FBL 10Q 2014 Q2

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

(Mark one)
 
 
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended June 30, 2014
 
 
 
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 or other jurisdiction of incorporation or organization)
 
(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)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
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. [X] Yes [ ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
 
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 [X] No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 Title of each class
 
Outstanding at July 30, 2014
Class A Common Stock, without par value
 
24,707,998
Class B Common Stock, without par value
 
11,413


















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FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014
TABLE OF CONTENTS


PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
 
Consolidated Statements of Operations
 
Consolidated Statements of Comprehensive Income
 
Consolidated Statements of Changes in Stockholders' Equity
 
Consolidated Statements of Cash Flows
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES
 
    



1


ITEM 1. FINANCIAL STATEMENTS

FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)

 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2014 - $6,029,051; 2013 - $5,828,539)
$
6,559,738

 
$
6,081,753

Equity securities - available for sale, at fair value (cost: 2014 - $105,368; 2013 - $90,071)
111,402

 
91,555

Mortgage loans
597,416

 
575,861

Real estate
4,066

 
4,084

Policy loans
181,048

 
176,993

Short-term investments
48,987

 
108,677

Other investments
2,444

 
1,079

Total investments
7,505,101

 
7,040,002

 
 
 
 
Cash and cash equivalents
31,672

 
6,370

Securities and indebtedness of related parties
122,899

 
116,305

Accrued investment income
75,987

 
75,186

Amounts receivable from affiliates
3,004

 
3,145

Reinsurance recoverable
99,484

 
100,001

Deferred acquisition costs
255,182

 
335,514

Value of insurance in force acquired
15,973

 
23,579

Other assets
74,131

 
67,266

Assets held in separate accounts
712,533

 
693,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
8,895,966

 
$
8,461,323


 


2




FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)

 
June 30,
2014
 
December 31,
2013
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
4,415,108

 
$
4,278,871

Traditional life insurance and accident and health products
1,545,388

 
1,515,139

Other policy claims and benefits
36,122

 
45,530

Supplementary contracts without life contingencies
344,310

 
349,761

Advance premiums and other deposits
251,680

 
240,441

Amounts payable to affiliates
1,106

 
408

Long-term debt payable to non-affiliates
97,000

 
97,000

Current income taxes
3,530

 
1,499

Deferred income taxes
192,751

 
122,839

Other liabilities
99,310

 
71,089

Liabilities related to separate accounts
712,533

 
693,955

Total liabilities
7,698,838

 
7,416,532

 
 
 
 
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 24,702,093 shares in 2014 and 24,742,942 shares in 2013
142,127

 
134,993

Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 11,413 shares in 2014 and 2013
72

 
72

Accumulated other comprehensive income
242,334

 
119,067

Retained earnings
809,528

 
787,609

Total FBL Financial Group, Inc. stockholders' equity
1,197,061

 
1,044,741

Noncontrolling interest
67

 
50

Total stockholders' equity
1,197,128

 
1,044,791

Total liabilities and stockholders' equity
$
8,895,966

 
$
8,461,323
















See accompanying notes.


3


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)

 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Interest sensitive product charges
$
27,361

 
$
26,795

 
$
54,452

 
$
52,099

Traditional life insurance premiums
47,444

 
46,058

 
92,936

 
90,992

Net investment income
95,215

 
92,898

 
187,846

 
183,708

Net realized capital gains on sales of investments
2,806

 
7,435

 
2,266

 
11,367

 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses

 
(199
)
 

 
(845
)
Non-credit portion in other comprehensive income

 

 

 

Net impairment losses recognized in earnings

 
(199
)
 

 
(845
)
Other income
3,011

 
3,696

 
6,872

 
7,410

Total revenues
175,837

 
176,683

 
344,372

 
344,731

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Interest sensitive product benefits
51,763

 
48,631

 
105,143

 
96,923

Traditional life insurance benefits
41,991

 
40,263

 
83,488

 
80,069

Policyholder dividends
2,907

 
3,395

 
6,252

 
6,753

Underwriting, acquisition and insurance expenses
35,274

 
37,335

 
68,718

 
72,359

Interest expense
1,086

 
1,838

 
2,298

 
3,813

Other expenses
4,383

 
4,818

 
8,511

 
9,202

Total benefits and expenses
137,404

 
136,280

 
274,410

 
269,119

 
38,433

 
40,403

 
69,962

 
75,612

Income taxes
(12,339
)
 
(13,378
)
 
(22,567
)
 
(24,961
)
Equity income, net of related income taxes
2,531

 
2,528

 
4,179

 
3,840

Net income
28,625

 
29,553

 
51,574

 
54,491

Net loss attributable to noncontrolling interest
17

 
34

 
60

 
62

Net income attributable to FBL Financial Group, Inc.
$
28,642

 
$
29,587

 
$
51,634

 
$
54,553

 
 
 
 
 
 
 
 
Earnings per common share
$
1.15

 
$
1.14

 
$
2.07

 
$
2.12

Earnings per common share - assuming dilution
$
1.14

 
$
1.13

 
$
2.06

 
$
2.10

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.35

 
$
0.11

 
$
0.70

 
$
0.22

















See accompanying notes.


4


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
28,625

 
$
29,553

 
$
51,574

 
$
54,491

Other comprehensive income (1)
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses
53,604

 
(131,175
)
 
122,912

 
(125,498
)
Non-credit impairment losses

 
1

 

 
(35
)
Change in underfunded status of postretirement benefit plans
183

 
205

 
355

 
468

Total other comprehensive income, net of tax
53,787

 
(130,969
)
 
123,267

 
(125,065
)
Total comprehensive income, net of tax
82,412

 
(101,416
)
 
174,841

 
(70,574
)
Comprehensive loss attributable to noncontrolling interest
17

 
34

 
60

 
62

Total comprehensive income (loss) applicable to FBL Financial Group, Inc.
$
82,429

 
$
(101,382
)
 
$
174,901

 
$
(70,512
)

(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 (Unaudited)
(Dollars in thousands)
 
FBL Financial Group, Inc. Stockholders' Equity
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Non-
controlling Interest
 
Total Stockholders' Equity
Balance at January 1, 2013
$
3,000

 
$
123,228

 
$
289,853

 
$
796,110

 
$
56

 
$
1,212,247

Net income - six months ended June 30, 2013

 

 

 
54,553

 
(62
)
 
54,491

Other comprehensive loss

 

 
(125,065
)
 

 

 
(125,065
)
Issuance of common stock under compensation plans

 
14,275

 

 

 

 
14,275

Purchase of common stock

 
(1,799
)
 

 
(12,206
)
 

 
(14,005
)
Dividends on preferred stock

 

 

 
(75
)
 

 
(75
)
Dividends on common stock

 

 

 
(5,645
)
 

 
(5,645
)
Receipts related to noncontrolling interest

 

 

 

 
57

 
57

Balance at June 30, 2013
$
3,000

 
$
135,704

 
$
164,788

 
$
832,737

 
$
51

 
$
1,136,280

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
3,000

 
$
135,065

 
$
119,067

 
$
787,609

 
$
50

 
$
1,044,791

Net income - six months ended June 30, 2014

 

 

 
51,634

 
(60
)
 
51,574

Other comprehensive income

 

 
123,267

 

 

 
123,267

Issuance of common stock under compensation plans

 
8,976

 

 

 

 
8,976

Purchase of common stock

 
(1,842
)
 

 
(12,339
)
 

 
(14,181
)
Dividends on preferred stock

 

 

 
(75
)
 

 
(75
)
Dividends on common stock

 

 

 
(17,301
)
 

 
(17,301
)
Receipts related to noncontrolling interest

 

 

 

 
77

 
77

Balance at June 30, 2014
$
3,000

 
$
142,199

 
$
242,334

 
$
809,528

 
$
67

 
$
1,197,128








See accompanying notes.


5


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

 
Six months ended June 30,
 
2014
 
2013
Operating activities
 
 
 
Net income
$
51,574

 
$
54,491

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
73,890

 
71,327

Charges for mortality, surrenders and administration
(52,479
)
 
(50,062
)
Net realized gains on investments
(2,266
)
 
(10,522
)
Change in fair value of derivatives
(932
)
 
(553
)
Increase in traditional life and accident and health benefit liabilities
30,249

 
29,991

Deferral of acquisition costs
(20,418
)
 
(22,807
)
Amortization of deferred acquisition costs and value of insurance in force
16,309

 
17,772

Change in reinsurance recoverable
517

 
(1,257
)
Provision for deferred income taxes
3,480

 
1,944

Other
(14,909
)
 
(12,750
)
Net cash provided by operating activities
85,015

 
77,574

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
202,166

 
401,421

Equity securities - available for sale
1,080

 
8,135

Mortgage loans
17,844

 
22,889

Derivative instruments
431

 
263

Policy loans
16,313

 
18,355

Securities and indebtedness of related parties
1,207

 
2,191

Real estate

 
1,957

Other long-term investments

 
30

Acquisitions:
 
 
 
Fixed maturities - available for sale
(354,061
)
 
(596,148
)
Equity securities - available for sale
(16,377
)
 
(6,108
)
Mortgage loans
(39,027
)
 
(41,140
)
Derivative instruments
(1,021
)
 
(222
)
Policy loans
(20,368
)
 
(18,587
)
Securities and indebtedness of related parties
(10,872
)
 
(15,847
)
Short-term investments, net change
59,690

 
13,128

Purchases and disposals of property and equipment, net
(6,149
)
 
(5,566
)
Net cash used in investing activities
(149,144
)
 
(215,249
)




6


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)

 
Six months ended June 30,
 
2014
 
2013
Financing activities
 
 
 
Contract holder account deposits
$
323,800

 
$
325,672

Contract holder account withdrawals
(211,604
)
 
(198,212
)
Receipts related to noncontrolling interests, net
77

 
57

Excess tax deductions on stock-based compensation
717

 
1,622

Repurchase of common stock, net
(6,183
)
 
(1,747
)
Dividends paid
(17,376
)
 
(5,720
)
Net cash provided by financing activities
89,431

 
121,672

Increase (decrease) in cash and cash equivalents
25,302

 
(16,003
)
Cash and cash equivalents at beginning of period
6,370

 
78,074

Cash and cash equivalents at end of period
$
31,672

 
$
62,071

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,425

 
$
3,950

Income taxes
9,001

 
7,001

































See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2014

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of FBL Financial Group, Inc. (we or the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Our financial statements include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our financial position and results of operations.

Operating results for the three- and six-month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2013 included in our Annual Report on Form 10-K for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgments and estimates and other information necessary to understand our financial position and results of operations.

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. Our low income housing tax credit investments totaled $81.5 million at June 30, 2014 and $76.2 million at December 31, 2013. Presently, we account for these investments under the equity method and include related tax benefits as a component of equity income. The new guidance allows 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, would be recognized as a component of income taxes. This guidance will be effective for fiscal years beginning after December 15, 2014 and must be applied retrospectively, if we elect to change our accounting practice. We are currently evaluating the impact of this new guidance on our consolidated financial statements.

In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance, including industry-specific guidance. Although insurance contracts are specifically excluded from the scope of this guidance, almost all entities will be affected to some extent by the significant increase in required disclosures. The new guidance is based on the principle that an entity should recognize revenue to reflect the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard, which becomes effective for fiscal years beginning after December 15, 2016; early adoption is not permitted. We are currently evaluating the impact of this new guidance on our consolidated financial statements.



8

Table of Contents

2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
June 30, 2014
 
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)
$
3,229,642

 
$
344,923

 
$
(11,910
)
 
$
3,562,655

 
$
526

Residential mortgage-backed
495,292

 
43,299

 
(4,969
)
 
533,622

 
(3,424
)
Commercial mortgage-backed
465,075

 
31,636

 
(2,557
)
 
494,154

 

Other asset-backed
471,648

 
19,054

 
(6,081
)
 
484,621

 
2,041

United States Government and agencies
38,768

 
4,158

 
(29
)
 
42,897

 

State, municipal and other governments
1,328,626

 
116,518

 
(3,355
)
 
1,441,789

 

Total fixed maturities
$
6,029,051

 
$
559,588

 
$
(28,901
)
 
$
6,559,738

 
$
(857
)
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
80,566

 
$
5,609

 
$
(468
)
 
$
85,707

 
$

Common stocks
24,802

 
893

 

 
25,695

 

Total equity securities
$
105,368

 
$
6,502

 
$
(468
)
 
$
111,402

 
$

 
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

 
$


(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and losses columns above. The non-credit loss component of OTTI losses for corporate and other asset-backed securities were in an unrealized gain position at June 30, 2014 and 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 $82.8 million at June 30, 2014 and $76.3 million at December 31, 2013. Corporate securities also include redeemable preferred stock with a carrying value of $19.7 million at June 30, 2014 and $17.1 million at December 31, 2013.


9

Table of Contents


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
 
 
 
 
 
 
 
 
June 30, 2014
 
Amortized
Cost
 
Estimated
Fair Value
 
(Dollars in thousands)
Due in one year or less
$
96,164

 
$
98,443

Due after one year through five years
772,820

 
875,150

Due after five years through ten years
910,895

 
996,046

Due after ten years
2,817,157

 
3,077,702

 
4,597,036

 
5,047,341

Mortgage-backed and other asset-backed
1,432,015

 
1,512,397

Total fixed maturities
$
6,029,051

 
$
6,559,738


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.

Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income
 
 
 
 
 
June 30,
2014
 
December 31,
2013
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
530,687

 
$
253,214

Equity securities - available for sale
6,034

 
1,484

 
536,721

 
254,698

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(141,844
)
 
(55,550
)
Value of insurance in force acquired
(12,812
)
 
(6,356
)
Unearned revenue reserve
8,722

 
2,790

Adjustments for assumed changes in policyholder liabilities
(9,067
)
 
(2,957
)
Provision for deferred income taxes
(133,587
)
 
(67,404
)
Net unrealized investment gains
$
248,133

 
$
125,221


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 OTTI loss was recognized in accumulated other comprehensive income, are reported along with changes in fair value for which no OTTI losses were previously recognized.



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Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
69,193

 
$
(1,091
)
 
$
299,090

 
$
(10,819
)
 
$
368,283

 
$
(11,910
)
 
41.2
%
Residential mortgage-backed
 
53,495

 
(697
)
 
29,675

 
(4,272
)
 
83,170

 
(4,969
)
 
17.2

Commercial mortgage-backed
 

 

 
36,494

 
(2,557
)
 
36,494

 
(2,557
)
 
8.9

Other asset-backed
 
80,114

 
(1,535
)
 
36,237

 
(4,546
)
 
116,351

 
(6,081
)
 
21.0

United States Government and agencies
 
3,556

 
(24
)
 
470

 
(5
)
 
4,026

 
(29
)
 
0.1

State, municipal and other governments
 
19,752

 
(202
)
 
90,207

 
(3,153
)
 
109,959

 
(3,355
)
 
11.6

Total fixed maturities
 
$
226,110

 
$
(3,549
)
 
$
492,173

 
$
(25,352
)
 
$
718,283

 
$
(28,901
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
7,826

 
$
(68
)
 
$
4,600

 
$
(400
)
 
$
12,426

 
$
(468
)
 
 
Total equity securities
 
$
7,826

 
$
(68
)
 
$
4,600

 
$
(400
)
 
$
12,426

 
$
(468
)
 
 

 
 
December 31, 2013
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated 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
)
 
 

Fixed maturities in the above tables include 206 securities from 178 issuers at June 30, 2014 and 440 securities from 366 issuers at December 31, 2013. The unrealized losses in fixed maturities were 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 June 30, 2014.

Corporate securities: The largest unrealized losses were in the consumer noncyclical sector ($102.5 million carrying value and $3.4 million unrealized loss). The largest unrealized losses in the consumer noncyclical sector were in the food processing ($28.4 million carrying value and $1.3 million unrealized loss) and the beverage ($11.4 million carrying value and $0.7 million unrealized loss) sub-sectors. The majority of losses in the sector were 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


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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 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 OTTIs 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 as well as our intent and ability to hold these investments until recovery of fair value, and have concluded they are not other than temporarily impaired.

Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $0.8 million at June 30, 2014, with the largest unrealized loss from an oil and gas company. 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 $3.5 million at June 30, 2014, 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 $1.8 million.

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 an OTTI 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 OTTI write down is 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 an OTTI. In determining whether or not an unrealized loss is an OTTI, 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 OTTI 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


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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 OTTI 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.

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
 
 
 
 
Six months ended June 30,
 
2014

2013
 
(Dollars in thousands)
Balance at beginning of period
$
(21,592
)
 
$
(27,712
)
Reductions due to investments sold
4,362

 
5,729

Balance at end of period
$
(17,230
)
 
$
(21,983
)

The table above 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 OTTI was recognized in other comprehensive income (loss) and corresponding changes in such amounts.

Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Gross gains
$
2,811

 
$
8,086

 
$
2,908

 
$
13,726

Gross losses
(5
)
 
(657
)
 
(642
)
 
(2,365
)
Real estate

 
12

 

 
12

Other

 
(6
)
 

 
(6
)
 
2,806

 
7,435

 
2,266

 
11,367

Impairment losses recognized in earnings:
 
 
 
 
 
 
 
Other credit-related (1)

 
(199
)
 

 
(845
)
Net realized gains on investments recorded in income
$
2,806

 
$
7,236

 
$
2,266

 
$
10,522


(1)
Amount represents credit-related losses for mortgage loans, real estate and fixed maturities written down to fair value through income.

Proceeds from sales of fixed maturities totaled $30.9 million during the six months ended June 30, 2014 and $79.3 million during the six months ended June 30, 2013.

Realized gains and losses on sales of investments are determined on the basis of specific identification.

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


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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 estimated loss, if any, for each impaired loan identified. An estimated loss is needed for loans in 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 June 30, 2014, and December 31, 2013, there were no non-performing loans over 90 days past due on contractual payments. 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.

Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
253,433

 
42.5
%
 
$
241,951

 
42.0
%
Retail
 
198,508

 
33.2

 
194,053

 
33.7

Industrial
 
127,345

 
21.3

 
126,151

 
21.9

Other
 
18,130

 
3.0

 
13,706

 
2.4

Total
 
$
597,416

 
100.0
%
 
$
575,861

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
169,700

 
28.4
%
 
$
170,529

 
29.6
%
Pacific
 
97,696

 
16.4

 
92,538

 
16.1

West North Central
 
87,506

 
14.6

 
85,629

 
14.9

East North Central
 
85,749

 
14.3

 
79,128

 
13.7

Mountain
 
51,872

 
8.7

 
53,460

 
9.3

West South Central
 
39,859

 
6.7

 
39,780

 
6.9

Other
 
65,034

 
10.9

 
54,797

 
9.5

Total
 
$
597,416

 
100.0
%
 
$
575,861

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
(Dollars in thousands)
0% - 50%
$
166,893

 
27.9
%
 
$
149,719

 
26.0
%
51% - 60%
216,280

 
36.2

 
202,025

 
35.1

61% - 70%
179,986

 
30.2

 
204,460

 
35.5

71% - 80%
34,257

 
5.7

 
15,559

 
2.7

81% - 90%

 

 
4,098

 
0.7

Total
$
597,416

 
100.0
%
 
$
575,861

 
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.


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Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
(Dollars in thousands)
2014
$
33,429

 
5.6
%
 
$

 
%
2013
83,192

 
13.9

 
84,478

 
14.7

2012
71,547

 
12.0

 
72,792

 
12.6

2011
47,511

 
7.9

 
48,190

 
8.4

2010
25,494

 
4.3

 
26,173

 
4.5

2009 and prior
336,243

 
56.3

 
344,228

 
59.8

Total
$
597,416

 
100.0
%
 
$
575,861

 
100.0
%

 Impaired Mortgage Loans
 
 
 
June 30, 2014
 
December 31, 2013
 
(Dollars in thousands)
Unpaid principal balance
$
22,255

 
$
22,100

Less:
 
 
 
Related allowance
871

 
888

Discount
351

 
429

Carrying value of impaired mortgage loans
$
21,033

 
$
20,783

 Allowance on Mortgage Loans
 
Six months ended June 30,
 
2014
 
2013
 
(Dollars in thousands)
Balance at beginning of period
$
888

 
$
1,694

Allowances established

 
475

Charge offs

 
(1,610
)
Recoveries of amounts previously charged off
(17
)
 

Balance at end of period
$
871

 
$
559


Mortgage Loan Modifications

Our commercial mortgage loan portfolio includes loans that have been modified. We assess loan modifications on a loan-by-loan basis to evaluate whether a troubled debt restructuring (TDR) has occurred. Generally, the types of concessions include: reduction of the contractual interest rate to a below market rate, extension of the maturity date, and/or a reduction of accrued interest. The amount, timing and extent of the concession granted is considered in determining if an impairment loss is needed for the restructuring.

There were no loan modifications during the first two quarters of 2014. During the first quarter of 2013 we modified one commercial mortgage loan that met the criteria of a TDR with a carrying value after the restructuring of $14.4 million and recognized an impairment loss of $0.5 million.



15

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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 for any reporting periods presented in this Form 10-Q. Our VIE investments are as follows:

 
June 30, 2014
 
December 31, 2013
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value
 
Maximum Exposure to Loss
 
(Dollars in thousands)
Real estate limited partnerships
$
17,359

 
$
17,359

 
$
17,646

 
$
17,646


We make commitments to fund partnership investments in the normal course of business. We did not have any other commitments to investees designated as VIEs as of June 30, 2014 or December 31, 2013.

Other

At June 30, 2014, we had committed to provide $29.3 million of additional funds for our limited partnerships and our limited liability companies.

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 $6.0 million at June 30, 2014 and $3.7 million at December 31, 2013. 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 $0.4 million at June 30, 2014 and $0.3 million at December 31, 2013 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 is included in net investment income and interest sensitive benefits and, for the three-month period ended June 30, totaled $1.3 million for 2014 and ($0.6) million for 2013.

3. Fair Values

The carrying and estimated fair values of our financial instruments are as follows:

Fair Values and Carrying Values
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities - available for sale
$
6,559,738

 
$
6,559,738

 
$
6,081,753

 
$
6,081,753

Equity securities - available for sale
111,402

 
111,402

 
91,555

 
91,555

Mortgage loans
597,416

 
627,053

 
575,861

 
594,451

Policy loans
181,048

 
221,381

 
176,993

 
210,401

Other investments
2,358

 
2,358

 
993

 
993

Cash, cash equivalents and short-term investments
80,659

 
80,659

 
115,047

 
115,047

Reinsurance recoverable
3,671

 
3,671

 
2,678

 
2,678

Assets held in separate accounts
712,533

 
712,533

 
693,955

 
693,955

 


16

Table of Contents

Fair Values and Carrying Values (continued)
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
3,460,941

 
$
3,587,849

 
$
3,360,519

 
$
3,371,706

Supplemental contracts without life contingencies
344,310

 
317,835

 
349,761

 
320,195

Advance premiums and other deposits
242,707

 
242,707

 
230,819

 
230,819

Long-term debt
97,000

 
70,597

 
97,000

 
63,343

Other liabilities
142

 
142

 

 

Liabilities related to separate accounts
712,533

 
705,751

 
693,955

 
686,387


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.

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


17

Table of Contents

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:

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 Federal Home Loan Bank (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.


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Table of Contents


Level 3 equity securities consist of a 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 is A-highest quality, B-moderate quality, C-low quality, 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.

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


19

Table of Contents

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 and 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.

Long-term debt:

Long-term debt is not measured at fair value on a recurring basis and 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.

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.



20

Table of Contents

Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
 
 
June 30, 2014
 
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
$

 
$
3,485,940

 
$
76,715

 
$
3,562,655

Residential mortgage-backed securities

 
533,622

 

 
533,622

Commercial mortgage-backed securities

 
419,108

 
75,046

 
494,154

Other asset-backed securities

 
394,986

 
89,635

 
484,621

United States Government and agencies
15,539

 
19,161

 
8,197

 
42,897

State, municipal and other governments

 
1,441,789

 

 
1,441,789

Non-redeemable preferred stocks

 
77,522

 
8,185

 
85,707

Common stocks
3,667

 
22,028

 

 
25,695

Other investments

 
2,358

 

 
2,358

Cash, cash equivalents and short-term investments
80,659

 

 

 
80,659

Reinsurance recoverable

 
3,671

 

 
3,671

Assets held in separate accounts
712,533

 

 

 
712,533

Total assets
$
812,398

 
$
6,400,185

 
$
257,778

 
$
7,470,361

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$

 
$

 
$
931

 
$
931

Other liabilities

 
142

 

 
142

Total liabilities
$

 
$
142

 
$
931

 
$
1,073


 
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



21

Table of Contents

Level 3 Fixed Maturities on a Recurring Basis by Valuation Source
 
 
 
June 30, 2014
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
48,970

 
$
27,745

 
$
76,715

Commercial mortgage-backed securities
75,046

 

 
75,046

Other asset-backed securities
68,845

 
20,790

 
89,635

United States Government and agencies
8,197

 

 
8,197

Total
$
201,058

 
$
48,535

 
$
249,593

Percent of total
80.6
%
 
19.4
%
 
100.0
%

 
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
%

Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
June 30, 2014
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
45,996

 
Discounted cash flow
 
Credit spread
 
0.68% - 7.00% (4.94%)
Commercial mortgage-backed
75,046

 
Discounted cash flow
 
Credit spread
 
1.90% - 4.00% (2.88%)
Other asset-backed securities
30,243

 
Discounted cash flow
 
Credit spread
 
0.82% - 6.44% (3.59%)
United States Government and agencies
8,197

 
Discounted cash flow
 
Credit spread
 
3.40% (3.40%)
Non-redeemable preferred stocks
8,185

 
Discounted cash flow
 
Credit spread
 
3.00% (3.00%)
Total Assets
$
167,667

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
931

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.60% - 1.40% (0.90%)
0.15% - 0.40% (0.25%)



22

Table of Contents

Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
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%)
State, municipal and other governments
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%)

The tables above exclude certain securities for which the fair value was based on non-binding broker quotes where we could not reasonably obtain the quantitative unobservable inputs.

Level 3 Financial Instruments Changes in Fair Value Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
 
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,
June 30, 2014
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
81,994

 
$
234

 
$
(9,342
)
 
$

 
$
521

 
$
13,623

 
$
(10,299
)
 
$
(16
)
 
$
76,715

Commercial mortgage-backed securities
71,712

 

 
(341
)
 

 
3,630

 

 

 
45

 
75,046

Other asset-backed securities
85,835

 
22,961

 
(7,567
)
 

 
(1
)
 
1,974

 
(14,107
)
 
540

 
89,635

United States Government and agencies
8,044

 

 

 

 
150

 

 

 
3

 
8,197

Non-redeemable preferred stocks
7,795

 

 

 

 
390

 

 

 

 
8,185

Total Assets
$
255,380

 
$
23,195

 
$
(17,250
)
 
$

 
$
4,690

 
$
15,597

 
$
(24,406
)
 
$
572

 
$
257,778

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
286

 
$
644

 
$
(13
)
 
$
14

 
$

 
$

 
$

 
$

 
$
931

Total Liabilities
$
286

 
$
644

 
$
(13
)
 
$
14

 
$

 
$

 
$

 
$

 
$
931




23

Table of Contents

Level 3 Financial Instruments Changes in Fair Value Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2012
 
Purchases
 
Disposals
 
Included in net income
 
Included in other compre-hensive income
 
Net transfers into
Level 3 (1)
 
Net transfers
out of
Level 3 (1)
 
Amort-ization included in net income
 
Balance,
June 30, 2013
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
100,463

 
$
2,056

 
$
(4,029
)
 
$

 
$
(1,355
)
 
$

 
$
(10,798
)
 
$
(12
)
 
$
86,325

Commercial mortgage-backed securities
76,281

 

 
(335
)
 

 
(4,082
)
 

 

 
42

 
71,906

Other asset-backed securities
95,756

 
32,782

 
(6,927
)
 

 
(561
)
 
4,062

 
(27,069
)
 
743

 
98,786

United States Government and agencies
8,555

 

 

 

 
(378
)
 

 

 
3

 
8,180

State, municipal and other governments
223

 

 
(218
)
 

 
(5
)
 

 

 

 

Non-redeemable preferred stocks
7,391

 

 

 

 
275

 

 

 

 
7,666

Total Assets
$
288,669

 
$
34,838

 
$
(11,509
)
 
$

 
$
(6,106
)
 
$
4,062

 
$
(37,867
)
 
$
776

 
$
272,863

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
307

 
$

 
$
(9
)
 
$

 
$

 
$

 
$

 
$

 
$
298

Total Liabilities
$
307

 
$

 
$
(9
)
 
$

 
$

 
$

 
$

 
$

 
$
298


(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 the periods presented above.

Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels
 
 
 
June 30, 2014
 
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
$

 
$

 
$
627,053

 
$
627,053

Policy loans

 

 
221,381

 
221,381

Total assets
$

 
$

 
$
848,434

 
$
848,434

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
3,586,918

 
$
3,586,918

Supplemental contracts without life contingencies

 

 
317,835

 
317,835

Advance premiums and other deposits

 

 
242,707

 
242,707

Long-term debt

 

 
70,597

 
70,597

Liabilities related to separate accounts

 

 
705,751

 
705,751

Total liabilities
$

 
$

 
$
4,923,808

 
$
4,923,808




24

Table of Contents

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


Level 3 Financial Instruments Measured at Fair Value on a Nonrecurring 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. There were no mortgage loans or real estate impaired to fair value during the six months ended June 30, 2014. During the six months ended June 30, 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.

4. Defined Benefit Plan

We participate with several affiliates and an unaffiliated organization in various defined benefit plans, including a multiemployer plan. Our share of net periodic pension cost for the plans is recorded as expense in our consolidated statements of operations.

Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Multiemployer Plan
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Service cost
$
1,320

 
$
1,618

 
$
2,640

 
$
3,236

Interest cost
3,505

 
3,346

 
7,010

 
6,692

Expected return on assets
(4,385
)
 
(3,916
)
 
(8,770
)
 
(7,832
)
Amortization of prior service cost
36

 
36

 
72

 
72

Amortization of actuarial loss
5,961

 
3,117

 
7,322

 
6,234

Net periodic pension cost
$
6,437

 
$
4,201

 
$
8,274

 
$
8,402

 
 
 
 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
$
2,065

 
$
1,341

 
$
2,654

 
$
2,682



25

Table of Contents

Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Other Plans
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Service cost
$
67

 
$
63

 
$
134

 
$
126

Interest cost
269

 
258

 
538

 
516

Amortization of prior service cost
(3
)
 
(3
)
 
(6
)
 
(6
)
Amortization of actuarial loss
283

 
317

 
566

 
634

Net periodic pension cost
$
616

 
$
635

 
$
1,232

 
$
1,270

 
 
 
 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
$
343

 
$
359

 
$
686

 
$
718

 
5. 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. We are not aware of any significant threatened or pending litigation or claims against FBL Financial Group, Inc. or any of its subsidiaries.

6. Stockholders' Equity

Share Repurchases

During 2012 and 2014, the Board of Directors approved plans to repurchase 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. Under these programs, we repurchased 333,426 shares for $14.2 million during the six months ended June 30, 2014 and 360,426 shares for $14.0 million during the six months ended June 30, 2013. At June 30, 2014, $47.0 million remains available for repurchase under the 2014 plan. 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 that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.



26

Table of Contents

Reconciliation of Outstanding Common Stock
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
(Dollars in thousands)
Outstanding at January 1, 2013
24,282,184

 
$
115,706

 
1,192,890

 
$
7,522

 
25,475,074

 
$
123,228

Issuance of common stock under compensation plans
499,548

 
14,275

 

 

 
499,548

 
14,275

Purchase of common stock
(360,426
)
 
(1,799
)
 

 

 
(360,426
)
 
(1,799
)
Conversion of Class B to Class A common stock (1)
51,599

 
325

 
(51,599
)
 
(325
)
 

 
$

Outstanding at June 30, 2013
24,472,905

 
$
128,507

 
1,141,291

 
$
7,197

 
25,614,196

 
$
135,704

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2014
24,742,942

 
$
134,993

 
11,413

 
$
72

 
24,754,355

 
$
135,065

Issuance of common stock under compensation plans
292,577

 
8,976

 

 

 
292,577

 
8,976

Purchase of common stock
(333,426
)
 
(1,842
)
 

 

 
(333,426
)
 
(1,842
)
Outstanding at June 30, 2014
24,702,093

 
$
142,127

 
11,413

 
$
72

 
24,713,506

 
$
142,199


(1)
There is no established market for our Class B common stock, although it is convertible upon demand into Class A common stock on a share for share basis.

Accumulated Other Comprehensive Income, Net of Tax and Other Offsets
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses
 
Underfunded Status of Postretirement Benefit Plans
 
Total
 
(Dollars in thousands)
Balance at January 1, 2013
$
306,167

 
$
(8,362
)
 
$
(7,952
)
 
$
289,853

Other comprehensive income before reclassifications
(120,433
)
 
1,758

 

 
(118,675
)
Reclassification adjustments
(6,858
)
 

 
468

 
(6,390
)
Balance at June 30, 2013
$
178,876

 
$
(6,604
)
 
$
(7,484
)
 
$
164,788

 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
126,587

 
$
(1,366
)
 
$
(6,154
)
 
$
119,067

Other comprehensive income before reclassifications
123,512

 
809

 

 
124,321

Reclassification adjustments
(1,409
)
 
$

 
355

 
(1,054
)
Balance at June 30, 2014
$
248,690

 
$
(557
)
 
$
(5,799
)
 
$
242,334


(1)
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.



27

Table of Contents

Accumulated Other Comprehensive Income Reclassification Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses (1)
 
Underfunded Status of Postretirement Benefit
Plans
 
Total
 
(Dollars in thousands)
Realized capital gains on sales of investments
$
(2,266
)
 
$

 
$

 
$
(2,266
)
Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
99

 

 

 
99

Other expenses: Amortization of unrecognized postretirement items:
 
 
 
 
 
 


Prior service costs

 

 
(6
)
 
(6
)
Net actuarial loss

 

 
552

 
552

Reclassifications before income taxes
(2,167
)
 

 
546

 
(1,621
)
Income taxes
758

 

 
(191
)
 
567

Reclassification adjustments
$
(1,409
)
 
$

 
$
355

 
$
(1,054
)
 
Six months ended June 30, 2013
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses (1)
 
Unfunded Status of Postretirement Benefit
Plans
 
Total
 
(Dollars in thousands)
Realized capital gains on sales of investments
$
(11,361
)
 
$

 
$

 
$
(11,361
)
Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
810

 

 

 
810

Other expenses: Amortization of unrecognized postretirement items:
 
 
 
 
 
 


Prior service costs

 

 
(6
)
 
(6
)
Net actuarial loss

 

 
726

 
726

Reclassifications before income taxes
(10,551
)
 

 
720

 
(9,831
)
Income taxes
3,693

 

 
(252
)
 
3,441

Reclassification adjustments
$
(6,858
)
 
$

 
$
468

 
$
(6,390
)
(1)
See Note 2 for further information.



28

Table of Contents

7. Earnings Per Share

Computation of Earnings Per Common Share
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income attributable to FBL Financial Group, Inc.
$
28,642

 
$
29,587

 
$
51,634

 
$
54,553

Less: Dividends on Series B preferred stock
37

 
37

 
75

 
75

Income available to common stockholders
$
28,605

 
$
29,550

 
$
51,559

 
$
54,478

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares - basic
24,835,339

 
25,832,976

 
24,886,581

 
25,705,154

Effect of dilutive securities - stock-based compensation
147,798

 
243,386

 
163,889

 
257,662

Weighted average shares - diluted
24,983,137

 
26,076,362

 
25,050,470

 
25,962,816

 
 
 
 
 
 
 
 
Earnings per common share
$
1.15

 
$
1.14

 
$
2.07

 
$
2.12

Earnings per common share - assuming dilution:
$
1.14

 
$
1.13

 
$
2.06

 
$
2.10

 
 
 
 
 
 
 
 
Antidilutive stock options excluded from diluted earnings per share

 
6,215

 

 
12,641

 
8. 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.

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 represents net income excluding the impact of realized gains and losses on investments and changes in net unrealized gains and losses on derivatives.

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 quarter to quarter. 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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Table of Contents

Financial Information Concerning our Operating Segments
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
Annuity
$
49,496

 
$
49,233

 
$
99,075

 
$
97,340

Life Insurance
98,837

 
95,553

 
194,654

 
188,891

Corporate and Other
23,255

 
25,395

 
46,624

 
49,292

 
171,588

 
170,181

 
340,353

 
335,523

Realized gains on investments (1)
2,806

 
7,183

 
2,266

 
10,481

Change in net unrealized gains/losses on derivatives (1)
1,443

 
(681
)
 
1,753

 
(1,273
)
Consolidated revenues
$
175,837

 
$
176,683

 
$
344,372

 
$
344,731

 
 
 
 
 
 
 
 
Pre-tax operating income:
 
 
 
 
 
 
 
Annuity
$
14,649

 
$
17,073

 
$
30,096

 
$
31,754

Life Insurance
11,881

 
11,003

 
21,973

 
20,935

Corporate and Other
6,966

 
6,041

 
11,559

 
13,139

 
33,496

 
34,117

 
63,628

 
65,828

Income taxes on operating income
(7,349
)
 
(8,480
)
 
(14,397
)
 
(17,057
)
Realized gains/losses on investments (1)
1,737

 
4,413

 
1,409

 
6,308

Change in net unrealized gains/losses on derivatives (1)
758

 
(463
)
 
994

 
(526
)
Consolidated net income attributable to FBL Financial Group, Inc.
$
28,642

 
$
29,587

 
$
51,634

 
$
54,553


(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 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 June 30, 2014 and December 31, 2013 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, includes premiums received on life insurance policies and deposits on annuities and universal life-type products. Net premiums collected totaled $176.3 million for the quarter ended June 30, 2014 and $165.6 million for the 2013 period. Net premiums collected totaled $355.1 million for the six months ended June 30, 2014 and $341.0 million for the 2013 period.

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.



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Table of Contents

Reconciliation of Traditional Life Insurance Premiums, Net of Reinsurance
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014

2013
 
2014
 
2013
 
(Dollars in thousands)
Traditional and universal life insurance premiums collected
$
73,586

 
$
84,462

 
$
146,424

 
$
161,115

Premiums collected on interest sensitive products
(27,034
)
 
(38,936
)
 
(53,422
)
 
(70,819
)
Traditional life insurance premiums collected
46,552

 
45,526

 
93,002

 
90,296

Change in due premiums and other
892

 
532

 
(66
)
 
696

Traditional life insurance premiums
$
47,444

 
$
46,058

 
$
92,936

 
$
90,992


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.

Interest Sensitive Product Charges by Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014

2013
 
2014
 
2013
 
(Dollars in thousands)
Annuity
 
 
 
 
 
 
 
Surrender charges and other
$
511

 
$
344

 
$
1,065

 
$
657

 
 
 
 
 
 
 
 
Life Insurance
 
 
 
 
 
 
 
Administration charges
$
3,544

 
$
3,063

 
$
7,039

 
$
5,935

Cost of insurance charges
11,259

 
10,668

 
22,276

 
20,965

Surrender charges
190

 
72

 
406

 
260

Amortization of policy initiation fees
342

 
644

 
374

 
1,036

Total
$
15,335

 
$
14,447

 
$
30,095

 
$
28,196

 
 
 
 
 
 
 
 
Corporate and Other
 
 
 
 
 
 
 
Administration charges
$
1,676

 
$
1,585

 
$
3,275

 
$
3,096

Cost of insurance charges
7,382

 
7,402

 
14,797

 
14,763

Surrender charges
103

 
105

 
241

 
269

Separate account charges
2,281

 
2,187

 
4,561

 
4,218

Amortization of policy initiation fees
73

 
725

 
418

 
900

Total
$
11,515

 
$
12,004

 
$
23,292

 
$
23,246

 
 
 
 
 
 
 
 
Consolidated interest sensitive product charges
$
27,361

 
$
26,795

 
$
54,452

 
$
52,099




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Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section includes a summary of FBL Financial Group, Inc.'s consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its life insurance subsidiary, Farm Bureau Life Insurance Company (Farm Bureau Life). Please read this discussion in conjunction with the accompanying consolidated financial statements and related notes. In addition, we encourage you to refer to our Form 10-K for the fiscal year ended December 31, 2013 for a complete description of our significant accounting policies and estimates. Familiarity with this information is important in understanding our financial position and results of operations.

This Form 10-Q 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. See Part 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for additional information on the risks and uncertainties that may affect the operations, performance, development and results of our business.

Overview

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 8 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 8 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.

Impact of Recent Business Environment
 
Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economy 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.

Economic environmental factors which may impact our business include, but are not limited to the following:

Gross Domestic Product decreased approximately 2.9% during the first quarter of 2014 based on recent estimates.
U.S. unemployment was estimated to be 6.1% during June 2014.
U.S. net farm income is forecasted to decrease 26.6% and farm real estate value is forecasted to increase 2.9% during 2014.
The U.S. 10 Year Treasury yield declined during the second quarter of 2014 to 2.53% at June 30, 2014.
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.



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Table of Contents

The decrease in market interest rates during the second quarter of 2014 increased the fair value of our fixed maturity portfolio. Strong liquidity and favorable corporate profitability continue to support the fundamental credit quality of our investment portfolio. Spreads declined broadly across the securitized markets during the second quarter of 2014.

Low current interest rates create a challenging environment for sales of new money fixed annuity products. Lower investment yields also continue to place strain on the spreads we earn from our investment products, as highlighted in the business segment discussion that follows.

Results of Operations for the Periods Ended June 30, 2014 and 2013

 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(Dollars in thousands, except per share data)
Pre-tax operating income:
 
 
 
 
 
 
 
 
 
 
 
Annuity segment
$
14,649

 
$
17,073

 
(14
)%
 
$
30,096

 
$
31,754

 
(5
)%
Life Insurance segment
11,881

 
11,003

 
8
 %
 
21,973

 
20,935

 
5
 %
Corporate and Other segment
6,966

 
6,041

 
15
 %
 
11,559

 
13,139

 
(12
)%
Total pre-tax operating income
33,496

 
34,117

 
(2
)%
 
63,628

 
65,828

 
(3
)%
Income taxes on operating income
(7,349
)
 
(8,480
)
 
(13
)%
 
(14,397
)
 
(17,057
)
 
(16
)%
Operating income
26,147

 
25,637

 
2
 %
 
49,231

 
48,771

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains/losses on investments (1)
1,737

 
4,413

 
(61
)%
 
1,409

 
6,308

 
(78
)%
Change in net unrealized gains/losses on derivatives (1)
758

 
(463
)
 
(264
)%
 
994

 
(526
)
 
(289
)%
Net income attributable to FBL Financial Group, Inc.
$
28,642

 
$
29,587

 
(3
)%
 
$
51,634

 
$
54,553

 
(5
)%
 
 
 
 
 
 
 
 
 
 
 

Operating income per common share - assuming dilution
$
1.05

 
$
0.98

 
7
 %
 
$
1.96

 
$
1.88

 
4
 %
Earnings per common share - assuming dilution
1.14

 
1.13

 
1
 %
 
2.06

 
2.10

 
(2
)%
Effective tax rate on operating income
22
%
 
25
%
 
 
 
23
%
 
26
%
 

Average invested assets, at amortized cost
 
 
 
 

 
$
6,847,977

 
$
6,663,018

 
3
 %
Annualized yield on average invested assets
 
 
 
 
 
 
5.59
%
 
5.69
%
 

Impact on pre-tax operating income of unlocking deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve
$
664

 
$
231

 
187
 %
 
$
664

 
$
231

 
187
 %

(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 the second quarter of 2014 and the six months ended June 30, 2014, compared to the prior year periods, primarily due to an increase in the volume of business in force, partially offset by increases in death benefits and other underwriting expenses. Net income decreased in the second quarter and the six months ended June 30, 2014, compared to the prior periods, primarily due to decreases in realized investment gains, partially offset by increases in operating income and the change in net unrealized gains/losses on derivatives. See the discussion that follows for details regarding operating income by segment.

Earnings per share and operating income per common share benefited from repurchases of Class A common shares in 2014 and 2013, 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 6 to the consolidated financial statements.



33

Table of Contents

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. For all of our blocks of business we unlocked our valuation assumptions for deferred policy acquisition costs, value of insurance in force and unearned revenue reserves during the second quarter of 2014 and 2013. See the discussion that follows for further details of the unlocking impact to our operating segments.



34

Table of Contents

Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
511

 
$
344

 
49
 %
 
$
1,065

 
$
657

 
62
 %
Net investment income
48,985

 
48,889

 
 %
 
98,010

 
96,683

 
1
 %
Total operating revenues
49,496

 
49,233

 
1
 %
 
99,075

 
97,340

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
26,047

 
25,399

 
3
 %
 
52,802

 
50,078

 
5
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commissions net of deferrals
562

 
595

 
(6
)%
 
1,016

 
1,532

 
(34
)%
Amortization of deferred acquisition costs
2,740

 
1,160

 
136
 %
 
5,201

 
3,981

 
31
 %
Amortization of value of insurance in force
583

 
369

 
58
 %
 
726

 
533

 
36
 %
Other underwriting expenses
4,915

 
4,637

 
6
 %
 
9,234

 
9,462

 
(2
)%
Total underwriting, acquisition and insurance expenses
8,800

 
6,761

 
30
 %
 
16,177

 
15,508

 
4
 %
Total benefits and expenses
34,847

 
32,160

 
8
 %
 
68,979

 
65,586

 
5
 %
Pre-tax operating income
$
14,649

 
$
17,073

 
(14
)%
 
$
30,096

 
$
31,754

 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
 
 
Annuity premiums collected, direct
$
84,574

 
$
62,374

 
36
 %
 
$
170,826

 
$
141,638

 
21
 %
Policy liabilities and accruals, end of period
 
 
 
 
 
 
3,647,436

 
3,516,696

 
4
 %
Average invested assets, at amortized cost
 
 
 
 
 
 
3,702,804

 
3,532,864

 
5
 %
Investment fee income included in net investment income (1)
172

 
1,154

 
(85
)%
 
1,052

 
2,571

 
(59
)%
Average individual annuity account value
 
 
 
 
 
 
2,504,203

 
2,368,494

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
 
 
 
 
 
 
5.56
%
 
5.81
%
 
 
Weighted average interest crediting rate
 
 
 
 
 
 
2.91
%
 
2.96
%
 
 
Spread
 
 
 
 
 
 
2.65
%
 
2.85
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
 
 
 
 
 
 
5.2
%
 
5.7
%
 
 
Impact on pre-tax income of unlocking deferred acquisition costs and value of insurance in force acquired
(207
)

1,436

 
(114
)%
 
$
(207
)
 
$
1,436

 
(114
)%

(1)
Includes prepayment fee income and amortization of any related premium or discount.

Pre-tax operating income for the Annuity segment decreased in the second quarter of 2014 and the six months ended June 30, 2014, compared to the prior year periods, primarily due to the impact of unlocking and lower investment fee income, partially offset by higher spread income earned from an increase in the volume of business in force.

Amortization of deferred acquisition costs and the value of insurance in force increased in the 2014 periods, compared to prior year periods, primarily due to the impact of unlocking. Unlocking, for each period, reflected changes in our projected earned spread, withdrawal and mortality assumptions within our amortization models.


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Table of Contents


The average aggregate account value for individual annuity contracts in force increased in 2014 periods, compared to prior year periods, due to continued sales and the crediting of interest. Premiums collected were higher in the 2014 periods due to increased sales of indexed annuity products. Indexed annuity collected premiums were $17.1 million during the second quarter of 2014 and $38.3 million for the six months ended June 30, 2014, compared with $3.5 million during the second quarter of 2013 and $5.7 million during the six months ended June 30, 2013.

Included within our policy liabilities are advances on our funding agreements with the Federal Home Loan Bank (FHLB). Outstanding funding agreements totaled $318.4 million at June 30, 2014 and $338.3 million at June 30, 2013.

The weighted average yield on cash and invested assets for individual annuities decreased for the six months ended June 30, 2014, compared to the prior year period, 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, and a decrease in investment fee income. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our individual annuity products decreased due to crediting rate actions taken in 2014 and a change in the underlying product mix.

Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
15,256

 
$
14,431

 
6
 %
 
$
29,931

 
$
28,106

 
6
 %
Traditional life insurance premiums
47,444

 
46,058

 
3
 %
 
92,936

 
90,992

 
2
 %
Net investment income
36,137

 
35,064

 
3
 %
 
71,787

 
69,793

 
3
 %
Total operating revenues
98,837

 
95,553

 
3
 %
 
194,654

 
188,891

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 

Interest sensitive product benefits:
 
 
 
 
 
 
 
 
 
 

Interest credited
8,100

 
7,731

 
5
 %
 
16,102

 
15,179

 
6
 %
Death benefits and other
11,041

 
9,631

 
15
 %
 
22,451

 
19,506

 
15
 %
Total interest sensitive product benefits
19,141

 
17,362

 
10
 %
 
38,553

 
34,685

 
11
 %
Traditional life insurance benefits:
 
 
 
 
 
 
 
 
 
 

Death benefits
18,260

 
15,680

 
16
 %
 
38,014

 
34,048

 
12
 %
Surrender and other benefits
7,200

 
9,064

 
(21
)%
 
16,209

 
18,165

 
(11
)%
Increase in traditional life future policy benefits
16,531

 
15,519

 
7
 %
 
29,265

 
27,848

 
5
 %
Total traditional life insurance benefits
41,991

 
40,263

 
4
 %
 
83,488

 
80,061

 
4
 %
Distributions to participating policyholders
2,907

 
3,395

 
(14
)%
 
6,252

 
6,753

 
(7
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 

Commission expense, net of deferrals
4,873

 
5,866

 
(17
)%
 
9,025

 
11,966

 
(25
)%
Amortization of deferred acquisition costs
3,279

 
4,385

 
(25
)%
 
7,110

 
7,407

 
(4
)%
Amortization of value of insurance in force
111

 
413

 
(73
)%
 
417

 
786

 
(47
)%
Other underwriting expenses
14,654

 
12,866

 
14
 %
 
27,836

 
26,298

 
6
 %
Total underwriting, acquisition and insurance expenses
22,917

 
23,530

 
(3
)%
 
44,388

 
46,457

 
(4
)%
Total benefits and expenses
86,956

 
84,550

 
3
 %
 
172,681

 
167,956

 
3
 %
Pre-tax operating income
$
11,881

 
$
11,003

 
8
 %
 
$
21,973

 
$
20,935

 
5
 %


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Table of Contents


Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(Dollars in thousands)
Other data
 
 
 
 
 
 
 
 
 
 
 
Life premiums collected, net of reinsurance
$
73,586

 
$
84,462

 
(13
)%
 
$
146,424

 
$
161,115

 
(9
)%
Policy liabilities and accruals, end of period
 
 
 
 

 
2,517,312

 
2,386,254

 
5
 %
Life insurance in force, end of period
 
 
 
 

 
50,356,058

 
47,704,532

 
6
 %
Average invested assets, at amortized cost
 
 
 
 

 
2,516,602

 
2,351,694

 
7
 %
Investment fee income included in net investment income (1)
(42
)
 
644

 
(107
)%
 
54

 
1,160

 
(95
)%
Average interest sensitive life account value
 
 
 
 

 
752,259

 
688,236

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
 
 
 
 
 
 
5.80
%
 
6.12
%
 
 
Weighted average interest crediting rate
 
 
 
 
 
 
4.01
%
 
4.07
%
 
 
Spread
 
 
 
 
 
 
1.79
%
 
2.05
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
 
 
 
 
 
 
5.3
%
 
5.5
%
 
 
Death benefits, net of reinsurance and reserves released
19,286

 
18,227

 
6
 %
 
$
39,899

 
$
36,954

 
8
 %
Impact on pre-tax income of unlocking deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve
391

 
(595
)
 
166
 %
 
391

 
(595
)
 
166
 %

(1)
Includes prepayment fee income and amortization of any related premium or discount.

Pre-tax operating income for the Life Insurance segment increased in the second quarter of 2014 and the six months ended June 30, 2014, compared to the prior year periods, primarily due to an increase in the volume of business in force, partially offset by increases in death benefits and other underwriting expenses.

Premiums collected were lower during the 2014 periods, compared to the prior year periods, primarily due to lower universal life sales. The reduction in sales also contributed to lower non-deferrable commission expenses. Commission expense for the six month period was also lower in 2014, compared to the prior year period, due to additional non-deferrable sales incentives paid during the first quarter 2013, which were not paid during the 2014 period.

Amortization of deferred acquisition costs and the value of insurance in force was lower in the 2014 periods, compared to prior year periods, primarily due to the impact of unlocking. Unlocking, for each period, reflected changes in projected withdrawal, mortality and premium persistency assumptions within our amortization models. Prior year unlocking also reflected changes in the projected earned spread assumption used in the estimate of future gross profits.

Other underwriting expenses increased during the 2014 period, compared to the prior year periods, primarily due in increases in non-deferrable sales related expenses.

Death benefits, net of reinsurance and reserves released, increased in the second quarter of 2014, compared to the prior period, primarily due to an increase in the number of claims and increased in the six months ended June 30, 2014, compared to the prior period, 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 the six months ended June 30, 2014, compared to the prior year period, due to lower yields on new investment acquisitions from premium


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receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, and a decrease in investment fee income. 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 and 2014 in response to the declining portfolio yield, partially offset by sales of products with higher crediting rates.

Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
11,515

 
$
12,004

 
(4
)%
 
$
23,292

 
$
23,246

 
 %
Net investment income
8,650

 
9,626

 
(10
)%
 
16,296

 
18,505

 
(12
)%
Other income
3,090

 
3,765

 
(18
)%
 
7,036

 
7,541

 
(7
)%
Total operating revenues
23,255

 
25,395

 
(8
)%
 
46,624

 
49,292

 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
6,579

 
5,960

 
10
 %
 
13,913

 
12,467

 
12
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
751

 
930

 
(19
)%
 
1,798

 
2,077

 
(13
)%
Amortization of deferred acquisition costs
614

 
3,917

 
(84
)%
 
2,269

 
4,176

 
(46
)%
Other underwriting expenses
1,774

 
1,680

 
6
 %
 
3,637

 
3,528

 
3
 %
Total underwriting, acquisition and insurance expenses
3,139

 
6,527

 
(52
)%
 
7,704

 
9,781

 
(21
)%
Interest expense
1,086

 
1,838

 
(41
)%
 
2,298

 
3,813

 
(40
)%
Other expenses
4,383

 
4,818

 
(9
)%
 
8,511

 
9,202

 
(8
)%
Total benefits and expenses
15,187

 
19,143

 
(21
)%
 
32,426

 
35,263

 
(8
)%
 
8,068

 
6,252

 
29
 %
 
14,198

 
14,029

 
1
 %
Net loss attributable to noncontrolling interest
17

 
34

 
(50
)%
 
60

 
62

 
(3
)%
Equity loss, before tax
(1,119
)
 
(245
)
 
357
 %
 
(2,699
)
 
(952
)
 
184
 %
Pre-tax operating income
$
6,966

 
$
6,041

 
15
 %
 
$
11,559

 
$
13,139

 
(12
)%
 
 
 
 
 
 
 
 
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
 
 
Average invested assets, at amortized cost
 
 
 
 

 
$
628,571

 
$
778,460

 
(19
)%
Investment fee income included in net investment income (1)
$
944

 
$
99

 
854
 %
 
930

 
124

 
650
 %
Average interest sensitive life account value
 
 
 
 

 
330,622

 
321,354

 
3
 %
Death benefits, net of reinsurance and reserves released
3,662

 
3,171

 
15
 %
 
8,012

 
6,766

 
18
 %
Impact on pre-tax income of unlocking of deferred acquisition costs and unearned revenue reserve
480

 
(610
)
 
179
 %
 
480

 
(610
)
 
179
 %
Estimated impact on pre-tax income from separate account performance on amortization of deferred acquisition costs
255

 
(370
)
 
169
 %
 
110

 
810

 
(86
)%

(1)
Includes prepayment fee income and amortization of any related premium or discount.



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Table of Contents

Pre-tax operating income increased for the Corporate and Other segment in the second quarter of 2014, compared to the prior period, due to a decrease in amortization of deferred acquisition costs, partially offset by a decrease in net investment income. Pre-tax operating income decreased in the six months ended June 30, 2014, compared to the prior year period, primarily due to decreases in net investment income and pre-tax equity income, partially offset by decreases in interest expense and amortization of deferred acquisition costs.

Other income and other expenses 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.

Death benefits net of reinsurance and reserves released increased during the 2014 periods, compared to the prior year periods, due to an increase in the average size of claims.

Net investment income decreased during the 2014 periods primarily due to lower invested assets held in this segment during the 2014 period, primarily due to higher stockholder dividends, share repurchase activity and the retirement of long term debt during the third quarter of 2013.

Amortization of deferred acquisition costs decreased during the second quarter of 2014, compared to the prior period, primarily due to the impact of separate account performance, increased death benefits and the impact of unlocking. The decrease in the six month period, compared to the prior year period, was primarily due to the impact of unlocking and increased death benefits. Unlocking, for each period, reflected changes in projected earned spread and withdrawal assumptions within our amortization models on our variable block of business.

Equity 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 fixed maturities 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 joint ventures. We also 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 the tax credits is subject to fluctuation from period to period due to the timing of the housing project completions and the approval of the tax credits. Equity income, net of related income taxes, was as follows:

Equity income, net of related income taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Equity income (loss):
 
 
 
 
 
 
 
Low income housing tax credit partnerships
$
(1,669
)
 
$
(1,540
)
 
$
(3,430
)
 
$
(2,886
)
Other equity method investments
550

 
1,295

 
731

 
1,934

 
(1,119
)
 
(245
)
 
(2,699
)
 
(952
)
Income taxes:
 
 
 
 
 
 
 
Taxes on equity income (loss)
379

 
87

 
945

 
334

Investment tax credits
3,271

 
2,686

 
5,933

 
4,458

Equity income, net of related income taxes
$
2,531

 
$
2,528

 
$
4,179

 
$
3,840


Income Taxes on Operating Income

The effective tax rate on operating income was 21.9% for the second quarter of 2014 and 22.6% for the six months ended June 30, 2014 compared with 24.9% for the second quarter of 2013 and 25.9% for the six months ended June 30, 2013. 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 2014 effective tax rates


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Table of Contents

decreased, compared to the prior periods, primarily due to an increase in tax credits from low income housing tax credit partnerships.

Impact of Operating Income Adjustments on FBL Net Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Realized gains on investments
$
2,806

 
$
7,236

 
$
2,266

 
$
10,522

Change in net unrealized gains/losses on derivatives
1,447

 
(605
)
 
1,878

 
(975
)
Change in amortization of:
 
 
 
 
 
 
 
Deferred acquisition costs
(408
)
 
(474
)
 
(442
)
 
(548
)
Value of insurance in force acquired
(10
)
 
(29
)
 
(7
)
 
(64
)
Unearned revenue reserve

 
(53
)
 

 
(41
)
Income tax offset
(1,340
)
 
(2,125
)
 
(1,292
)
 
(3,112
)
Net impact of operating income adjustments
$
2,495

 
$
3,950

 
$
2,403

 
$
5,782

Summary of adjustments noted above after offsets and income taxes:
 
 
 
 
 
 
 
Realized gains/losses on investments
$
1,737

 
$
4,413

 
$
1,409

 
$
6,308

Change in net unrealized gains/losses on derivatives
758

 
(463
)
 
994

 
(526
)
Net impact of operating income adjustments
$
2,495

 
$
3,950

 
$
2,403

 
$
5,782

Net impact per common share - basic
$
0.10

 
$
0.15

 
$
0.10

 
$
0.22

Net impact per common share - assuming dilution
$
0.09

 
$
0.15

 
$
0.10

 
$
0.22


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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in thousands)
Realized gains (losses) on investments:
 
 
 
 
 
 
 
Realized gains on sales
$
2,811

 
$
8,098

 
$
2,908

 
$
13,738

Realized losses on sales
(5
)
 
(663
)
 
(642
)
 
(2,371
)
Total other-than-temporary impairment charges

 
(199
)
 

 
(845
)
Net realized investment gains reported in statements of operations
$
2,806

 
$
7,236

 
$
2,266

 
$
10,522


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 June 30, 2014 and December 31, 2013.



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Table of Contents

Investment Credit Impairment Losses Recognized in Net Income
 
 
 
 
 
 
 
 
 
Three months ended June 30,

Six months ended June 30,
 
2014

2013

2014

2013
 
(Dollars in thousands)
Corporate securities:
 
 
 
 
 
 
 
Transportation
$

 
$
199

 
$

 
$
199

Mortgage loans

 

 
$

 
$
475

Real estate

 

 

 
171

Total other-than-temporary impairment losses reported in net income
$

 
$
199

 
$

 
$
845


There were no impairment losses for the three and six months ended June 30, 2014. Other-than-temporary credit impairment losses for the three months ended June 30, 2013 were incurred within the transportation sector due to our intent to reduce our exposure by selling all or a portion of the security. Losses for the six months ended June 30, 2013 included a mortgage loan due to a restructuring and real estate due to a contract to sell the property for less than its carrying value.

Financial Condition

Investments

Our investment portfolio increased 6.6% to $7,505.1 million at June 30, 2014 compared to $7,040.0 million at December 31, 2013. The portfolio increased due to an increase of $277.5 million in the net unrealized appreciation of fixed maturities during 2014 and positive cash flows from operating and financing activities. Additional details regarding securities in an unrealized loss position at June 30, 2014 are included in the discussion that follows and in Note 2 to our consolidated financial statements. 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.

Fixed Maturity Acquisitions Selected Information
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
2014
 
2013
 
 
(Dollars in thousands)
Cost of acquisitions:
 
 
 
 
Corporate
 
$
167,151

 
$
373,686

Mortgage and asset-backed
 
198,243

 
100,609

United States Government and agencies
 
499

 
974

Tax-exempt municipals
 
8,000

 
118,224

Taxable municipals
 
20,955

 
5,050

Total
 
$
394,848

 
$
598,543

Effective annual yield
 
4.60
%
 
4.30
%
Credit quality
 
 
 
 
NAIC 1 designation
 
73.8
%
 
67.2
%
NAIC 2 designation
 
26.2
%
 
32.1
%
Non-investment grade
 
%
 
0.7
%
Weighted-average life in years
 
16.0

 
19.0
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


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Table of Contents

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 the six months ended June 30, 2014 and June 30, 2013, 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 4.76% during the six-month period ended June 30, 2014 and 4.66% during the six-month period ended June 30, 2013.

Investment Portfolio Summary 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
(Dollars in thousands)
Fixed maturities - available for sale:
 
 
 
 
 
 
 
Public
$
5,074,245

 
67.6
%
 
$
4,630,764

 
65.8
%
144A private placement
1,178,147

 
15.7

 
1,150,257

 
16.3

Private placement
307,346

 
4.1

 
300,732

 
4.3

Total fixed maturities - available for sale
6,559,738

 
87.4

 
6,081,753

 
86.4

Equity securities
111,402

 
1.5

 
91,555

 
1.3

Mortgage loans
597,416

 
8.0

 
575,861

 
8.2

Real estate
4,066

 
0.1

 
4,084

 
0.1

Policy loans
181,048

 
2.4

 
176,993

 
2.5

Short-term investments
48,987

 
0.6

 
108,677

 
1.5

Other investments
2,444

 

 
1,079

 

Total investments
$
7,505,101

 
100.0
%
 
$
7,040,002

 
100.0
%

As of June 30, 2014, 96.0% (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 (NAIC designations 3 through 6). As of June 30, 2014, no single non-investment grade holding exceeded 0.2% of total investments.



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Table of Contents

Credit Quality by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
NAIC Designation
 
Equivalent Rating (1)
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
4,164,226

 
63.5
%
 
$
3,729,070

 
61.3
%
2
 
BBB
 
2,134,353

 
32.5

 
2,086,756

 
34.3

 
 
Total investment grade
 
6,298,579

 
96.0

 
5,815,826

 
95.6

3
 
BB
 
170,436

 
2.6

 
167,003

 
2.7

4
 
B
 
45,539

 
0.7

 
48,972

 
0.8

5
 
CCC
 
34,680

 
0.5

 
40,540

 
0.7

6
 
In or near default
 
10,504

 
0.2

 
9,412

 
0.2

 
 
Total below investment grade
 
261,159

 
4.0

 
265,927

 
4.4

 
 
Total fixed maturities - available for sale
 
$
6,559,738

 
100.0
%
 
$
6,081,753

 
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
 
 
 
June 30, 2014
 
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
$
341,399

 
$
300,957

 
$
28,945

 
$
40,442

 
$
(1,514
)
Capital goods
218,965

 
202,372

 
21,503

 
16,593

 
(714
)
Communications
129,603

 
116,649

 
13,059

 
12,954

 
(293
)
Consumer cyclical
220,454

 
206,992

 
17,663

 
13,462

 
(489
)
Consumer non-cyclical
366,828

 
264,350

 
26,121

 
102,478

 
(3,395
)
Energy
415,815

 
394,491

 
50,196

 
21,324

 
(1,164
)
Finance
769,938

 
742,973

 
64,005

 
26,965

 
(759
)
Transportation
81,229

 
78,426

 
8,095

 
2,803

 
(247
)
Utilities
947,643

 
827,264

 
110,182

 
120,379

 
(3,263
)
Other
70,781

 
59,898

 
5,154

 
10,883

 
(72
)
Total corporate securities
3,562,655

 
3,194,372

 
344,923

 
368,283

 
(11,910
)
Mortgage and asset-backed securities
1,512,397

 
1,276,381

 
93,989

 
236,016

 
(13,607
)
United States Government and agencies
42,897

 
38,872

 
4,158

 
4,025

 
(29
)
State, municipal and other governments
1,441,789

 
1,331,830

 
116,518

 
109,959

 
(3,355
)
Total
$
6,559,738

 
$
5,841,455

 
$
559,588

 
$
718,283

 
$
(28,901
)



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Table of Contents

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 non-cyclical
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
)

Non-Sovereign European Debt Exposure
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
Italy
$
19,704

 
$
22,470

 
$
19,700

 
$
20,003

Spain
15,429

 
20,179

 
15,429

 
19,256

Ireland
13,092

 
15,352

 
13,037

 
15,155

Subtotal
48,225

 
58,001

 
48,166

 
54,414

United Kingdom
181,469

 
192,445

 
182,671

 
182,762

Netherlands
54,795

 
60,304

 
60,952

 
64,335

France
37,221

 
40,732

 
37,223

 
39,564

Other countries
87,195

 
94,005

 
77,471

 
78,881

Subtotal
360,680

 
387,486

 
358,317

 
365,542

Total European exposure
$
408,905

 
$
445,487

 
$
406,483

 
$
419,956


The table above reflects our exposure to non-sovereign European debt. This represents 6.8% of total fixed maturities as of June 30, 2014 and 6.9% as of December 31, 2013. The exposures are primarily in the industrial, financial and utility sectors. We do not own any securities issued by European governments.



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Table of Contents

Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
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
 
$
487,712

 
67.9
%
 
$
(14,182
)
 
49.1
%
2
 
BBB
 
162,985

 
22.7

 
(4,494
)
 
15.5

 
 
Total investment grade
 
650,697

 
90.6

 
(18,676
)
 
64.6

3
 
BB
 
45,206

 
6.3

 
(6,235
)
 
21.6

4
 
B
 
7,112

 
1.0

 
(802
)
 
2.8

5
 
CCC
 
9,693

 
1.3

 
(445
)
 
1.5

6
 
In or near default
 
5,575

 
0.8

 
(2,743
)
 
9.5

 
 
Total below investment grade
 
67,586

 
9.4

 
(10,225
)
 
35.4

 
 
Total
 
$
718,283

 
100.0
%
 
$
(28,901
)
 
100.0
%

 
 
 
 
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
%

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
June 30, 2014
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
Fair Value is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
(Dollars in thousands)
Three months or less
$

 
$
127,204

 
$

 
$
(1,711
)
Greater than three months to six months

 
26,904

 

 
(671
)
Greater than six months to nine months

 
28,100

 

 
(434
)
Greater than nine months to twelve months

 
47,451

 

 
(733
)
Greater than twelve months
14,185

 
503,340

 
(4,499
)
 
(20,853
)
Total
$
14,185

 
$
732,999

 
$
(4,499
)
 
$
(24,402
)



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Table of Contents

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
is Less than 75% of Cost
 
Fair Value is 75% or Greater than Cost
 
Fair Value is Less than 75% of Cost
 
Fair 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
)

Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
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
$
81

 
$
(2
)
 
$
129

 
$
(1
)
Due after one year through five years
7,210

 
(692
)
 
21,508

 
(1,525
)
Due after five years through ten years
38,704

 
(1,389
)
 
182,126

 
(8,459
)
Due after ten years
436,273

 
(13,211
)
 
1,018,590

 
(84,095
)
 
482,268

 
(15,294
)
 
1,222,353

 
(94,080
)
Mortgage and asset-backed
236,015

 
(13,607
)
 
329,800

 
(21,803
)
Total
$
718,283

 
$
(28,901
)
 
$
1,552,153

 
$
(115,883
)

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.

Mortgage and Asset-Backed Securities by Type
 
 
 
 
 
 
 
 
 
June 30, 2014
 
Amortized Cost
 
Par Value
 
Carrying
Value
 
Percent of Fixed Maturities
 
(Dollars in thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Sequential
$
323,736

 
$
383,357

 
$
351,203

 
5.4
%
Pass-through
22,118

 
22,070

 
24,240

 
0.4

Planned and targeted amortization class
143,004

 
141,429

 
149,968

 
2.3

Other
6,434

 
9,265

 
8,211

 
0.1

Total residential mortgage-backed securities
495,292

 
556,121

 
533,622

 
8.2

Commercial mortgage-backed securities
465,075

 
481,491

 
494,154

 
7.5

Other asset-backed securities
471,648

 
513,219

 
484,621

 
7.4

Total
$
1,432,015

 
$
1,550,831

 
$
1,512,397

 
23.1
%



46

Table of Contents

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
%

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.

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 June 30, 2014 and at December 31, 2013, that own securities backed by Alt-A home equity, subprime first-lien, adjustable rate mortgages and commercial mortgage collateral. The funds are reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of $12.9 million at June 30, 2014 and $17.9 million at December 31, 2013.

Mortgage and Asset-Backed Securities by Collateral Type
 
 
 
June 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
(Dollars in thousands)
Government agency
$
214,251

 
$
227,404

 
3.5
%
 
$
199,372

 
$
207,065

 
3.4
%
Prime
151,240

 
167,426

 
2.6

 
166,667

 
180,236

 
2.9

Alt-A
172,085

 
186,914

 
2.9

 
178,653

 
190,217

 
3.1

Subprime
57,650

 
55,126

 
0.8

 
31,766

 
29,891

 
0.5

Commercial mortgage
465,075

 
494,154

 
7.5

 
391,845

 
404,667

 
6.7

Non-mortgage
371,714

 
381,373

 
5.8

 
360,579

 
369,862

 
6.1

Total
$
1,432,015

 
$
1,512,397

 
23.1
%
 
$
1,328,882

 
$
1,381,938

 
22.7
%

The mortgage and asset-backed securities can be summarized into three broad categories: residential, commercial and other asset-backed securities.


47

Table of Contents

 
Residential Mortgage-Backed Securities by Collateral Type and Origination Year
 
 
 
 
 
June 30, 2014
 
Government & Prime
 
Alt-A
 
Subprime
 
Total
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
2014-2008
$
173,846

 
$
181,739

 
$
568

 
$
575

 
$

 
$

 
$
174,414

 
$
182,314

2007
28,889

 
35,345

 
27,065

 
29,103

 

 

 
55,954

 
64,448

2006
21,250

 
25,499

 
26,203

 
30,761

 

 

 
47,453

 
56,260

2005
11,901

 
13,445

 
6,385

 
7,196

 
894

 
864

 
19,180

 
21,505

2004 and prior
110,446

 
118,865

 
87,845

 
90,230

 

 

 
198,291

 
209,095

Total
$
346,332

 
$
374,893

 
$
148,066

 
$
157,865

 
$
894

 
$
864

 
$
495,292

 
$
533,622


 
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


Residential Mortgage-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
NAIC
Designation
 
Equivalent Rating
 
Carrying Value
 
Percent of
Total
 
Carrying Value
 
Percent of
Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
478,390

 
89.6
%
 
$
473,391

 
90.9
%
2
 
BBB
 
27,305

 
5.1

 
18,670

 
3.6

3
 
BB
 
17,758

 
3.4

 
17,920

 
3.4

4
 
B
 
10,169

 
1.9

 
10,747

 
2.1

 
 
Total
 
$
533,622

 
100.0
%
 
$
520,728

 
100.0
%
Commercial Mortgage-Backed Securities by Origination Year
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
2014
$
88,616

 
90,845

 
$

 

2013
28,706

 
28,254

 
20,421

 
18,423

2011
88,696

 
94,450

 
88,494

 
90,998

2010
4,999

 
5,503

 
4,999

 
5,308

2009 and prior
254,058

 
275,102

 
277,931

 
289,938

Total
$
465,075

 
$
494,154

 
$
391,845

 
$
404,667




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Table of Contents

Commercial Mortgage-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
NAIC
Designation
 
Equivalent Rating
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
GNMA
 
$
290,039

 
58.7
%
 
$
195,987

 
48.4
%
1
 
FNMA
 
13,783

 
2.8

 
13,816

 
3.4

1
 
AAA, AA, A
 
 
 
 
 
 
 
 
 
 
Generic
 
95,506

 
19.3

 
91,797

 
22.7

 
 
Super Senior
 
32,650

 
6.6

 
49,798

 
12.3

 
 
Mezzanine
 
17,945

 
3.6

 
18,046

 
4.5

 
 
Junior
 
20,566

 
4.2

 
20,418

 
5.0

 
 
Total AAA, AA, A
 
166,667

 
33.7

 
180,059

 
44.5

2
 
BBB
 
13,315

 
2.7

 
5,898

 
1.5

3
 
BB
 
8,068

 
1.6

 
6,855

 
1.7

4
 
B
 
2,282

 
0.5

 
2,052

 
0.5

 
 
Total
 
$
494,154

 
100.0
%
 
$
404,667

 
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. GSEs 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 $103.4 million at June 30, 2014 and $96.6 million at December 31, 2013. 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
 
 
 
June 30, 2014
 
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)
2014
$

 
$

 
$

 
$

 
$

 
$

 
$
27,921

 
$
27,936

 
$
27,921

 
$
27,936

2013

 

 

 

 

 

 
64,742

 
65,372

 
64,742

 
65,372

2012

 

 

 

 

 

 
136,692

 
139,191

 
136,692

 
139,191

2011

 

 

 

 

 

 
23,865

 
24,206

 
23,865

 
24,206

2010 and prior
19,159

 
19,937

 
24,019

 
29,049

 
56,756

 
54,262

 
118,494

 
124,668

 
218,428

 
227,916

Total
$
19,159

 
$
19,937

 
$
24,019

 
$
29,049

 
$
56,756

 
$
54,262

 
$
371,714

 
$
381,373

 
$
471,648

 
$
484,621




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Table of Contents

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

2009 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


Other Asset-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
NAIC
Designation
 
Equivalent Ratings
 
Carrying
Value
 
Percent of
Total
 
Carrying
Value
 
Percent of
Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
432,159

 
89.2
%
 
$
400,140

 
87.6
%
2
 
BBB
 
14,430

 
3.0

 
14,327

 
3.1

3
 
BB
 
10,511

 
2.2

 
10,350

 
2.3

4
 
B
 
5,899

 
1.2

 
5,816

 
1.3

5
 
CCC
 
11,958

 
2.4

 
17,896

 
3.9

6
 
In or near default
 
9,664

 
2.0

 
8,014

 
1.8

 
 
Total
 
$
484,621

 
100.0
%
 
$
456,543

 
100.0
%
 
State, Municipal and Other Government Securities

State, municipal and other government securities totaled $1,441.8 million, or 22.0% of total fixed maturities, at June 30, 2014, 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 in 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 1.8% of our total fixed maturities at June 30, 2014. As of June 30, 2014, Illinois-related holdings held in the portfolio were rated investment grade, and were trading at 107.3% of amortized cost. Our municipal bond exposure had an average rating of AA and was trading at 108.5% of amortized cost at June 30, 2014.

Equity Securities

Equity securities totaled $111.4 million at June 30, 2014 and $91.6 million at December 31, 2013. Gross unrealized gains totaled $6.5 million and gross unrealized losses totaled $0.5 million at June 30, 2014. At December 31, 2013, gross unrealized gains totaled $3.9 million and gross unrealized losses totaled $2.4 million on these securities. The unrealized losses were primarily attributable to nonredeemable 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 $597.4 million at June 30, 2014 and $575.9 million at December 31, 2013. 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 142 at June 30, 2014 and 143 at December 31, 2013. In 2014, new loans ranged


50

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from $2.1 million to $8.5 million in size, with an average loan size of $4.8 million, an average loan term of 14 years and an average yield of 4.84%. 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 2.9% that are interest only loans at June 30, 2014. At June 30, 2014, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 55.1% and the weighted average debt service coverage ratio was 1.6 based on the results of our 2013 annual study. See Note 2 to our consolidated financial statements for further discussion regarding our mortgage loans.

Asset-Liability Management

Our asset-liability management program includes (i) designing and developing products that encourage persistency and help ensure targeted spreads are earned and, as a result, create a stable liability structure, and (ii) structuring the investment portfolio with duration and cash flow characteristics consistent with the duration and cash flow characteristics of our insurance liabilities. The weighted average life of the fixed maturity and mortgage loan portfolio based on fair values was approximately 10.5 years at June 30, 2014 and 10.4 years at December 31, 2013. The effective duration of the fixed maturity and mortgage loan portfolios backing our annuity products was 5.8 at June 30, 2014 and 6.0 at December 31, 2013. The effective duration of our annuity liabilities was approximately 6.3 at June 30, 2014 and December 31, 2013. While it can be difficult to maintain asset and liability durations that are closely matched in a dynamic environment, we have identified various strategies that can be implemented if duration mismatches exceed acceptable tolerances.

Other Assets

Deferred acquisition costs decreased 23.9% to $255.2 million at June 30, 2014, primarily due to a $86.3 million increase in the impact of the change in net unrealized appreciation on fixed maturity securities during the period. Cash and cash equivalents increased 397.2% to $31.7 million primarily due to normal fluctuations in timing of payments made and received. Assets held in separate accounts increased 2.7% to $712.5 million primarily due to market performance on the underlying investment portfolios.

Liabilities

Future policy benefits increased 2.9% to $5,960.5 million at June 30, 2014 primarily due to an increase in the volume of annuity and life business in force. Deferred income taxes increased 56.9% to $192.8 million primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments. Other liabilities increased 39.7% to $99.3 million primarily due to increases for securities purchased.

Stockholders' Equity

Our stockholders' equity increased 14.6% to $1,197.1 million at June 30, 2014, compared to $1,044.7 million at December 31, 2013, primarily due to the change in unrealized appreciation of fixed maturity securities during the period and net income, partially offset by stock repurchases and cash dividends.

At June 30, 2014, FBL's common stockholders' equity was $1,194.1 million, or $48.32 per share, compared to $1,041.7 million or $42.08 per share at December 31, 2013. Included in stockholders' equity per common share is $9.81 at June 30, 2014 and $4.81 at December 31, 2013 attributable to accumulated other comprehensive income.



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Liquidity and Capital Resources

Cash Flows

During 2014, our operating activities generated cash flows totaling $85.0 million consisting of net income of $51.6 million adjusted for non-cash operating revenues and expenses netting to $33.4 million. We used cash of $149.1 million in our investing activities during the 2014 period. The primary uses were $441.7 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $239.0 million in sales, maturities and repayments of investments. Our financing activities provided cash of $89.4 million during the 2014 period. The primary financing source was $323.8 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $211.6 million for return of policyholder account balances on interest sensitive products. Also, we used $6.2 million for the net repurchase of common stock.

Sources and Uses of Capital Resources

Parent company cash inflows from operations consist primarily of (i) fees that it charges 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 the six months ended June 30, 2014 included management fees from subsidiaries and affiliates totaling $1.8 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 2012 and 2014, our Board of Directors approved plans to repurchase our 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. Under these plans, we repurchased 333,426 shares for $14.2 million during the first six months of 2014 including 70,481 shares for $3.0 million during the second quarter. At June 30, 2014, $47.0 million remains available for repurchases under the 2014 plan. 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 that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.

Interest payments on our debt totaled $2.4 million for the six months ended June 30, 2014 and $4.0 million for the 2013 period. Interest payments on our debt outstanding at June 30, 2014 are estimated to be $2.4 million for the remainder of 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 $203.6 million for the six months ended June 30, 2014 and $216.6 million for the 2013 period.

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 was $359.0 million. There are certain additional limits to the amount of dividend that may be paid within any twelve-month period 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 for year ended December 31, 2013 included in our Annual Report on Form 10-K. Due to the $120.0 million extraordinary dividend paid by Farm Bureau Life to FBL Financial Group, Inc. on September 24, 2013, any dividends made prior to September 25, 2014 will require approval of the Iowa Insurance Division.

We paid regular cash dividends on our common and preferred stock during the six-month period ended June 30 totaling $17.4 million in 2014 and $5.7 million in 2013. It is anticipated that quarterly cash dividend requirements for 2014 will be $0.0075


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per Series B preferred share and $0.35 per common share. The level of common stock dividends are analyzed quarterly and are dependent upon our capital and liquidity positions. In addition, alternative uses of excess capital may impact future dividend levels. Assuming these quarterly dividend rates, the common and preferred dividends would total approximately $17.4 million for the remainder of 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 $72.8 million at June 30, 2014. 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. We had no material commitments for capital expenditures as of June 30, 2014.

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. Our adjusted capital and RBC is reported to our insurance regulators annually based on formulas which may be revised throughout the year. We estimate our adjusted capital and RBC quarterly; however, these estimates may differ from annual results should the regulatory formulas change. As of June 30, 2014, our total adjusted capital is estimated at $605.3 million, resulting in a RBC ratio of 531%, based on company action level capital of $114.0 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 June 30, 2014, included $49.0 million of short-term investments, $31.7 million of cash and cash equivalents and $572.0 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.

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. There have been no material changes to our total contractual obligations since December 31, 2013.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks of Financial Instruments
 
There have been no material changes in the market risks from the information provided in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Form 10-K for the fiscal year ended December 31, 2013.

ITEM 4. 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 (the Act) 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


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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 June 30, 2014, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In July 2014, we implemented a new Enterprise Resource Planning (ERP) system, which effectively replaced our general ledger, accounts payable, cash disbursement and fixed asset systems. During implementation we followed a system development process that required significant pre-implementation planning, design and testing to ensure an ongoing effective control environment. It is anticipated that implementation of this new ERP will enhance internal controls due to increased automation and further integration of related processes.


PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Issuer Purchases of Equity Securities

The following table sets forth issuer purchases of equity securities for the quarter ended June 30, 2014.

Period
 
 (a) Total Number of Shares (or Units) Purchased
 
(b) Average Price Paid per Share (or Unit)
 
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1, 2014 through April 30, 2014
 
57,058

 
$
42.81

 
57,058
 
$47,557,384
May 1, 2014 through May 31, 2014
 
13,423

 
42.91

 
13,423
 
$46,981,345
June 1, 2014 through June 30, 2014
 

 

 
 
$46,981,345
Total
 
70,481

 
$
42.83

 
 
 
 

Activity in this table represents Class A common shares repurchased by the Company in connection with the repurchase plan announced on February 20, 2014. The plan authorizes us to make up to $50.0 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. EXHIBITS

(a) Exhibits:
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 Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 as follows: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Financial Statements
 
 
+
Filed or furnished 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.


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SIGNATURES

Pursuant to the requirements 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.


Date: July 31, 2014                


 
FBL FINANCIAL GROUP, INC.
 
 
 
 
 
 
 
By
/s/ James P. Brannen
 
 
James P. Brannen
 
 
Chief Executive Officer (Principal Executive Officer)
 
 
 
 
By
/s/ Donald J. Seibel
 
 
Donald J. Seibel
 
 
Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)



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