63,592 | $ | 55,910 | $ | 58,263 | |||||
| Life Insurance | 48,814 | 43,741 | 50,502 | ||||||||
| Corporate and Other | 22,172 | 16,856 | 2,293 | ||||||||
| 134,578 | 116,507 | 111,058 | |||||||||
| Income taxes on operating income | (33,985 | ) | (33,748 | ) | (32,240 | ) | |||||
| Realized gains/losses on investments (1) | 8,206 | (477 | ) | (5,983 | ) | ||||||
| Change in net unrealized gains/losses on derivatives (1) | (241 | ) | 619 | 932 | |||||||
| Loss on debt redemption (1) | — | (22 | ) | (21,564 | ) | ||||||
| Loss from discontinued operations | — | (2,939 | ) | (11,464 | ) | ||||||
| Consolidated net income attributable to FBL Financial Group, Inc. | $ | 108,558 | $ | 79,940 | $ | 40,739 | |||||
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| Financial Information Concerning our Operating Segments - continued | |||||||
| December 31, | |||||||
| 2013 | 2012 | ||||||
| (Dollars in thousands) | |||||||
| Assets: | |||||||
| Annuity | $ | 3,778,018 | $ | 3,627,891 | |||
| Life Insurance | 2,789,145 | 2,609,255 | |||||
| Corporate and Other | 1,701,368 | 1,735,996 | |||||
| 8,268,531 | 7,973,142 | ||||||
| Unrealized gains in accumulated other comprehensive income (2) | 192,792 | 444,584 | |||||
| Consolidated assets | $ | 8,461,323 | $ | 8,417,726 | |||
| (1) | Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired and income taxes attributable to these items. |
| (2) | Amounts are net adjustments for assumed changes in deferred acquisition costs and value of insurance in force acquired and deferred income taxes attributable to these items. |
Depreciation and amortization related to property and equipment are allocated to the product segments while the related property, equipment and capitalized software are allocated to the Corporate and Other segment. Depreciation and amortization for the Corporate and Other segment include $2.2 million for 2013, $2.4 million for 2012 and $1.8 million for 2011 relating to leases with affiliates. In the consolidated statements of operations, we record these depreciation amounts net of related lease income from affiliates.
Our investment in equity method investees, the related equity income and interest expense are attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significant during the periods presented above. Goodwill at December 31, 2013 and 2012 was allocated among the segments as follows: Annuity ($3.9 million) and Life Insurance ($6.1 million).
Premiums collected, which is not a measure used in financial statements prepared according to GAAP, include premiums received on life insurance policies and deposits on annuities and universal life-type products. Net premiums collected totaled $635.6 million in 2013, $646.3 million in 2012 and $678.9 million in 2011.
Under GAAP, premiums on whole life and term life policies are recognized as revenues over the premium-paying period and reported in the Life Insurance segment. The following chart provides a reconciliation of life insurance premiums collected to those reported in the GAAP financial statements.
| Reconciliation of Traditional Life Insurance Premiums, Net of Reinsurance | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Traditional and universal life insurance premiums collected | $ | 307,474 | $ | 255,709 | $ | 229,468 | |||||
| Premiums collected on interest sensitive products | (127,271 | ) | (81,212 | ) | (60,702 | ) | |||||
| Traditional life insurance premiums collected | 180,203 | 174,497 | 168,766 | ||||||||
| Change in due premiums and other | 741 | 589 | (247 | ) | |||||||
| Traditional life insurance premiums | $ | 180,944 | $ | 175,086 | $ | 168,519 | |||||
There is no comparable GAAP financial measure for premiums collected on annuities and universal life-type products. GAAP revenues for those interest sensitive and variable products consist of various policy charges and fees assessed on those contracts, as summarized in the chart below.
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| Interest Sensitive Product Charges by Segment | |||||||||||
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | |||||||||||
| Annuity | |||||||||||
| Surrender charges and other | $ | 1,236 | $ | 775 | $ | 664 | |||||
| Life Insurance | |||||||||||
| Administration charges | $ | 19,602 | $ | 11,726 | $ | 9,922 | |||||
| Cost of insurance charges | 42,697 | 39,886 | 37,334 | ||||||||
| Surrender charges | 484 | 943 | 578 | ||||||||
| Amortization of policy initiation fees | 1,462 | 2,354 | 1,313 | ||||||||
| Total | $ | 64,245 | $ | 54,909 | $ | 49,147 | |||||
| Corporate and Other | |||||||||||
| Administration charges | $ | 6,138 | $ | 5,975 | $ | 6,317 | |||||
| Cost of insurance charges | 29,567 | 29,638 | 29,794 | ||||||||
| Surrender charges | 525 | 780 | 1,151 | ||||||||
| Separate account charges | 8,742 | 8,372 | 8,748 | ||||||||
| Amortization of policy initiation fees | 1,122 | 961 | 1,282 | ||||||||
| Total | $ | 46,094 | $ | 45,726 | $ | 47,292 | |||||
| Consolidated interest sensitive product charges | $ | 111,575 | $ | 101,410 | $ | 97,103 | |||||
| Premium Concentration by State | ||||||||
| Year ended December 31, | ||||||||
| 2013 | 2012 | 2011 | ||||||
| Life and annuity collected premiums: | ||||||||
| Iowa | 27.6 | % | 28.7 | % | 26.5 | % | ||
| Kansas | 20.0 | 21.9 | 20.9 | |||||
| Oklahoma | 7.7 | 7.3 | 9.2 | |||||
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14. Quarterly Financial Information (Unaudited)
Unaudited Quarterly Results of Operations
| 2013 | |||||||||||||||
| Quarter ended | March 31, | June 30, | September 30, | December 31, | |||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||
| Premiums and product charges | $ | 70,238 | $ | 72,853 | $ | 76,153 | $ | 73,275 | |||||||
| Net investment income | 90,810 | 92,898 | 93,382 | 93,561 | |||||||||||
| Realized gains (losses) on investments | 3,286 | 7,236 | 693 | 2,340 | |||||||||||
| Total revenues | 168,048 | 176,683 | 173,516 | 172,984 | |||||||||||
| Net income from continuing operations | 24,938 | 29,553 | 26,985 | 26,917 | |||||||||||
| Net income (loss) attributable to FBL Financial Group, Inc. | 24,966 | 29,587 | 27,053 | 26,952 | |||||||||||
| Earnings per common share | $ | 0.97 | $ | 1.14 | $ | 1.05 | $ | 1.08 | |||||||
| Earnings per common share - assuming dilution | $ | 0.96 | $ | 1.13 | $ | 1.04 | $ | 1.07 | |||||||
| 2012 | |||||||||||||||
| Quarter ended | March 31, | June 30, | September 30, | December 31, | |||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||
| Premiums and product charges | $ | 68,355 | $ | 70,098 | $ | 67,524 | $ | 70,519 | |||||||
| Net investment income | 86,888 | 89,423 | 93,482 | 91,531 | |||||||||||
| Realized gains (losses) on investments | (643 | ) | 732 | 1,462 | (1,099 | ) | |||||||||
| Total revenues | 159,605 | 165,982 | 165,359 | 164,594 | |||||||||||
| Net income from continuing operations | 19,499 | 20,277 | 20,487 | 22,533 | |||||||||||
| Income (loss) from discontinued operations | (2,932 | ) | (84 | ) | 55 | 22 | |||||||||
| Net income (loss) attributable to FBL Financial Group, Inc. | 16,587 | 20,291 | 20,476 | 22,586 | |||||||||||
| Earnings (loss) per common share: | |||||||||||||||
| Income (loss) from continuing operations | $ | 0.64 | $ | 0.74 | $ | 0.77 | 0.87 | ||||||||
| Income (loss) from discontinued operations | (0.10 | ) | — | — | — | ||||||||||
| Earnings (loss) per common share | $ | 0.54 | $ | 0.74 | $ | 0.77 | $ | 0.87 | |||||||
| Earnings (loss) per common share - assuming dilution: | |||||||||||||||
| Income (loss) from continuing operations | $ | 0.63 | $ | 0.73 | $ | 0.76 | $ | 0.86 | |||||||
| Income (loss) from discontinued operations | (0.10 | ) | — | — | — | ||||||||||
| Earnings (loss) per common share - assuming dilution | $ | 0.53 | $ | 0.73 | $ | 0.76 | $ | 0.86 | |||||||
114
15. Sale of EquiTrust Life Business
On December 30, 2011, we sold our wholly-owned subsidiary EquiTrust Life in an all cash transaction for $462.1 million. The sales price reflected adjustments to the initial closing price subsequent to the closing date based on a final statutory net worth reconciliation. The transaction resulted in an after-tax loss on the sale of $56.4 million, or $1.84 per basic and $1.81 per diluted common share. The loss consists of the sales price less the net book value of the assets and one-time transaction costs and termination benefits totaling $12.5 million, before tax.
The sale allowed us to exit the annuity business sold through the independent distribution channel, which represented a majority of EquiTrust Life's operations, focus on our core Farm Bureau Life operations and undertake certain capital management initiatives. While EquiTrust Life was sold in its entirety, Farm Bureau Life assumed a limited portion of the EquiTrust Life business related to variable universal life and variable annuity products distributed through various unaffiliated third parties, as well as a small amount of fixed life and annuity products. The business component sold is described herein as “the EquiTrust Life Business.”
EquiTrust Life retains all of its contingent liabilities after the sale. The Agreement contains customary representations, warranties and covenants of the parties, as well as post-closing indemnification obligations. The post-closing indemnification obligations may be triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. Certain of these obligations are subject to various time limitations and monetary thresholds and caps.
A summary of income (losses) from discontinued operations is as follows:
| Condensed Statements of Income (Loss) from Discontinued Operations | |||||||
| Year ended December 31, | |||||||
| 2012 | 2011 | ||||||
| (Dollars in thousands) | |||||||
| Revenues | $ | — | $ | 436,391 | |||
| Benefits and expenses | (214 | ) | (358,753 | ) | |||
| Interest expense allocation | (855 | ) | (13,818 | ) | |||
| Equity income | — | 1,862 | |||||
| Income taxes | 382 | (23,003 | ) | ||||
| Income (loss) from discontinued operations | $ | (687 | ) | $ | 42,679 | ||
Expenses are reduced for estimated corporate overhead absorbed by the Company after the sale. In addition, as described below, the sale of EquiTrust Life required us to redeem a majority of our senior notes; therefore the related interest expense is allocated to the EquiTrust Life Business.
Notes Redemptions
In connection with the EquiTrust Life Sale, we redeemed $225.0 million of our long-term debt in accordance with the mandatory redemption provisions of the underlying notes. This includes $50.0 million Senior Notes with our affiliate, Farm Bureau Property & Casualty, which was extinguished on December 30, 2011. The remaining $175.0 million of unaffiliated debt was extinguished on January 30, 2012, at the make-whole redemption price of $210.9 million. On December 30, 2011, we exercised the provisions of the trust indentures and deposited $211.6 million into two irrevocable defeasance trusts for the principal, accrued interest and estimated make-whole premium. The trust funds were not withdrawable by us, and consisted of $126.4 million in cash and $85.2 million in short-term investments at December 31, 2011. The note holders were paid from assets in the trusts on January 30, 2012.
The make-whole redemption premium was based on U.S. Treasury yields and considered an embedded derivative with a fair value of $33.1 million at December 31, 2011. The change in fair value during 2012 was offset by the write off of deferred debt issuance costs and reported with the loss on debt redemption in the consolidated statements of operations. See Note 6 for additional details on our debt.
115
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Our internal control over financial reporting changes from time-to-time as we modify and enhance our systems and processes to meet our dynamic needs. Changes are also made as we strive to be more efficient in how we conduct our business. Any significant changes in controls are evaluated prior to implementation to help ensure the continued effectiveness of our internal controls and internal control environment. While changes have taken place in our internal controls during the quarter ended December 31, 2013, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See Item 8 for Management's Report on Internal Control Over Financial Reporting. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of this examination.
ITEM 9B. OTHER INFORMATION
There is no information required to be disclosed on Form 8-K for the quarter ended December 31, 2013 which has not been previously reported.
PART III
The information required by Part III, Items 10 through 14, is hereby incorporated by reference from our definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2013.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | 1. | Financial Statements. See Table of Contents following the cover page for a list of financial statements included in this Report. | |
| 2. | Financial Statement Schedules. The following financial statement schedules are included as part of this Report immediately following the signature page: | ||
| Schedule I - Summary of Investments | |||
| Schedule II - Condensed Financial Information of Registrant (Parent Company) | |||
| Schedule III - Supplementary Insurance Information | |||
| Schedule IV - Reinsurance | |||
All other schedules are omitted because they are not applicable, not required or the information they contain is included elsewhere in the consolidated financial statements or notes.
116
| 3. | Exhibits. | ||
| Incorporated by reference | ||||
| Exhibit # | Description | Form | SEC File No. | Report Date |
| 3.1 | Restated Articles of Incorporation, filed with the Iowa Secretary of State on August 29, 2012 | 10-Q | 001-11917 | September 30, 2012 |
| 3.2+ | Third Restated and Amended Bylaws, as amended through February 14, 2013 | |||
| 4.1 | Form of Class A Common Stock Certificate of the Registrant | S-1 | 333-04332 | July 11, 1996 |
| 4.2+ | Restated Stockholders' Agreement Regarding Management and Transfer of Shares of Class B Common Stock of FBL Financial Group, Inc., effective February 14, 2013 | |||
| 4.2(a)+ | Amendment to Restated Stockholders' Agreement Regarding Management and Transfer of Shares of Class B Common Stock of FBL Financial Group, Inc., effective February 14, 2013 | |||
| 4.3 | Certificate of Trust; Declaration of Trust of FBL Financial Group Capital Trust dated May 30, 1997, including in Annex I thereto the form of Trust Preferred Security and the form of Trust Common Security; Subordinated Deferrable Interest Note Agreement dated May 30, 1997 between FBL Financial Group, Inc. and FBL Financial Group Capital Trust, including therein the form of Subordinated Deferrable Interest Note; Preferred Securities Guarantee Agreement of FBL Financial Group, Inc., dated May 30 1997 | 8-K | 001-11917 | June 6, 1997 |
| 10.1 | Trademark License from the American Farm Bureau Federation to Farm Bureau Life Insurance Company, dated May 20, 1987 | S-1 | 333-04332 | July 11, 1996 |
| 10.2 | Membership Agreement between American Farm Bureau Federation and the Iowa Farm Bureau Federation, dated February 13, 1987 | S-1 | 333-04332 | July 11, 1996 |
| 10.3 | Form of Royalty Agreement with Farm Bureau organizations adopted 2009 | 10-K | 001-11917 | December 31, 2009 |
| 10.4 | Form of Services Agreement between FBL Financial Group, Inc. and Farm Bureau Management Corporation, dated January 1, 1996 | S-1 | 333-04332 | July 11, 1996 |
| 10.5 | Management Services Agreement effective as of January 1, 2012 between Farm Bureau Mutual Holding Company, Farm Bureau Multi-State Services, Inc., Farm Bureau Property & Casualty Insurance Company and Western Agricultural Insurance Company, and FBL Financial Group, Inc. | 10-K | 001-11917 | December 31, 2012 |
| 10.6 | Lease Agreement dated as of March 31, 1998 between IFBF Property Management, Inc., FBL Financial Group, Inc. and Farm Bureau Property & Casualty Insurance Company | 10-Q | 001-11917 | March 31, 1998 |
| 10.6(a) | Amendment effective January 1, 2012 to Lease Agreement | 10-K | 001-11917 | December 31, 2011 |
| 10.7 | Building Management Services Agreement, dated March 31, 1998, between IFBF Property Management, Inc. and FBL Financial Group, Inc. | 10-Q | 001-11917 | March 31, 1998 |
| 10.8* | 2006 Class A Common Stock Compensation Plan as amended through February 17, 2011 | 10-Q | 001-11917 | March 31, 2011 |
| 10.8(a)* | Form of Stock Option Agreement, pursuant to the FBL Financial Group, Inc. 2006 Class A Common Stock Compensation Plan | 10-Q | 001-11917 | March 31, 2011 |
| 10.9* | Executive Salary and Bonus Deferred Compensation Plan as amended through August 21, 2013 | 10-Q | 001-11917 | September 30, 2013 |
| 10.10* | 2008 Revised Rules for Payment of Meeting Fees, Retainers and Expenses to the Board of Directors | 10-K | 001-11917 | December 31, 2007 |
117
| Incorporated by reference | ||||
| Exhibit # | Description | Form | SEC File No. | Report Date |
| 10.11* | Management Performance Plan (2012) | 10-Q | 001-11917 | March 31, 2012 |
| 10.12* | Management Performance Plan (2013) | 10-Q | 001-11917 | June 30, 2013 |
| 10.13* | Form of Restricted Stock Agreement, dated as of February 16, 2010, between the Company and each of James P. Brannen, Charles T. Happel, Kevin R. Slawin and Bruce A. Trost | 10-Q | 001-11917 | March 31, 2010 |
| 10.14* | Director Compensation Plan as amended through December 15, 2011 | 10-K | 001-11917 | December 31, 2011 |
| 10.15* | Cash-Based Restricted Stock Unit Plan as amended through August 21, 2013 | 10-Q | 001-11917 | September 30, 2013 |
| 10.16* | Form of Cash Settled Restricted Stock Unit Grant Agreements | 10-K | 001-11917 | December 31, 2012 |
| 10.21* | Retention Agreement dated August 23, 2012 between James P. Brannen, CEO, and the Company | 10-Q | 001-11917 | September 30, 2012 |
| 21+ | Subsidiaries of FBL Financial Group, Inc. | |||
| 23+ | Consent of Independent Registered Public Accounting Firm | |||
| 31.1+ | Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 31.2+ | Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
| 32+ | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| 101+# | Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language) from FBL Financial Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 as follows: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows. | |||
| * | exhibit relates to a compensatory plan for management or directors | |||
| + | filed herewith | |||
| # | In accordance with Rule 402 of Regulation S-T, the XBRL related information in this report shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing. | |||
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 20th day of February, 2014.
FBL Financial Group, Inc.
By: /s/ JAMES P. BRANNEN
James P. Brannen
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated;
| Signature | Title | Date | ||
| /s/ JAMES P. BRANNEN James P. Brannen | Chief Executive Officer (Principal Executive Officer) and Director | February 20, 2014 | ||
/s/ DONALD J. SEIBEL Donald J. Seibel | Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | February 20, 2014 | ||
/s/ CRAIG D. HILL Craig D. Hill | Chairman of the Board and Director | February 20, 2014 | ||
/s/ JERRY L. CHICOINE Jerry L. Chicoine | Vice Chair and Director | February 20, 2014 | ||
/s/ STEVE L. BACCUS Steve L. Baccus | Director | February 20, 2014 | ||
/s/ ROGER K. BROOKS Roger K. Brooks | Director | February 20, 2014 | ||
/s/ JOE D. HEINRICH Joe D. Heinrich | Director | February 20, 2014 | ||
/s/ PAUL E. LARSON Paul E. Larson | Director | February 20, 2014 | ||
/s/ FRANK S. PRIESTLEY Frank S. Priestley | Director | February 20, 2014 | ||
/s/ KEVIN G. ROGERS Kevin G. Rogers | Director | February 20, 2014 | ||
/s/ SCOTT E. VANDERWAL Scott E. VanderWal | Director | February 20, 2014 | ||
119
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited the consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2013, and have issued our report thereon dated February 20, 2014 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedules listed in Item 15(a)2 of this Form 10-K. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 20, 2014
120
Schedule I - Summary of Investments - Other
Than Investments in Related Parties
FBL FINANCIAL GROUP, INC.
December 31, 2013
| Column A | Column B | Column C | Column D | |||||||||
| Type of Investment | Cost (1) | Value | Amount at which shown in the balance sheet | |||||||||
| (Dollars in thousands) | ||||||||||||
| Fixed maturities, available for sale: | ||||||||||||
| Bonds: | ||||||||||||
| Corporate | $ | 3,142,476 | $ | 3,306,779 | $ | 3,306,779 | ||||||
| Mortgage and asset-backed | 1,328,882 | 1,381,938 | 1,381,938 | |||||||||
| United States Government and agencies | 39,261 | 43,281 | 43,281 | |||||||||
| State, municipal and other governments | 1,317,920 | 1,349,755 | 1,349,755 | |||||||||
| Total | 5,828,539 | $ | 6,081,753 | 6,081,753 | ||||||||
| Equity securities, available for sale: | ||||||||||||
| Common stocks: | ||||||||||||
| Banks, trusts and insurance companies | 21,810 | $ | 21,810 | 21,810 | ||||||||
| Industrial, miscellaneous and all other | 2,569 | 3,295 | 3,295 | |||||||||
| Non-redeemable preferred stocks | 65,692 | 66,450 | 66,450 | |||||||||
| Total | 90,071 | $ | 91,555 | 91,555 | ||||||||
| Mortgage loans | 576,880 | 575,861 | ||||||||||
| Investment real estate (2) | 4,101 | 4,084 | ||||||||||
| Policy loans | 176,993 | 176,993 | ||||||||||
| Short-term investments | 108,677 | 108,677 | ||||||||||
| Other investments | 662 | 1,079 | ||||||||||
| Total investments | $ | 6,785,923 | $ | 7,040,002 | ||||||||
| (1) | On the basis of cost adjusted for repayments and amortization of premiums and accrual of discounts for fixed maturities and short-term investments; original cost for equity securities, real estate and other investments; and unpaid principal balance for mortgage loans and policy loans. |
| (2) | Amount shown on balance sheet differs from cost due to depreciation and allowance for possible losses deducted from cost. |
121
Schedule II - Condensed Financial Information of Registrant
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)
| December 31, | |||||||
| 2013 | 2012 | ||||||
| Assets | |||||||
| Investments in subsidiaries (eliminated in consolidation) | $ | 1,021,684 | $ | 1,219,355 | |||
| Fixed maturities - available for sale, at fair value (amortized cost: 2013 - $69,240; 2012 - $51,606) | 71,507 | 52,480 | |||||
| Short-term investments | 31,078 | 24,502 | |||||
| Cash and cash equivalents | — | 47,994 | |||||
| Amounts receivable from affiliates | 3,145 | 3,931 | |||||
| Amounts receivable from subsidiaries (eliminated in consolidation) | 597 | 576 | |||||
| Accrued investment income | 276 | 447 | |||||
| Current income taxes recoverable | — | 173 | |||||
| Deferred income tax assets | 21,879 | 24,822 | |||||
| Other assets | 9,489 | 7,309 | |||||
| Total assets | $ | 1,159,655 | $ | 1,381,589 | |||
| Liabilities and stockholders' equity | |||||||
| Liabilities: | |||||||
| Accrued expenses and other liabilities | $ | 17,028 | $ | 20,740 | |||
| Amounts payable to affiliates | 408 | 1,658 | |||||
| Current income taxes | 478 | — | |||||
| Long-term debt payable to affiliates | — | 50,000 | |||||
| Long-term debt payable to non-affiliates | 97,000 | 97,000 | |||||
| Total liabilities | 114,914 | 169,398 | |||||
| Stockholders' equity: | |||||||
| Preferred stock | 3,000 | 3,000 | |||||
| Class A common stock | 134,993 | 115,706 | |||||
| Class B common stock | 72 | 7,522 | |||||
| Accumulated other comprehensive income | 119,067 | 289,853 | |||||
| Retained earnings | 787,609 | 796,110 | |||||
| Total stockholders' equity | 1,044,741 | 1,212,191 | |||||
| Total liabilities and stockholders' equity | $ | 1,159,655 | $ | 1,381,589 | |||
See accompanying notes to condensed financial statements.
122
Schedule II -Condensed Financial Information of Registrant (Continued)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
Condensed Statements of Operations
(Dollars in thousands)
| Year Ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| Revenues: | |||||||||||
| Net investment income | $ | 2,120 | $ | 557 | $ | 396 | |||||
| Realized gains (losses) on investments | 33 | (25 | ) | — | |||||||
| Dividends from subsidiaries (eliminated in consolidation) | 140,000 | 45,000 | 29,139 | ||||||||
| Management fee income from affiliates | 1,760 | 1,907 | 3,701 | ||||||||
| Management fee income from subsidiaries (eliminated in consolidation) (1) | 2,072 | 2,255 | 2,278 | ||||||||
| Other income | 22 | 3,804 | 1,791 | ||||||||
| Total revenues | 146,007 | 53,498 | 37,305 | ||||||||
| Expenses: | |||||||||||
| Interest expense (1) | 6,967 | 7,935 | 8,532 | ||||||||
| Loss on debt redemption | — | 33 | 33,176 | ||||||||
| General and administrative expenses | 9,582 | 12,902 | 9,185 | ||||||||
| Total expenses | 16,549 | 20,870 | 50,893 | ||||||||
| 129,458 | 32,628 | (13,588 | ) | ||||||||
| Income tax benefit | 5,316 | 4,010 | 16,945 | ||||||||
| Income before equity in undistributed income of subsidiaries | 134,774 | 36,638 | 3,357 | ||||||||
| Equity in undistributed income (dividends in excess of equity income) of subsidiaries (eliminated in consolidation) | (26,216 | ) | 46,241 | 64,415 | |||||||
| Net income from continuing operations | 108,558 | 82,879 | 67,772 | ||||||||
| Discontinued operations: | |||||||||||
| Loss on sale of subsidiary, net of tax benefit | — | (2,252 | ) | (54,143 | ) | ||||||
| Income (loss) from discontinued operations, net of tax | — | (687 | ) | 27,110 | |||||||
| Total income (loss) from discontinued operations | — | (2,939 | ) | (27,033 | ) | ||||||
| Net income | $ | 108,558 | $ | 79,940 | $ | 40,739 | |||||
(1) Excludes items classified as discontinued operations on a consolidated basis.
See accompanying notes to condensed financial statements.
123
Schedule II - Condensed Financial Information of Registrant (Continued)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
Condensed Statements of Cash Flows
(Dollars in thousands)
| Year ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| Net cash used in operating activities | $ | (5,750 | ) | $ | (3,984 | ) | $ | (14,446 | ) | ||
| Investing activities | |||||||||||
| Sales of fixed maturities - available for sale | 45,808 | 793 | — | ||||||||
| Acquisitions of fixed maturities - available for sale | (15,192 | ) | (4,866 | ) | (2,094 | ) | |||||
| Short-term investments, net change | (6,577 | ) | 11,045 | (13,283 | ) | ||||||
| Dividends from subsidiaries (eliminated in consolidation) | 92,135 | 5,089 | 29,139 | ||||||||
| Proceeds received from sale of subsidiary | — | (9,315 | ) | 471,431 | |||||||
| Net cash provided by investing activities | 116,174 | 2,746 | 485,193 | ||||||||
| Financing activities | |||||||||||
| Transfer from (to) restricted debt defeasance trusts | — | 211,627 | (211,627 | ) | |||||||
| Repayments of debt | (50,000 | ) | (174,258 | ) | (50,000 | ) | |||||
| Excess tax deductions on stock-based compensation | 1,964 | 2,393 | 656 | ||||||||
| Issuance (repurchase) of common stock, net | (43,707 | ) | (173,253 | ) | (5,869 | ) | |||||
| Capital contribution to subsidiary | (1,900 | ) | (2,000 | ) | — | ||||||
| Dividends paid | (64,775 | ) | (11,082 | ) | (8,917 | ) | |||||
| Net cash used in financing activities | (158,418 | ) | (146,573 | ) | (275,757 | ) | |||||
| Increase (decrease) in cash and cash equivalents | (47,994 | ) | (147,811 | ) | 194,990 | ||||||
| Cash and cash equivalents at beginning of year | 47,994 | 195,805 | 815 | ||||||||
| Cash and cash equivalents at end of year | $ | — | $ | 47,994 | $ | 195,805 | |||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash received (paid) during the year for: | |||||||||||
| Income taxes | $ | 9,182 | $ | 54,237 | $ | 3,856 | |||||
| Interest | (7,104 | ) | (11,383 | ) | (22,298 | ) | |||||
| Non-cash operating activity: | |||||||||||
| Net assets of subsidiary sold | — | — | (543,990 | ) | |||||||
| Non-cash investing activity: | |||||||||||
| Dividend from subsidiary in the form of securities | 47,865 | 39,911 | — | ||||||||
See accompanying notes to condensed financial statements.
124
Schedule II - Condensed Financial Information of Registrant (Continued)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
Notes to Condensed Financial Statements
December 31, 2013
1. Basis of Presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of FBL Financial Group, Inc.
In the parent company only financial statements, our investments in subsidiaries are stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. In addition, the carrying value includes net unrealized gains/losses on the subsidiaries' investments classified as "available for sale."
2. Sale of EquiTrust Life Business
As further discussed in Note 15 to the consolidated financial statements included in Item 8, we sold our subsidiary, EquiTrust Life Insurance Company on December 30, 2011.
3. Dividends from Subsidiaries
The parent company received dividends totaling $140.0 million in 2013 and $45.0 million in 2012 in the form of cash ($92.1 million in 2013 and $5.1 million in 2012) and securities ($47.9 million in 2013 and $39.9 million in 2012). The parent company received cash dividends of $29.1 million in 2011, which includes $4.5 million from discontinued operations.
4. Debt
See Note 6 to the consolidated financial statements included in Item 8 for a description of the parent company's debt, including items paid off. The company's debt matures in 2047.
125
Schedule III - Supplementary Insurance Information
FBL FINANCIAL GROUP, INC.
| Column A | Column B | Column C | Column D | Column E | |||||||||||
| Deferred acquisition costs | Future policy benefits, losses, claims and loss expenses | Unearned revenues | Other policyholder funds | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| December 31, 2013: | |||||||||||||||
| Annuity | $ | 82,404 | $ | 3,172,598 | $ | — | $ | 376,879 | |||||||
| Life Insurance | 216,743 | 2,254,194 | 8,884 | 191,478 | |||||||||||
| Corporate and Other | 91,917 | 389,746 | 13,951 | 21,845 | |||||||||||
| Impact of unrealized gains/losses | (55,550 | ) | 2,957 | (2,790 | ) | — | |||||||||
| Total | $ | 335,514 | $ | 5,819,495 | $ | 20,045 | $ | 590,202 | |||||||
| December 31, 2012: | |||||||||||||||
| Annuity | $ | 82,396 | $ | 3,047,762 | $ | — | $ | 384,375 | |||||||
| Life Insurance | 199,266 | 2,104,973 | 13,585 | 182,597 | |||||||||||
| Corporate and Other | 94,984 | 379,708 | 14,519 | 20,786 | |||||||||||
| Impact of unrealized gains/losses | (172,320 | ) | — | (13,554 | ) | — | |||||||||
| Total | $ | 204,326 | $ | 5,532,443 | $ | 14,550 | $ | 587,758 | |||||||
| December 31, 2011: | |||||||||||||||
| Annuity | $ | 78,102 | $ | 2,811,631 | $ | — | $ | 379,354 | |||||||
| Life Insurance | 187,113 | 2,010,818 | 12,218 | 174,561 | |||||||||||
| Corporate and Other | 99,916 | 346,025 | 14,960 | 17,321 | |||||||||||
| Impact of unrealized gains/losses | (104,875 | ) | — | (8,312 | ) | — | |||||||||
| Total | $ | 260,256 | $ | 5,168,474 | $ | 18,866 | $ | 571,236 | |||||||
126
Schedule III - Supplementary Insurance Information (Continued)
FBL FINANCIAL GROUP, INC.
| Column A | Column F | Column G | Column H | Column I | Column J | ||||||||||||||
| Premium revenue | Net investment income | Benefits, claims, losses and settlement expenses | Amortization of deferred acquisition costs | Other operating expenses | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| December 31, 2013: | |||||||||||||||||||
| Annuity | $ | 1,236 | $ | 196,303 | $ | 102,308 | $ | 9,422 | $ | 22,217 | |||||||||
| Life Insurance | 245,148 | 140,510 | 231,861 | 15,760 | 75,571 | ||||||||||||||
| Corporate and Other | 46,093 | 35,843 | 30,183 | 5,170 | 10,499 | ||||||||||||||
| Change in net unrealized gains/losses on derivatives | — | (2,005 | ) | (310 | ) | (1,324 | ) | — | |||||||||||
| Impact of realized gains/losses | 42 | — | 28 | 880 | 65 | ||||||||||||||
| Total | $ | 292,519 | $ | 370,651 | $ | 364,070 | $ | 29,908 | $ | 108,352 | |||||||||
| December 31, 2012: | |||||||||||||||||||
| Annuity | $ | 775 | $ | 191,211 | $ | 102,961 | $ | 9,327 | $ | 23,803 | |||||||||
| Life Insurance | 229,986 | 138,076 | 218,856 | 21,216 | 69,765 | ||||||||||||||
| Corporate and Other | 45,722 | 30,259 | 30,721 | 5,326 | 10,582 | ||||||||||||||
| Change in net unrealized gains/losses on derivatives | — | 1,778 | 117 | 709 | — | ||||||||||||||
| Impact of realized gains/losses | 13 | — | 22 | 1,073 | 105 | ||||||||||||||
| Total | $ | 276,496 | $ | 361,324 | $ | 352,677 | $ | 37,651 | $ | 104,255 | |||||||||
| December 31, 2011: | |||||||||||||||||||
| Annuity | $ | 664 | $ | 181,974 | $ | 100,487 | $ | 8,916 | $ | 14,974 | |||||||||
| Life Insurance | 217,665 | 134,999 | 211,330 | 18,042 | 56,052 | ||||||||||||||
| Corporate and Other | 47,283 | 25,890 | 29,229 | 7,967 | 22,294 | ||||||||||||||
| Change in net unrealized gains/losses on derivatives | — | 447 | 2 | (987 | ) | — | |||||||||||||
| Impact of realized gains/losses | 10 | — | (7 | ) | 881 | 45 | |||||||||||||
| Total | $ | 265,622 | $ | 343,310 | $ | 341,041 | $ | 34,819 | $ | 93,365 | |||||||||
127
Schedule IV - Reinsurance
FBL FINANCIAL GROUP, INC.
| Column A | Column B | Column C | Column D | Column E | Column F | |||||||||||||
| Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percent of amount assumed to net | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Year ended December 31, 2013: | ||||||||||||||||||
| Life insurance in force, at end of year | $ | 54,603,479 | $ | 13,220,004 | $ | 613,281 | $ | 41,996,756 | 1.5 | % | ||||||||
| Insurance premiums and other considerations: | ||||||||||||||||||
| Interest sensitive product charges | $ | 112,229 | $ | 1,026 | $ | 372 | $ | 111,575 | 0.3 | % | ||||||||
| Traditional life insurance premiums | 200,729 | 20,199 | 414 | 180,944 | 0.2 | |||||||||||||
| Accident and health premiums | 8,540 | 8,135 | — | 405 | — | |||||||||||||
| $ | 321,498 | $ | 29,360 | $ | 786 | $ | 292,924 | 0.3 | ||||||||||
| Year ended December 31, 2012: | ||||||||||||||||||
| Life insurance in force, at end of year | $ | 51,955,217 | $ | 11,999,297 | $ | 612,850 | $ | 40,568,770 | 1.5 | % | ||||||||
| Insurance premiums and other considerations: | ||||||||||||||||||
| Interest sensitive product charges | $ | 102,027 | $ | 1,010 | $ | 393 | $ | 101,410 | 0.4 | % | ||||||||
| Traditional life insurance premiums | 194,090 | 19,249 | 245 | 175,086 | 0.1 | |||||||||||||
| Accident and health premiums | 9,012 | 8,604 | — | 408 | — | |||||||||||||
| $ | 305,129 | $ | 28,863 | $ | 638 | $ | 276,904 | 0.2 | ||||||||||
| Year ended December 31, 2011: | ||||||||||||||||||
| Life insurance in force, at end of year | $ | 49,778,838 | $ | 11,031,493 | $ | 588,791 | $ | 39,336,136 | 1.5 | % | ||||||||
| Insurance premiums and other considerations: | ||||||||||||||||||
| Interest sensitive product charges | $ | 97,725 | $ | 1,061 | $ | 439 | $ | 97,103 | 0.5 | % | ||||||||
| Traditional life insurance premiums | 189,159 | 20,640 | — | 168,519 | — | |||||||||||||
| Accident and health premiums | 9,468 | 9,065 | — | 403 | — | |||||||||||||
| $ | 296,352 | $ | 30,766 | $ | 439 | $ | 266,025 | 0.2 | ||||||||||
128