10-Q

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 September 30, 2015
 
 
 
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 October 30, 2015
Class A Common Stock, without par value
 
24,769,873
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 SEPTEMBER 30, 2015
TABLE OF CONTENTS


PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
 
Consolidated Statements of Operations
 
Consolidated Statements of Comprehensive Income (Loss)
 
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 1A.
Risk Factors
 
 
 
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)

 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2015 - $6,332,977; 2014 - $6,111,433)
$
6,720,128

 
$
6,700,698

Equity securities - available for sale, at fair value (cost: 2015 - $116,822; 2014 - $107,410)
120,543

 
112,623

Mortgage loans
694,069

 
629,296

Real estate
3,438

 
3,622

Policy loans
185,353

 
182,502

Short-term investments
17,314

 
48,585

Other investments
1,075

 
3,644

Total investments
7,741,920

 
7,680,970

 
 
 
 
Cash and cash equivalents
32,637

 
76,632

Securities and indebtedness of related parties
141,089

 
129,872

Accrued investment income
83,959

 
76,445

Amounts receivable from affiliates
5,436

 
2,666

Reinsurance recoverable
102,845

 
101,247

Deferred acquisition costs
292,450

 
220,760

Value of insurance in force acquired
21,053

 
22,497

Other assets
74,235

 
70,286

Assets held in separate accounts
617,172

 
683,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,112,796

 
$
9,064,408


 


2




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

 
September 30,
2015
 
December 31,
2014
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
4,722,977

 
$
4,543,980

Traditional life insurance and accident and health products
1,620,174

 
1,581,138

Other policy claims and benefits
39,645

 
34,895

Supplementary contracts without life contingencies
342,260

 
341,955

Advance premiums and other deposits
256,973

 
248,679

Amounts payable to affiliates
679

 
188

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

 
97,000

Current income taxes
13,514

 
2,764

Deferred income taxes
153,028

 
205,698

Other liabilities
82,065

 
72,196

Liabilities related to separate accounts
617,172

 
683,033

Total liabilities
7,945,487

 
7,811,526

 
 
 
 
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 24,766,512 shares in 2015 and 24,703,903 shares in 2014
148,016

 
144,625

Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 11,413 shares in 2015 and 2014
72

 
72

Accumulated other comprehensive income
169,560

 
258,410

Retained earnings
846,630

 
846,737

Total FBL Financial Group, Inc. stockholders' equity
1,167,278

 
1,252,844

Noncontrolling interest
31

 
38

Total stockholders' equity
1,167,309

 
1,252,882

Total liabilities and stockholders' equity
$
9,112,796

 
$
9,064,408
















See accompanying notes.


3




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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Interest sensitive product charges
$
29,856

 
$
27,633

 
$
86,250

 
$
82,085

Traditional life insurance premiums
46,719

 
45,020

 
142,758

 
137,956

Net investment income
95,882

 
95,744

 
292,144

 
283,590

Net realized capital gains (losses) on sales of investments
(93
)
 
1,273

 
7,509

 
3,539

 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
(559
)
 
(273
)
 
(719
)
 
(273
)
Non-credit portion in other comprehensive income (loss)
146

 

 
146

 

Net impairment losses recognized in earnings
(413
)
 
(273
)
 
(573
)
 
(273
)
Other income
3,543

 
4,023

 
12,097

 
10,895

Total revenues
175,494

 
173,420

 
540,185

 
517,792

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Interest sensitive product benefits
53,940

 
53,002

 
163,121

 
158,145

Traditional life insurance benefits
41,604

 
38,375

 
131,967

 
121,863

Policyholder dividends
2,885

 
2,834

 
8,802

 
9,086

Underwriting, acquisition and insurance expenses
36,176

 
34,829

 
107,535

 
103,547

Interest expense
1,213

 
1,197

 
3,637

 
3,495

Other expenses
4,277

 
3,488

 
13,425

 
11,999

Total benefits and expenses
140,095

 
133,725

 
428,487

 
408,135

 
35,399

 
39,695

 
111,698

 
109,657

Income taxes
(11,520
)
 
(12,535
)
 
(36,057
)
 
(35,102
)
Equity income, net of related income taxes
2,761

 
2,992

 
6,932

 
7,171

Net income
26,640

 
30,152

 
82,573

 
81,726

Net loss attributable to noncontrolling interest
19

 
7

 
49

 
67

Net income attributable to FBL Financial Group, Inc.
$
26,659

 
$
30,159

 
$
82,622

 
$
81,793

 
 
 
 
 
 
 
 
Earnings per common share
$
1.07

 
$
1.21

 
$
3.31

 
$
3.28

Earnings per common share - assuming dilution
$
1.06

 
$
1.21

 
$
3.30

 
$
3.26

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.40

 
$
0.35

 
$
1.20

 
$
1.05

Special cash dividend per common share
$

 
$

 
$
2.00

 
$











See accompanying notes.


4




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
26,640

 
$
30,152

 
$
82,573

 
$
81,726

Other comprehensive income (loss) (1)
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses
(2,802
)
 
(8,154
)
 
(89,488
)
 
114,758

Non-credit impairment losses
(85
)
 

 
(85
)
 

Change in underfunded status of postretirement benefit plans
246

 
181

 
723

 
536

Total other comprehensive income (loss), net of tax
(2,641
)
 
(7,973
)
 
(88,850
)
 
115,294

Total comprehensive income (loss), net of tax
23,999

 
22,179

 
(6,277
)
 
197,020

Comprehensive loss attributable to noncontrolling interest
19

 
7

 
49

 
67

Total comprehensive income (loss) applicable to FBL Financial Group, Inc.
$
24,018

 
$
22,186

 
$
(6,228
)
 
$
197,087


(1)
Other comprehensive income (loss) 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, 2014
$
3,000

 
$
135,065

 
$
119,067

 
$
787,609

 
$
50

 
$
1,044,791

Net income - nine months ended September 30, 2014

 

 

 
81,793

 
(67
)
 
81,726

Other comprehensive income

 

 
115,294

 

 

 
115,294

Issuance of common stock under compensation plans

 
9,560

 

 

 

 
9,560

Purchase of common stock

 
(2,201
)
 

 
(14,741
)
 

 
(16,942
)
Dividends on preferred stock

 

 

 
(112
)
 

 
(112
)
Dividends on common stock

 

 

 
(25,948
)
 

 
(25,948
)
Receipts related to noncontrolling interest

 

 

 

 
93

 
93

Balance at September 30, 2014
$
3,000

 
$
142,424

 
$
234,361

 
$
828,601

 
$
76

 
$
1,208,462

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
3,000

 
$
144,697

 
$
258,410

 
$
846,737

 
$
38

 
$
1,252,882

Net income - nine months ended September 30, 2015

 

 

 
82,622

 
(49
)
 
82,573

Other comprehensive loss

 

 
(88,850
)
 

 

 
(88,850
)
Issuance of common stock under compensation plans

 
3,790

 

 

 

 
3,790

Purchase of common stock

 
(399
)
 

 
(3,343
)
 

 
(3,742
)
Dividends on preferred stock

 

 

 
(112
)
 

 
(112
)
Dividends on common stock

 

 

 
(79,274
)
 

 
(79,274
)
Receipts related to noncontrolling interest

 

 

 

 
42

 
42

Balance at September 30, 2015
$
3,000

 
$
148,088

 
$
169,560

 
$
846,630

 
$
31

 
$
1,167,309






See accompanying notes.


5




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

 
Nine months ended September 30,
 
2015
 
2014
Operating activities
 
 
 
Net income
$
82,573

 
$
81,726

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
113,783

 
111,324

Charges for mortality, surrenders and administration
(81,011
)
 
(78,708
)
Net realized gains on investments
(6,936
)
 
(3,266
)
Change in fair value of derivatives
292

 
(777
)
Increase in traditional life and accident and health benefit liabilities
39,037

 
47,853

Deferral of acquisition costs
(30,682
)
 
(30,223
)
Amortization of deferred acquisition costs and value of insurance in force
28,617

 
25,546

Change in reinsurance recoverable
(1,598
)
 
140

Provision for deferred income taxes
(4,818
)
 
692

Other
4,126

 
(7,869
)
Net cash provided by operating activities
143,383

 
146,438

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
471,774

 
373,020

Equity securities - available for sale
13,620

 
1,360

Mortgage loans
32,841

 
34,733

Derivative instruments
3,078

 
696

Policy loans
26,615

 
24,802

Securities and indebtedness of related parties
18,091

 
2,972

Acquisitions:
 
 
 
Fixed maturities - available for sale
(680,727
)
 
(570,403
)
Equity securities - available for sale
(23,022
)
 
(17,025
)
Mortgage loans
(97,510
)
 
(88,023
)
Derivative instruments
(2,675
)
 
(1,584
)
Policy loans
(29,466
)
 
(29,154
)
Securities and indebtedness of related parties
(22,930
)
 
(15,886
)
Short-term investments, net change
31,271

 
64,489

Purchases and disposals of property and equipment, net
(8,330
)
 
(7,434
)
Net cash used in investing activities
(267,370
)
 
(227,437
)




6




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

 
Nine months ended September 30,
 
2015
 
2014
Financing activities
 
 
 
Contract holder account deposits
$
476,664

 
$
457,913

Contract holder account withdrawals
(316,925
)
 
(306,882
)
Receipts related to noncontrolling interests, net
42

 
93

Excess tax deductions on stock-based compensation
1,088

 
828

Issuance or repurchase of common stock, net
(1,491
)
 
(8,065
)
Dividends paid
(79,386
)
 
(26,060
)
Net cash provided by financing activities
79,992

 
117,827

Increase (decrease) in cash and cash equivalents
(43,995
)
 
36,828

Cash and cash equivalents at beginning of period
76,632

 
6,370

Cash and cash equivalents at end of period
$
32,637

 
$
43,198

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,638

 
$
3,638

Income taxes
16,501

 
10,701































See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2015

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 nine-month period ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2014 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.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (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, 2017; early adoption is not permitted. We are currently evaluating the impact of this new guidance on our consolidated financial statements.

In February 2015, the FASB issued guidance that amends existing consolidation guidance. The new guidance modifies the consolidation framework for certain investment entities and all limited partnerships. It also eliminates certain criteria used to determine whether fees paid to a decision maker are a variable interest. The amendment allows for either a full retrospective or modified approach at adoption of the new standard, which becomes effective for fiscal years beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. 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
 
 
 
 
 
 
 
September 30, 2015
 
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)
$
3,454,960

 
$
245,670

 
$
(84,290
)
 
$
3,616,340

 
$
415

Residential mortgage-backed
440,014

 
40,202

 
(4,731
)
 
475,485

 
(3,560
)
Commercial mortgage-backed
510,629

 
49,983

 
(1,452
)
 
559,160

 

Other asset-backed
568,039

 
15,655

 
(4,581
)
 
579,113

 
4,804

United States Government and agencies
40,648

 
4,057

 
(5
)
 
44,700

 

State, municipal and other governments
1,318,687

 
128,776

 
(2,133
)
 
1,445,330

 

Total fixed maturities
$
6,332,977

 
$
484,343

 
$
(97,192
)
 
$
6,720,128

 
$
1,659

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
87,029

 
$
4,635

 
$
(1,301
)
 
$
90,363

 
 
Common stocks
29,793

 
454

 
(67
)
 
30,180

 
 
Total equity securities
$
116,822

 
$
5,089

 
$
(1,368
)
 
$
120,543

 
 
 
December 31, 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)
$
3,335,535

 
$
348,937

 
$
(17,566
)
 
$
3,666,906

 
$
211

Residential mortgage-backed
453,607

 
42,510

 
(4,583
)
 
491,534

 
(3,694
)
Commercial mortgage-backed
485,934

 
45,573

 
(812
)
 
530,695

 

Other asset-backed
508,090

 
17,188

 
(4,017
)
 
521,261

 
5,223

United States Government and agencies
38,227

 
4,581

 
(4
)
 
42,804

 

State, municipal and other governments
1,290,040

 
157,571

 
(113
)
 
1,447,498

 

Total fixed maturities
$
6,111,433

 
$
616,360

 
$
(27,095
)
 
$
6,700,698

 
$
1,740

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

 
$
5,135

 
$
(660
)
 
$
85,041

 
 
Common stocks
26,844

 
738

 

 
27,582

 
 
Total equity securities
$
107,410

 
$
5,873

 
$
(660
)
 
$
112,623

 
 

(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 gross unrealized 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 September 30, 2015 and December 31, 2014 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 $48.2 million at September 30, 2015 and $80.9 million at December 31, 2014. Corporate securities also include redeemable preferred stock with a carrying value of $24.9 million at September 30, 2015 and $29.9 million at December 31, 2014.


9

Table of Contents

Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
 
 
 
 
September 30, 2015
 
Amortized
Cost
 
Estimated
Fair Value
 
(Dollars in thousands)
Due in one year or less
$
104,470

 
$
106,544

Due after one year through five years
720,973

 
784,894

Due after five years through ten years
830,380

 
875,297

Due after ten years
3,158,472

 
3,339,635

 
4,814,295

 
5,106,370

Mortgage-backed and other asset-backed
1,518,682

 
1,613,758

Total fixed maturities
$
6,332,977

 
$
6,720,128


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
 
 
 
 
 
September 30,
2015
 
December 31,
2014
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
387,151

 
$
589,265

Equity securities - available for sale
3,721

 
5,213

 
390,872

 
594,478

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(112,780
)
 
(179,544
)
Value of insurance in force acquired
(3,537
)
 
(3,939
)
Unearned revenue reserve
5,473

 
11,461

Adjustments for assumed changes in policyholder liabilities
(6,567
)
 
(11,182
)
Provision for deferred income taxes
(95,692
)
 
(143,932
)
Net unrealized investment gains
$
177,769

 
$
267,342


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 the 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.



10

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Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
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
 
$
802,548

 
$
(64,347
)
 
$
96,958

 
$
(19,943
)
 
$
899,506

 
$
(84,290
)
 
86.7
%
Residential mortgage-backed
 
22,564

 
(273
)
 
26,843

 
(4,458
)
 
49,407

 
(4,731
)
 
4.9

Commercial mortgage-backed
 
44,129

 
(881
)
 
7,626

 
(571
)
 
51,755

 
(1,452
)
 
1.5

Other asset-backed
 
71,000

 
(900
)
 
66,455

 
(3,681
)
 
137,455

 
(4,581
)
 
4.7

United States Government and agencies
 
2,010

 
(5
)
 

 

 
2,010

 
(5
)
 

State, municipal and other governments
 
86,915

 
(2,133
)
 

 

 
86,915

 
(2,133
)
 
2.2

Total fixed maturities
 
$
1,029,166

 
$
(68,539
)
 
$
197,882

 
$
(28,653
)
 
$
1,227,048

 
$
(97,192
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
33,034

 
$
(551
)
 
$
4,250

 
$
(750
)
 
$
37,284

 
$
(1,301
)
 
 
Common stocks
 
1,241

 
(67
)
 

 

 
1,241

 
(67
)
 
 
Total equity securities
 
$
34,275

 
$
(618
)
 
$
4,250

 
$
(750
)
 
$
38,525

 
$
(1,368
)
 
 

 
 
December 31, 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
 
$
203,764

 
$
(9,756
)
 
$
142,600

 
$
(7,810
)
 
$
346,364

 
$
(17,566
)
 
64.8
%
Residential mortgage-backed
 
27,889

 
(315
)
 
19,084

 
(4,268
)
 
46,973

 
(4,583
)
 
16.9

Commercial mortgage-backed
 

 

 
20,900

 
(812
)
 
20,900

 
(812
)
 
3.0

Other asset-backed
 
128,516

 
(2,349
)
 
55,526

 
(1,668
)
 
184,042

 
(4,017
)
 
14.8

United States Government and agencies
 
500

 

 
470

 
(4
)
 
970

 
(4
)
 

State, municipal and other governments
 

 

 
12,472

 
(113
)
 
12,472

 
(113
)
 
0.5

Total fixed maturities
 
$
360,669

 
$
(12,420
)
 
$
251,052

 
$
(14,675
)
 
$
611,721

 
$
(27,095
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
14,838

 
$
(110
)
 
$
4,450

 
$
(550
)
 
$
19,288

 
$
(660
)
 
 
Total equity securities
 
$
14,838

 
$
(110
)
 
$
4,450

 
$
(550
)
 
$
19,288

 
$
(660
)
 
 

Fixed maturities in the above tables include 368 securities from 299 issuers at September 30, 2015 and 185 securities from 160 issuers at December 31, 2014. We do not have plans to sell or believe we will be required to sell any of our temporarily-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 September 30, 2015.

Corporate securities: The largest unrealized losses were in the energy sector ($142.3 million carrying value and $25.4 million unrealized loss) and the basic industrial sector ($126.6 million carrying value and $19.5 million unrealized loss). The largest unrealized losses in the energy sector were in the oil field services ($32.5 million carrying value and $12.8 million unrealized loss) and energy-independent ($54.7 million carrying value and $7.2 million unrealized loss) sub-sectors. The largest unrealized losses in the basic industrial sector were in the metal/mining ($62.3 million carrying value and $14.5 million unrealized loss) and the chemicals ($47.1 million carrying value and $4.6 million unrealized loss) sub-sectors. The majority of losses were primarily attributable to credit spread widening across the energy sector and metal/mining sub-sectors associated with sharp declines in commodity prices.



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Residential mortgage-backed securities: The unrealized losses on residential mortgage-backed securities were primarily due to continued uncertainty regarding mortgage defaults on Alt-A loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.

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 on equity securities 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 finance 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 $3.7 million at September 30, 2015, with the largest unrealized loss from an energy service provider. With respect to mortgage- and asset-backed securities not backed by the United States Government, our largest aggregate unrealized loss from the same issuer at September 30, 2015 was $3.7 million, consisting of two different securities that are backed by different pools of Alt-A residential mortgage loans. Both securities are rated non-investment grade and the largest unrealized loss totaled $2.2 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 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.



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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
 
 
 
 
 
Nine months ended September 30,
 
2015

2014
 
(Dollars in thousands)
Balance at beginning of period
$
(16,772
)
 
$
(21,592
)
Increases to previously impaired investments
(363
)
 

Reductions due to investments sold
757

 
4,468

Balance at end of period
$
(16,378
)
 
$
(17,124
)

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 September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
 
 
 
 
Realized gains (losses) on sales of investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Gross gains
$
136

 
$
1,437

 
$
2,884

 
$
4,345

Gross losses
(229
)
 
(164
)
 
(1,832
)
 
(806
)
Securities and indebtedness of related parties

 

 
6,457

 

Net realized gains on investments recorded in income
$
(93
)
 
$
1,273

 
7,509

 
3,539

Impairment losses recognized in earnings:
 
 
 
 
 
 
 
Credit-related portion of fixed maturity losses (1)
(363
)
 

 
(363
)
 

Other credit-related (2)
(50
)
 
(273
)
 
(210
)
 
(273
)
Net realized gains (losses) on investments recorded in income
$
(506
)
 
$
1,000

 
$
6,936

 
$
3,266


(1)
Amount represents the credit-related losses recognized for fixed maturities which were impaired through income but not written down to fair value. As discussed above, the non-credit portion of the losses have been recognized in other comprehensive income (loss).
(2)
Amount represents credit-related losses recognized for real estate, other investments and fixed maturities written down to fair value through income.

Proceeds from sales of fixed maturities totaled $88.3 million during the nine months ended September 30, 2015 and $47.5 million during the nine months ended September 30, 2014.

The realized gain on securities and indebtedness of related parties relates to a partnership investment's underlying asset sold at a gain and the dissolution of the partnership during 2015.

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


13

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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, management maintains and regularly reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and establish an estimated loss, if needed, for each impaired loan identified. An estimated loss is needed for loans for which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements.

Any loan delinquent on contractual payments is considered non-performing. At September 30, 2015 and December 31, 2014, 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 non-accrual 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 such that the collection of interest is considered likely.

Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
312,177

 
45.0
%
 
$
269,308

 
42.8
%
Retail
 
215,600

 
31.0

 
214,710

 
34.1

Industrial
 
124,673

 
18.0

 
125,425

 
19.9

Other
 
41,619

 
6.0

 
19,853

 
3.2

Total
 
$
694,069

 
100.0
%
 
$
629,296

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
217,000

 
31.2
%
 
$
191,835

 
30.5
%
West North Central
 
103,723

 
14.9

 
85,664

 
13.6

Pacific
 
96,284

 
13.9

 
94,770

 
15.1

East North Central
 
76,854

 
11.1

 
80,999

 
12.9

Mountain
 
68,523

 
9.9

 
62,473

 
9.9

West South Central
 
64,662

 
9.3

 
50,010

 
7.9

Other
 
67,023

 
9.7

 
63,545

 
10.1

Total
 
$
694,069

 
100.0
%
 
$
629,296

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Loan-to-Value Ratio
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
236,618

 
34.1
%
 
$
180,884

 
28.7
%
51% - 60%
 
178,501

 
25.7

 
189,210

 
30.1

61% - 70%
 
202,993

 
29.2

 
198,336

 
31.5

71% - 80%
 
67,152

 
9.7

 
53,480

 
8.5

81% - 90%
 
8,805

 
1.3

 
7,386

 
1.2

Total
 
$
694,069

 
100.0
%
 
$
629,296

 
100.0
%


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Table of Contents


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 there are loan modifications or refinance requests.

Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2015
 
$
96,592

 
13.9
%
 
$

 
%
2014
 
84,221

 
12.1

 
86,174

 
13.7

2013
 
79,694

 
11.5

 
81,802

 
13.0

2012
 
66,472

 
9.6

 
70,274

 
11.2

2011
 
45,730

 
6.6

 
46,813

 
7.4

2010 and prior
 
321,360

 
46.3

 
344,233

 
54.7

Total
 
$
694,069

 
100.0
%
 
$
629,296

 
100.0
%

 Impaired Mortgage Loans
 
 
 
September 30, 2015
 
December 31, 2014
 
(Dollars in thousands)
Unpaid principal balance
$
21,868

 
$
22,103

Less:
 
 
 
Related allowance
(851
)
 
(857
)
Discount
(132
)
 
(267
)
Carrying value of impaired mortgage loans
$
20,885

 
$
20,979

 Allowance on Mortgage Loans
 
Nine months ended September 30,
 
2015
 
2014
 
(Dollars in thousands)
Balance at beginning of period
$
857

 
$
888

Charge offs
(6
)
 
(24
)
Balance at end of period
$
851

 
$
864


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 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 three quarters of 2015 or of 2014.

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 would therefore be 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:



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Table of Contents

 
September 30, 2015
 
December 31, 2014
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value
 
Maximum Exposure to Loss
 
(Dollars in thousands)
Real estate limited partnerships
$
15,486

 
$
15,486

 
$
17,046

 
$
17,046


We make commitments to fund partnership investments in the normal course of business. We did not have any commitments to investees designated as VIEs as of September 30, 2015 or December 31, 2014.

Other

At September 30, 2015, we had committed to provide $35.2 million of additional funds for limited partnerships and limited liability companies in which we invest.

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 $4.2 million at September 30, 2015 and $7.1 million at December 31, 2014. At September 30, 2015, we had master netting agreements with counterparties covering cash collateral payable totaling $0.4 million. This amount was invested and included in the consolidated balance sheets with corresponding amounts netted against the derivative instruments. We also received collateral of $0.5 million at September 30, 2015 which is held in a separate custodial account and not recorded on the balance sheet. Our derivative assets consist of derivatives embedded within our modified coinsurance agreements and call options which provide an economic hedge for our index annuity contracts. Derivative liabilities totaled $8.5 million at September 30, 2015 and $8.7 million at December 31, 2014 and include derivatives embedded within our index annuity contracts and derivatives embedded within our modified coinsurance agreements. The net gain recognized on these derivatives is included in net investment income and interest sensitive benefits.

Net gain (loss) recognized on these derivatives totaled $(2.0) million for the quarter ended September 30, 2015 and $(0.1) million for the same period in 2014 and totaled $(2.1) million for the nine months ended September 30, 2015 and $1.6 million for the same period in 2014.


3. Fair Values

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

Fair Values and Carrying Values
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities - available for sale
$
6,720,128

 
$
6,720,128

 
$
6,700,698

 
$
6,700,698

Equity securities - available for sale
120,543

 
120,543

 
112,623

 
112,623

Mortgage loans
694,069

 
739,554

 
629,296

 
667,913

Policy loans
185,353

 
234,651

 
182,502

 
230,070

Other investments
988

 
988

 
3,558

 
3,558

Cash, cash equivalents and short-term investments
49,951

 
49,951

 
125,217

 
125,217

Reinsurance recoverable
2,820

 
2,820

 
3,562

 
3,562

Assets held in separate accounts
617,172

 
617,172

 
683,033

 
683,033



16

Table of Contents

Fair Values and Carrying Values (continued)
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
3,715,477

 
$
3,663,602

 
$
3,563,558

 
$
3,666,960

Supplemental contracts without life contingencies
342,260

 
305,842

 
341,955

 
329,651

Advance premiums and other deposits
247,887

 
247,887

 
239,700

 
239,700

Long-term debt
97,000

 
69,394

 
97,000

 
69,772

Other liabilities
60

 
60

 
173

 
173

Liabilities related to separate accounts
617,172

 
612,301

 
683,033

 
677,040


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 from which we obtain the information. Transfers into 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 asset-backed, United States Government agencies, state and municipal and private placement corporate 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 private placement corporate bonds where quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a


17

Table of Contents

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 corporate, mortgage- and asset-backed, United States Government agencies and private placement corporate 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 corporate investments in Level 3 are determined by reference to the 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 the 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 corporate bonds 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 period-to-period 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 of Des Moines (FHLB), with estimated fair value based on the current redemption value of the shares and non-redeemable preferred stock. Estimated fair value is obtained from external pricing sources using a matrix pricing approach.

Level 3 equity securities consist of non-redeemable preferred stock for which no active market exists, and fair value estimates for these securities is based on the values of comparable securities which are actively traded. Increases in spreads used in our


18

Table of Contents

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, net of collateral received.

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.



19

Table of Contents

Future policy benefits, supplemental contracts without life contingencies and advance premiums and other deposits:

Level 3 policy-related financial instruments of investment-type contracts are those not involving significant mortality or morbidity risks. No active market exists for these contracts and they are not measured at fair value on a recurring basis. Fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed. Fair values for our investment-type contracts with expected maturities, including deferred annuities, funding agreements and supplementary contracts, are determined using discounted cash flow valuation techniques based on current interest rates adjusted to reflect our credit risk and an additional provision for adverse deviation. For certain deposit liabilities with no defined maturities and no surrender charges, including pension-related deposit administration funds, advance premiums and other deposits, fair value is the account value or amount payable on demand. Significant judgment is required in selecting the assumptions used to estimate the fair values of these financial instruments. For contracts with known maturities, increases in current rates will result in a decrease in discounted cash flows and a decrease in the estimated fair value of the policy obligation.

Certain annuity contracts include embedded derivatives 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. Long-term debt is a Level 3 measurement. The fair value of our outstanding debt is estimated using a discounted cash flow method based on the market's assessment or our current incremental borrowing rate for similar types of borrowing arrangements adjusted, as needed, to reflect our credit risk. Our selection of the credit spread requires significant judgment. A decrease in the spread will increase the estimated fair value of the outstanding debt.

Other liabilities:

Level 2 other liabilities include the embedded derivatives in our modified coinsurance contracts under which we cede business. Fair values for the embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturities.

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.



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Table of Contents

Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
 
 
September 30, 2015
 
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
$

 
$
3,565,630

 
$
50,710

 
$
3,616,340

Residential mortgage-backed securities

 
469,521

 
5,964

 
475,485

Commercial mortgage-backed securities

 
469,014

 
90,146

 
559,160

Other asset-backed securities

 
521,067

 
58,046

 
579,113

United States Government and agencies
14,559

 
21,132

 
9,009

 
44,700

State, municipal and other governments

 
1,445,330

 

 
1,445,330

Non-redeemable preferred stocks

 
82,579

 
7,784

 
90,363

Common stocks
4,492

 
25,688

 

 
30,180

Other investments

 
988

 

 
988

Cash, cash equivalents and short-term investments
49,951

 

 

 
49,951

Reinsurance recoverable

 
2,820

 

 
2,820

Assets held in separate accounts
617,172

 

 

 
617,172

Total assets
$
686,174

 
$
6,603,769

 
$
221,659

 
$
7,511,602

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$

 
$

 
$
8,441

 
$
8,441

Other liabilities

 
60

 

 
60

Total liabilities
$

 
$
60

 
$
8,441

 
$
8,501




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Table of Contents

Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
 
 
December 31, 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
$

 
$
3,602,667

 
$
64,239

 
$
3,666,906

Residential mortgage-backed securities

 
491,534

 

 
491,534

Commercial mortgage-backed securities

 
452,804

 
77,891

 
530,695

Other asset-backed securities

 
405,120

 
116,141

 
521,261

United States Government and agencies
15,170

 
18,569

 
9,065

 
42,804

State, municipal and other governments

 
1,447,498

 

 
1,447,498

Non-redeemable preferred stocks

 
76,987

 
8,054

 
85,041

Common stocks
3,501

 
24,081

 

 
27,582

Other investments

 
3,558

 

 
3,558

Cash, cash equivalents and short-term investments
125,217

 

 

 
125,217

Reinsurance recoverable

 
3,562

 

 
3,562

Assets held in separate accounts
683,033

 

 

 
683,033

Total assets
$
826,921

 
$
6,526,380

 
$
275,390

 
$
7,628,691

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$

 
$

 
$
8,681

 
$
8,681

Other liabilities

 
173

 

 
173

Total liabilities
$

 
$
173

 
$
8,681

 
$
8,854

Level 3 Fixed Maturities by Valuation Source - Recurring Basis
 
 
 
September 30, 2015
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
17,240

 
$
33,470

 
$
50,710

Residential mortgage-backed securities
5,964

 

 
5,964

Commercial mortgage-backed securities
90,146

 

 
90,146

Other asset-backed securities
37,586

 
20,460

 
58,046

United States Government and agencies

 
9,009

 
9,009

Total
$
150,936

 
$
62,939

 
$
213,875

Percent of total
70.6
%
 
29.4
%
 
100.0
%

 
December 31, 2014
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
40,095

 
$
24,144

 
$
64,239

Commercial mortgage-backed securities
77,891

 

 
77,891

Other asset-backed securities
95,271

 
20,870

 
116,141

United States Government and agencies

 
9,065

 
9,065

Total
$
213,257

 
$
54,079

 
$
267,336

Percent of total
79.8
%
 
20.2
%
 
100.0
%



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Table of Contents

Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
September 30, 2015
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
38,214

 
Discounted cash flow
 
Credit spread
 
1.00% - 12.50% (7.68%)
Commercial mortgage-backed
73,084

 
Discounted cash flow
 
Credit spread
 
1.50% - 4.65% (3.12%)
Other asset-backed securities
13,846

 
Discounted cash flow
 
Credit spread
 
1.21% - 7.70% (5.59%)
United States Government and agencies
9,009

 
Discounted cash flow
 
Credit spread
 
2.02% (2.02%)
Non-redeemable preferred stocks
7,784

 
Discounted cash flow
 
Credit spread
 
4.23% (4.23%)
Total Assets
$
141,937

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
8,441

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.85% - 2.15% (1.45%)
0.15% - 0.40% (0.25%)

 
December 31, 2014
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
41,491

 
Discounted cash flow
 
Credit spread
 
0.95% - 6.80% (4.92%)
Commercial mortgage-backed
77,891

 
Discounted cash flow
 
Credit spread
 
1.75% - 4.00% (2.89%)
Other asset-backed securities
26,937

 
Discounted cash flow
 
Credit spread
 
0.96% - 6.17% (4.31%)
United States Government and agencies
9,065

 
Discounted cash flow
 
Credit spread
 
1.80% (1.80%)
Non-redeemable preferred stocks
8,054

 
Discounted cash flow
 
Credit spread
 
3.34% (3.34%)
Total Assets
$
163,438

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
8,681

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.70% - 1.70% (1.10%)
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.



23

Table of Contents

Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
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,
September 30, 2015
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
64,239

 
$
12,993

 
$
(16,061
)
 
$

 
$
(4,321
)
 
$
18,451

 
$
(25,174
)
 
$
583

 
$
50,710

Residential mortgage-backed securities

 
19,353

 

 

 
273

 

 
(13,667
)
 
5

 
5,964

Commercial mortgage-backed securities
77,891

 
17,286

 
(688
)
 

 
(2,088
)
 

 
(2,334
)
 
79

 
90,146

Other asset-backed securities
116,141

 
46,216

 
(5,225
)
 

 
(324
)
 

 
(98,759
)
 
(3
)
 
58,046

United States Government and agencies
9,065

 

 

 

 
(61
)
 

 

 
5

 
9,009

Non-redeemable preferred stocks
8,054

 

 

 

 
(270
)
 

 

 

 
7,784

Total Assets
$
275,390

 
$
95,848

 
$
(21,974
)
 
$

 
$
(6,791
)
 
$
18,451

 
$
(139,934
)
 
$
669

 
$
221,659

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
8,681

 
$
3,219

 
$
(713
)
 
$
(2,746
)
 
$

 
$

 
$

 
$

 
$
8,441

Total Liabilities
$
8,681

 
$
3,219

 
$
(713
)
 
$
(2,746
)
 
$

 
$

 
$

 
$

 
$
8,441




24

Table of Contents

Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 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,
September 30, 2014
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
81,994

 
$
262

 
$
(12,957
)
 
$
(273
)
 
$
(171
)
 
$
13,624

 
$
(14,960
)
 
$
(25
)
 
$
67,494

Commercial mortgage-backed securities
71,712

 
2,920

 
(558
)
 

 
4,669

 

 
(4,820
)
 
71

 
73,994

Other asset-backed securities
85,835

 
44,671

 
(13,730
)
 

 
(32
)
 
1,974

 
(15,477
)
 
1,087

 
104,328

United States Government and agencies
8,044

 

 

 

 
121

 

 

 
5

 
8,170

Non-redeemable preferred stocks
7,795

 

 

 

 
352

 

 

 

 
8,147

Total Assets
$
255,380

 
$
47,853

 
$
(27,245
)
 
$
(273
)
 
$
4,939

 
$
15,598

 
$
(35,257
)
 
$
1,138

 
$
262,133

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
286

 
$
6,000

 
$
(344
)
 
$
(286
)
 
$

 
$

 
$

 
$

 
$
5,656

Total Liabilities
$
286

 
$
6,000

 
$
(344
)
 
$
(286
)
 
$

 
$

 
$

 
$

 
$
5,656


(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. The fair values of newly issued securities often require additional estimation until a market is created, generally within a few months after issuance. Once a market is created, as was the case for the majority of the security transfers out of the Level 3 category above, Level 2 valuation sources become available. 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
 
 
 
September 30, 2015
 
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
$

 
$

 
$
739,554

 
$
739,554

Policy loans

 

 
234,651

 
234,651

Total assets
$

 
$

 
$
974,205

 
$
974,205

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
3,655,161

 
$
3,655,161

Supplemental contracts without life contingencies

 

 
305,842

 
305,842

Advance premiums and other deposits

 

 
247,887

 
247,887

Long-term debt

 

 
69,394

 
69,394

Liabilities related to separate accounts

 

 
612,301

 
612,301

Total liabilities
$

 
$

 
$
4,890,585

 
$
4,890,585




25

Table of Contents

Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels
 
 
 
December 31, 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
$

 
$

 
$
667,913

 
$
667,913

Policy loans

 

 
230,070

 
230,070

Total assets
$

 
$

 
$
897,983

 
$
897,983

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
3,658,279

 
$
3,658,279

Supplemental contracts without life contingencies

 

 
329,651

 
329,651

Advance premiums and other deposits

 

 
239,700

 
239,700

Long-term debt

 

 
69,772

 
69,772

Liabilities related to separate accounts

 

 
677,040

 
677,040

Total liabilities
$

 
$

 
$
4,974,442

 
$
4,974,442


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. On May 22, 2015, one real estate property was impaired to fair value totaling $1.0 million which resulted in an impairment charge of $0.2 million. There were no mortgage loans or real estate impaired to fair value during the nine months ended September 30, 2014.


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 September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Service cost
$
1,488

 
$
1,319

 
$
4,464

 
$
3,959

Interest cost
3,300

 
3,505

 
9,900

 
10,515

Expected return on assets
(4,463
)
 
(4,385
)
 
(13,389
)
 
(13,155
)
Amortization of prior service cost
36

 
36

 
108

 
108

Amortization of actuarial loss
2,598

 
1,361

 
7,794

 
4,083

Effect of settlement
2,944

 
1,341

 
7,434

 
5,941

Net periodic pension cost
$
5,903

 
$
3,177

 
$
16,311

 
$
11,451

 
 
 
 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
$
1,913

 
$
1,018

 
$
5,286

 
$
3,672


Pension settlement charges are recognized when total cash payments exceed the sum of the service and interest cost for the year.


26

Table of Contents

Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Other Plans
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Service cost
$
109

 
$
68

 
$
327

 
$
202

Interest cost
250

 
269

 
750

 
807

Amortization of prior service cost
(3
)
 
(3
)
 
(9
)
 
(9
)
Amortization of actuarial loss
382

 
283

 
1,146

 
849

Net periodic pension cost
$
738

 
$
617

 
$
2,214

 
$
1,849

 
 
 
 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
$
418

 
$
343

 
$
1,254

 
$
1,029

 

5. Commitments and Contingencies

Legal Proceedings

In the normal course of business, we may be involved in litigation in which damages are alleged that are substantially in excess of contractual policy benefits or certain other agreements. In recent years, companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We are not aware of any such matters threatened or pending against FBL Financial Group, Inc. or any of its subsidiaries.


6. Stockholders' Equity

Share Repurchases

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 programs, we repurchased 66,904 shares for $3.7 million during the nine months ended September 30, 2015 and 395,816 shares for $16.9 million during the nine months ended September 30, 2014. At September 30, 2015, $39.0 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.

Special Dividend

On March 6, 2015, the Board of Directors approved a special $2.00 per share cash dividend to Class A and Class B common shareholders of record as of March 16, 2015. The aggregate dividend totaling $49.5 million was paid on March 26, 2015.



27

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, 2014
24,742,942

 
$
134,993

 
11,413

 
$
72

 
24,754,355

 
$
135,065

Issuance of common stock under compensation plans
314,273

 
9,560

 

 

 
314,273

 
9,560

Purchase of common stock
(395,816
)
 
(2,201
)
 

 

 
(395,816
)
 
(2,201
)
Outstanding at September 30, 2014
24,661,399

 
$
142,352

 
11,413

 
$
72

 
24,672,812

 
$
142,424

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2015
24,703,903

 
$
144,625

 
11,413

 
$
72

 
24,715,316

 
$
144,697

Issuance of common stock under compensation plans
129,513

 
3,790

 

 

 
129,513

 
3,790

Purchase of common stock
(66,904
)
 
(399
)
 

 

 
(66,904
)
 
(399
)
Outstanding at September 30, 2015
24,766,512

 
$
148,016

 
11,413

 
$
72

 
24,777,925

 
$
148,088


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, 2014
$
126,587

 
$
(1,366
)
 
$
(6,154
)
 
$
119,067

Other comprehensive income before reclassifications
114,698

 
2,247

 

 
116,945

Reclassification adjustments
(2,187
)
 

 
536

 
(1,651
)
Balance at September 30, 2014
$
239,098

 
$
881

 
$
(5,618
)
 
$
234,361

 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
266,211

 
$
1,131

 
$
(8,932
)
 
$
258,410

Other comprehensive income (loss) before reclassifications
(88,917
)
 
32

 

 
(88,885
)
Reclassification adjustments
(603
)
 
$
(85
)
 
723

 
35

Balance at September 30, 2015
$
176,691

 
$
1,078

 
$
(8,209
)
 
$
169,560


(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.



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Table of Contents

Accumulated Other Comprehensive Income Reclassification Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
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 losses on sales of investments
$
(1,052
)
 
$

 
$

 
$
(1,052
)
Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
125

 
7

 

 
132

Other-than-temporary impairment losses

 
(146
)
 

 
(146
)
Other expenses: Change in unrecognized postretirement items:
 
 
 
 
 
 


Prior service costs

 

 
(9
)
 
(9
)
Net actuarial loss

 

 
1,122

 
1,122

Reclassifications before income taxes
(927
)
 
(139
)
 
1,113

 
47

Income taxes
324

 
54

 
(390
)
 
(12
)
Reclassification adjustments
$
(603
)
 
$
(85
)
 
$
723

 
$
35

 
Nine months ended September 30, 2014
 
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 losses on sales of investments
$
(3,539
)
 
$

 
$

 
$
(3,539
)
Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
175

 

 

 
175

Other expenses: Change in unrecognized postretirement items:
 
 
 
 
 
 


Prior service costs

 

 
(9
)
 
(9
)
Net actuarial loss

 

 
834

 
834

Reclassifications before income taxes
(3,364
)
 

 
825

 
(2,539
)
Income taxes
1,177

 

 
(289
)
 
888

Reclassification adjustments
$
(2,187
)
 
$

 
$
536

 
$
(1,651
)

(1)
See Note 2 for further information.



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Table of Contents

7. Earnings Per Share

Computation of Earnings Per Common Share
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income attributable to FBL Financial Group, Inc.
$
26,659

 
$
30,159

 
$
82,622

 
$
81,793

Less: Dividends on Series B preferred stock
37

 
37

 
112

 
112

Income available to common stockholders
$
26,622

 
$
30,122

 
$
82,510

 
$
81,681

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares - basic
24,923,202

 
24,858,021

 
24,926,188

 
24,877,424

Effect of dilutive securities - stock-based compensation
79,850

 
130,966

 
93,275

 
152,660

Weighted average shares - diluted
25,003,052

 
24,988,987

 
25,019,463

 
25,030,084

 
 
 
 
 
 
 
 
Earnings per common share
$
1.07

 
$
1.21

 
$
3.31

 
$
3.28

Earnings per common share - assuming dilution:
$
1.06

 
$
1.21

 
$
3.30

 
$
3.26

 
There were no antidilutive stock options outstanding in either period presented.


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 September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
Annuity
$
53,415

 
$
51,070

 
$
159,638

 
$
150,145

Life Insurance
101,431

 
97,935

 
305,897

 
292,589

Corporate and Other
23,530

 
23,046

 
70,978

 
69,670

 
178,376

 
172,051

 
536,513

 
512,404

Net realized gains (losses) on investments (1)
(511
)
 
1,000

 
6,934

 
3,266

Change in net unrealized gains/losses on derivatives (1)
(2,371
)
 
369

 
(3,262
)
 
2,122

Consolidated revenues
$
175,494

 
$
173,420

 
$
540,185

 
$
517,792

 
 
 
 
 
 
 
 
Pre-tax operating income (loss):
 
 
 
 
 
 
 
Annuity
$
19,762

 
$
16,971

 
$
53,681

 
$
47,067

Life Insurance
18,355

 
14,623

 
41,784

 
36,596

Corporate and Other
(2,774
)
 
6,789

 
5,673

 
18,348

 
35,343

 
38,383

 
101,138

 
102,011

Income taxes on operating income
(8,059
)
 
(8,920
)
 
(22,234
)
 
(23,317
)
Net realized gains/losses on investments (1)
(307
)
 
597

 
4,421

 
2,006

Change in net unrealized gains/losses on derivatives (1)
(318
)
 
99

 
(703
)
 
1,093

Consolidated net income attributable to FBL Financial Group, Inc.
$
26,659

 
$
30,159

 
$
82,622

 
$
81,793


(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 September 30, 2015 and December 31, 2014 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 $184.0 million for the quarter ended September 30, 2015 and $149.4 million for the same period in 2014. Net premiums collected totaled $508.4 million for the nine months ended September 30, 2015 and $504.4 million for the same period in 2014.

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 September 30,
 
Nine months ended September 30,
 
2015

2014
 
2015
 
2014
 
(Dollars in thousands)
Traditional and universal life insurance premiums collected
$
68,159

 
$
67,657

 
$
210,461

 
$
214,081

Premiums collected on interest sensitive products
(21,638
)
 
(22,743
)
 
(68,664
)
 
(76,165
)
Traditional life insurance premiums collected
46,521

 
44,914

 
141,797

 
137,916

Change in due premiums and other
198

 
106

 
961

 
40

Traditional life insurance premiums
$
46,719

 
$
45,020

 
$
142,758

 
$
137,956


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 September 30,
 
Nine months ended September 30,
 
2015

2014
 
2015
 
2014
 
(Dollars in thousands)
Annuity
 
 
 
 
 
 
 
Surrender charges and other
$
542

 
$
327

 
$
1,810

 
$
1,392

 
 
 
 
 
 
 
 
Life Insurance
 
 
 
 
 
 
 
Administration charges
$
3,558

 
$
3,394

 
$
10,763

 
$
10,433

Cost of insurance charges
11,947

 
11,625

 
35,162

 
33,901

Surrender charges
254

 
209

 
740

 
615

Amortization of policy initiation fees
1,235

 
425

 
2,251

 
799

Total
$
16,994

 
$
15,653

 
$
48,916

 
$
45,748

 
 
 
 
 
 
 
 
Corporate and Other
 
 
 
 
 
 
 
Administration charges
$
1,392

 
$
1,484

 
$
4,426

 
$
4,759

Cost of insurance charges
7,500

 
7,391

 
22,311

 
22,188

Surrender charges
46

 
123

 
238

 
364

Separate account charges
2,204

 
2,252

 
6,722

 
6,813

Amortization of policy initiation fees
1,178

 
403

 
1,827

 
821

Total
$
12,320

 
$
11,653

 
$
35,524

 
$
34,945

 
 
 
 
 
 
 
 
Consolidated interest sensitive product charges
$
29,856

 
$
27,633

 
$
86,250

 
$
82,085




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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, 2014 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, 2014 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 during such times. 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 and other environmental factors which may impact our business include, but are not limited to, the following:

Gross Domestic Product increased at an annual rate of 1.5% during the third quarter 2015 based on recent estimates.
U.S. unemployment was estimated to be 5.1% during September 2015.
U.S. net farm income is forecast to decrease 36.0% and farm real estate value is forecast to decrease 2.1% during 2015 according to recent U.S. Department of Agriculture forecasts.
The U.S. 10-year Treasury yield decreased during the third quarter of 2015 to 2.06% at September 30, 2015.
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.
The Department of Labor recently proposed to expand an insurance company's fiduciary responsibilities for sales of insurance products to be used in retirement plans. See Part 2, Item 1A for further discussion of this proposal.


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Table of Contents

The low market interest rate environment continues to impact our investment yields as well as the interest we credit on our interest sensitive products. The benchmark 10-year U.S. Treasury yield decreased during the quarter and credit spreads rose moderately, but available investment yields remain low. Our average investment portfolio yield declined during the quarter as yields on new acquisitions were generally lower than the average portfolio yield. As a result we proactively reduced customer crediting rates on certain annuity products during the third quarter of 2015. Low crediting rates pose challenges to maintaining attractive annuity and universal life products, although our rates are comparable to other insurance companies, allowing us to maintain our competitive position within the market. We continue to reassess the future profitability of our interest sensitive products as future profit expectations impact the valuation of deferred policy acquisition costs. During 2014 and 2015 we unlocked assumptions used to amortize deferred policy acquisition costs to reflect the expectation of lower earned spread rates, primarily driven by the expected continuation of low market interest rates. We experienced a slight decrease in the fair value of our fixed maturity security portfolio during the third quarter of 2015 due to a modest increase in market yields. See the segment discussion and “Financial Condition” section that follows for additional information regarding the impact of low market interest rates on our business.


Results of Operations for the Periods Ended September 30, 2015 and 2014

 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(Dollars in thousands, except per share data)
Pre-tax operating income (loss):
 
 
 
 
 
 
 
 
 
 
 
Annuity segment
$
19,762

 
$
16,971

 
16
 %
 
$
53,681

 
$
47,067

 
14
 %
Life Insurance segment
18,355

 
14,623

 
26
 %
 
41,784

 
36,596

 
14
 %
Corporate and Other segment
(2,774
)
 
6,789

 
(141
)%
 
5,673

 
18,348

 
(69
)%
Total pre-tax operating income
35,343

 
38,383

 
(8
)%
 
101,138

 
102,011

 
(1
)%
Income taxes on operating income
(8,059
)
 
(8,920
)
 
(10
)%
 
(22,234
)
 
(23,317
)
 
(5
)%
Operating income
27,284

 
29,463

 
(7
)%
 
78,904

 
78,694

 
 %
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains/losses on investments (1)
(307
)
 
597

 
(151
)%
 
4,421

 
2,006

 
120
 %
Change in net unrealized gains/losses on derivatives (1)
(318
)
 
99

 
(421
)%
 
(703
)
 
1,093

 
(164
)%
Net income attributable to FBL Financial Group, Inc.
$
26,659

 
$
30,159

 
(12
)%
 
$
82,622

 
$
81,793

 
1
 %
 
 
 
 
 
 
 
 
 
 
 

Operating income per common share - assuming dilution
$
1.09

 
$
1.18

 
(8
)%
 
$
3.15

 
$
3.14

 
 %
Earnings per common share - assuming dilution
1.06

 
1.21

 
(12
)%
 
3.30

 
3.26

 
1
 %
Effective tax rate on operating income
23
%
 
23
%
 
 
 
22
%
 
23
%
 

Average invested assets, at amortized cost
 
 
 
 

 
$
7,231,934

 
$
6,885,291

 
5
 %
Annualized yield on average invested assets
 
 
 
 
 
 
5.58
%
 
5.60
%
 

Impact on operating income of unlocking deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and certain product reserves, net of tax
$
197

 
$

 
N/A
 
$
197

 
$
42

 
369
 %

(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 and net income decreased in the third quarter of 2015, compared to the prior year period, primarily due to an increase in death benefits, partially offset by the impact of an increase in the volume of business in force. Operating and net income increased in the nine months ended September 30, 2015, compared to the prior year period, primarily due to increases in the volume of business in force and investment fee income, partially offset by an increase in death benefits. Net income for


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Table of Contents

the nine-month period, compared to the prior year period, was also impacted by an increase in net realized gains, partially offset by a decrease in net unrealized gains/losses on derivatives. See the discussion that follows for details regarding operating income by segment.

We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve for participating life insurance and interest sensitive products, as well as certain reserves on interest sensitive products, as applicable, through an “unlocking” process. These assumptions typically consist of withdrawal and lapse rates, earned spreads and mortality with revisions based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually. See the discussion that follows for further details of the unlocking impact to our operating segments.

Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
542

 
$
327

 
66
 %
 
$
1,810

 
$
1,392

 
30
 %
Net investment income
52,873

 
50,743

 
4
 %
 
157,828

 
148,753

 
6
 %
Total operating revenues
53,415

 
51,070

 
5
 %
 
159,638

 
150,145

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
26,490

 
25,896

 
2
 %
 
82,105

 
78,698

 
4
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commissions net of deferrals
441

 
560

 
(21
)%
 
1,422

 
1,576

 
(10
)%
Amortization of deferred acquisition costs
1,477

 
2,685

 
(45
)%
 
6,957

 
7,886

 
(12
)%
Amortization of value of insurance in force
288

 
183

 
57
 %
 
740

 
909

 
(19
)%
Other underwriting expenses
4,957

 
4,775

 
4
 %
 
14,733

 
14,009

 
5
 %
Total underwriting, acquisition and insurance expenses
7,163

 
8,203

 
(13
)%
 
23,852

 
24,380

 
(2
)%
Total benefits and expenses
33,653

 
34,099

 
(1
)%
 
105,957

 
103,078

 
3
 %
Pre-tax operating income
$
19,762

 
$
16,971

 
16
 %
 
$
53,681

 
$
47,067

 
14
 %



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Table of Contents

Annuity Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,

Nine months ended September 30,
 
2015

2014

Change

2015

2014

Change
 
(Dollars in thousands)
Other data
 
 
 
 
 
 
 
 
 
 
 
Annuity premiums collected, direct
$
101,971

 
$
67,756

 
50
%
 
$
248,330

 
$
238,582

 
4
%
Policy liabilities and accruals, end of period
 
 
 
 
 
 
3,890,679

 
3,683,054

 
6
%
Average invested assets, at amortized cost
 
 
 
 
 
 
3,943,774

 
3,728,141

 
6
%
Investment fee income included in net investment income (1)
2,439

 
1,730

 
41
%
 
7,655

 
2,782

 
175
%
Average individual annuity account value
 
 
 
 
 
 
2,668,600

 
2,521,584

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
 
 
 
 
 
 
5.59
%
 
5.58
%
 
 
Weighted average interest crediting rate
 
 
 
 
 
 
2.78
%
 
2.88
%
 
 
Spread
 
 
 
 
 
 
2.81
%
 
2.70
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
 
 
 
 
 
 
4.2
%
 
4.8
%
 
 

(1)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our prepayment speed assumptions.

Pre-tax operating income for the Annuity segment increased in the third quarter of 2015 and the nine months ended September 30, 2015, compared to the prior year periods, primarily due to higher spread income earned from an increase in the volume of business in force and higher investment fee income.

The average aggregate account value for individual annuity contracts in force increased in 2015, compared to the prior year period, due to continued sales and the crediting of interest. Continued growth in our business in force contributes to increases in net investment income, interest sensitive product charges and interest sensitive benefits. Premiums collected were higher in the 2015 periods primarily due to increased sales of fixed rate deferred annuity products in the third quarter of 2015. The amount of premiums collected is highly dependent upon the relationship between the current crediting rates of our products compared to those of competing products.

The Annuity segment also includes advances on our funding agreements with the Federal Home Loan Bank of Des Moines (FHLB). Outstanding funding agreements totaled $398.9 million at September 30, 2015 and $326.4 million at September 30, 2014.

Amortization of deferred acquisition costs and the value of insurance in force changed during the quarter and nine months ended September 30, 2015, compared to prior year periods, due to changes in the actual profits on the underlying business. Amortization, as well as reserves held on certain products, also changed due to the impact of unlocking. Unlocking generally reflects changes in our projected earned spreads, withdrawal and mortality assumptions. The impact of unlocking on pre-tax operating income for the quarter and nine months ended September 30, 2015 and 2014 was as follows:



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Table of Contents

Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Amortization of deferred acquisition costs
$
1,419

 
$

 
$
1,419

 
$
197

Amortization of value of insurance in force acquired
(52
)
 

 
(52
)
 
(403
)
Changes in certain product reserves reported in interest sensitive product benefits
(722
)
 

 
(722
)
 

Increase (decrease) to pre-tax operating income
$
645

 
$

 
$
645

 
$
(206
)

The weighted average yield on cash and invested assets for individual annuities increased for the nine months ended September 30, 2015, compared to the prior year period, primarily due to higher investment fee income, partially offset by lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. 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 2015 and 2014 in response to the declining portfolio yield and a change in the underlying product mix.



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Table of Contents

Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
16,969

 
$
15,565

 
9
 %
 
$
48,715

 
$
45,496

 
7
 %
Traditional life insurance premiums
46,719

 
45,020

 
4
 %
 
142,758

 
137,956

 
3
 %
Net investment income
37,743

 
37,350

 
1
 %
 
114,424

 
109,137

 
5
 %
Total operating revenues
101,431

 
97,935

 
4
 %
 
305,897

 
292,589

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 

Interest sensitive product benefits:
 
 
 
 
 
 
 
 
 
 

Interest credited
8,692

 
8,348

 
4
 %
 
24,942

 
24,450

 
2
 %
Death benefits and other
10,856

 
11,847

 
(8
)%
 
33,490

 
34,298

 
(2
)%
Total interest sensitive product benefits
19,548

 
20,195

 
(3
)%
 
58,432

 
58,748

 
(1
)%
Traditional life insurance benefits:
 
 
 
 
 
 
 
 
 
 

Death benefits
21,768

 
14,120

 
54
 %
 
67,197

 
52,134

 
29
 %
Surrender and other benefits
7,242

 
7,025

 
3
 %
 
21,568

 
23,234

 
(7
)%
Increase in traditional life future policy benefits
12,594

 
17,226

 
(27
)%
 
43,201

 
46,491

 
(7
)%
Total traditional life insurance benefits
41,604

 
38,371

 
8
 %
 
131,966

 
121,859

 
8
 %
Distributions to participating policyholders
2,885

 
2,834

 
2
 %
 
8,802

 
9,086

 
(3
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 

Commission expense, net of deferrals
4,065

 
4,753

 
(14
)%
 
12,815

 
13,778

 
(7
)%
Amortization of deferred acquisition costs
147

 
3,776

 
(96
)%
 
8,162

 
10,886

 
(25
)%
Amortization of value of insurance in force
379

 
381

 
(1
)%
 
1,102

 
798

 
38
 %
Other underwriting expenses
14,448

 
13,002

 
11
 %
 
42,834

 
40,838

 
5
 %
Total underwriting, acquisition and insurance expenses
19,039

 
21,912

 
(13
)%
 
64,913

 
66,300

 
(2
)%
Total benefits and expenses
83,076

 
83,312

 
 %
 
264,113

 
255,993

 
3
 %
Pre-tax operating income
$
18,355

 
$
14,623

 
26
 %
 
$
41,784

 
$
36,596

 
14
 %



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Table of Contents

Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Other data
 
 
 
 
 
 
 
 
 
 
 
Life premiums collected, net of reinsurance
$
68,159

 
$
67,657

 
1
 %
 
$
210,461

 
$
214,081

 
(2
)%
Policy liabilities and accruals, end of period
 
 
 
 

 
2,648,057

 
2,548,951

 
4
 %
Life insurance in force, end of period
 
 
 
 

 
53,476,684

 
50,987,664

 
5
 %
Average invested assets, at amortized cost
 
 
 
 

 
2,668,728

 
2,532,057

 
5
 %
Investment fee income included in net investment income (1)
536

 
1,008

 
(47
)%
 
3,771

 
1,062

 
255
 %
Average interest sensitive life account value
 
 
 
 

 
788,353

 
756,575

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
 
 
 
 
 
 
5.96
%
 
5.88
%
 
 
Weighted average interest crediting rate
 
 
 
 
 
 
3.90
%
 
4.02
%
 
 
Spread
 
 
 
 
 
 
2.06
%
 
1.86
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
 
 
 
 
 
 
5.6
%
 
5.4
%
 
 
Death benefits, net of reinsurance and reserves released
22,072

 
17,140

 
29
 %
 
$
66,919

 
$
57,039

 
17
 %

(1)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our prepayment speed assumptions.

Pre-tax operating income for the Life Insurance segment increased in the third quarter of 2015 and the nine months ended September 30, 2015, compared to the prior year periods, primarily due to increases in the volume of business in force and the impact of unlocking, partially offset by increases in death benefits. The increase for the nine-month period also reflected higher investment fee income.

Continued growth in our business in force contributes to the increase in revenues and expenses. Increases in other underwriting expenses for the quarter and nine-month periods ended September 30, 2015, compared to prior year periods, were also due to increases in our defined benefit plan expenses related to a change in the discount rate used in our pension benefit obligations and increases in settlement charges.

Amortization of deferred acquisition costs, the value of insurance in force and unearned revenue reserves changed during the quarter and nine months ended September 30, 2015, compared to prior year periods, due to changes in the actual profits on the underlying business. Amortization, as well as reserves held on certain interest sensitive products, also changed due to the impact of unlocking. Unlocking generally reflects changes in projected earned spreads, policy lapses and mortality assumptions. The impact of unlocking on pre-tax operating income for the quarter and nine months ended September 30, 2015 and 2014 was as follows:



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Table of Contents

Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Amortization of unearned revenue reserve reported in interest sensitive product charges and other income
$
617

 
$

 
$
617

 
$
97

Amortization of deferred acquisition costs
4,400

 

 
4,400

 
60

Amortization of value of insurance in force acquired

 

 

 
234

Changes in certain product reserves reported in interest sensitive product benefits
(513
)
 

 
(513
)
 
(300
)
Increase (decrease) to pre-tax operating income
$
4,504

 
$

 
$
4,504

 
$
91


Death benefits, net of reinsurance and reserves released, increased in the third quarter of 2015 and the nine months ended September 30, 2015 compared to the prior year periods, due to increases in the number of claims. The third quarter, compared to the prior year period, was also impacted by lower reinsurance received on our claims.

Comparability between the periods was also impacted by the correction of an immaterial error which increased pre-tax earnings by $1.3 million in the third quarter of 2015. The correction was related to a reduction of interest sensitive reserves, reducing other interest sensitive product benefits by $1.7 million, partially offset by a $0.4 million increase in amortization of deferred acquisition costs.

The weighted average yield on cash and invested assets for interest sensitive life insurance products increased in the first nine months of 2015, compared to the prior year period, due to an increase in investment fee income from prepayment fees, partially offset by lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. 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 decreased due to crediting rate decreases taken in 2015 and 2014 in response to the declining portfolio yield, partially offset by sales of products with higher crediting rates.




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Table of Contents

Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
12,321

 
$
11,653

 
6
 %
 
$
35,522

 
$
34,945

 
2
 %
Net investment income
7,637

 
7,282

 
5
 %
 
23,154

 
23,578

 
(2
)%
Other income
3,572

 
4,111

 
(13
)%
 
12,302

 
11,147

 
10
 %
Total operating revenues
23,530

 
23,046

 
2
 %
 
70,978

 
69,670

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
9,478

 
6,556

 
45
 %
 
24,377

 
20,469

 
19
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
737

 
914

 
(19
)%
 
2,491

 
2,712

 
(8
)%
Amortization of deferred acquisition costs
7,880

 
2,213

 
256
 %
 
11,452

 
4,482

 
156
 %
Other underwriting expenses
1,703

 
1,650

 
3
 %
 
5,085

 
5,287

 
(4
)%
Total underwriting, acquisition and insurance expenses
10,320

 
4,777

 
116
 %
 
19,028

 
12,481

 
52
 %
Interest expense
1,213

 
1,197

 
1
 %
 
3,637

 
3,495

 
4
 %
Other expenses
4,277

 
3,488

 
23
 %
 
13,425

 
11,999

 
12
 %
Total benefits and expenses
25,288

 
16,018

 
58
 %
 
60,467

 
48,444

 
25
 %
 
(1,758
)
 
7,028

 
(125
)%
 
10,511

 
21,226

 
(50
)%
Net loss attributable to noncontrolling interest
19

 
7

 
171
 %
 
49

 
67

 
(27
)%
Equity loss, before tax
(1,035
)
 
(246
)
 
321
 %
 
(4,887
)
 
(2,945
)
 
66
 %
Pre-tax operating income (loss)
$
(2,774
)
 
$
6,789

 
(141
)%
 
$
5,673

 
$
18,348

 
(69
)%
Other data
 
 
 
 
 
 
 
 
 
 
 
Average invested assets, at amortized cost
 
 
 
 
 
 
$
619,432

 
$
625,092

 
(1
)%
Investment fee income included in net investment income (1)
$
83

 
$
198

 
(58
)%
 
434

 
1,128

 
(62
)%
Average interest sensitive life account value
 
 
 
 
 
 
340,645

 
331,308

 
3
 %
Death benefits, net of reinsurance and reserves released
5,256

 
3,632

 
45
 %
 
14,112

 
11,644

 
21
 %
Estimated impact on pre-tax income from separate account performance on amortization of deferred acquisition costs
(2,000
)
 
(650
)
 
(208
)%
 
(2,398
)
 
(540
)
 
344
 %

(1)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our prepayment speed assumptions.

Pre-tax operating income decreased for the Corporate and Other segment in the third quarter of 2015 and the nine months ended September 30, 2015, compared to the prior year periods, primarily due to an increase in pre-tax equity loss, increases in death benefits and an increase in the amortization of deferred acquisition costs from the impact of unlocking and market performance on our variable business.

Death benefits, net of reinsurance and reserves released, increased in the third quarter of 2015 and the nine months ended September 30, 2015 compared to the prior year periods, due to increases in the number of claims in addition to an increase in the average size of claims for the nine-month period.



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Table of Contents

Amortization of deferred acquisition costs and unearned revenue reserves changed over the prior periods primarily due to the impact of unlocking and market performance in the separate accounts. Unlocking generally reflects changes in projected earned spreads and withdrawal and mortality assumptions. The impact of unlocking on pre-tax operating income for the quarter and nine months ended September 30, 2015 and 2014 was as follows:

Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Amortization of unearned revenue reserve reported in interest sensitive product charges
$
607

 
$

 
$
607

 
$
(160
)
Amortization of deferred acquisition costs
(4,375
)
 

 
(4,375
)
 
640

Changes in certain product reserves reported in interest sensitive product benefits
(1,078
)
 

 
(1,078
)
 
(300
)
Increase (decrease) to pre-tax operating income
$
(4,846
)
 
$

 
$
(4,846
)
 
$
180


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.

Equity income (loss) includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies where we exhibit some control but have a minority ownership interest. Given the timing of availability of financial information from our equity investees, we will consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of bond and equity securities held by the investment partnerships, the 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 have increased our investments in low income housing tax credit partnerships which generate pre-tax losses, but after-tax gains, as the related tax credits are realized. The timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and the approval of tax credits. Equity income, net of related income taxes, was as follows:

Equity Income, Net of Related Income Taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Equity income (loss):
 
 
 
 
 
 
 
Low income housing tax credit partnerships
$
(1,554
)
 
$
(1,355
)
 
$
(5,396
)
 
$
(4,785
)
Other equity method investments
519

 
1,109

 
509

 
1,840

 
(1,035
)
 
(246
)
 
(4,887
)
 
(2,945
)
Income taxes:
 
 
 
 
 
 
 
Taxes on equity income (loss)
362

 
93

 
1,710

 
1,038

Investment tax credits
3,434

 
3,145

 
10,109

 
9,078

Equity income, net of related income taxes
$
2,761

 
$
2,992

 
$
6,932

 
$
7,171


Income Taxes on Operating Income

The effective tax rate on operating income was 22.8% for the third quarter of 2015 and 22.0% for the nine months ended September 30, 2015, compared with 23.2% for the third quarter of 2014, and 22.9% for the nine months ended September 30, 2014. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of low-income housing


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Table of Contents

tax credits and tax-exempt interest and dividend income. The 2015 effective tax rate decreased, compared to the prior year period, 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 September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Realized gains (losses) on investments
$
(506
)
 
$
1,000

 
$
6,936

 
$
3,266

Change in net unrealized gains/losses on derivatives
(796
)
 
14

 
(1,470
)
 
1,892

Change in amortization of:
 
 
 
 
 
 
 
Deferred acquisition costs
346

 
59

 
263

 
(383
)
Value of insurance in force acquired
1

 

 
(5
)
 
(7
)
Unearned revenue reserve
(5
)
 

 
(2
)
 

Income tax offset
335

 
(377
)
 
(2,004
)
 
(1,669
)
Net impact of operating income adjustments
$
(625
)
 
$
696

 
$
3,718

 
$
3,099


Summary of adjustments noted above after offsets and income taxes:
 
 
 
 
 
 
 
Realized gains/losses on investments
$
(307
)
 
$
597

 
$
4,421

 
$
2,006

Change in net unrealized gains/losses on derivatives
(318
)
 
99

 
(703
)
 
1,093

Net impact of operating income adjustments
$
(625
)
 
$
696

 
$
3,718

 
$
3,099

Net impact per common share - basic
$
(0.03
)
 
$
0.03

 
$
0.15

 
$
0.12

Net impact per common share - assuming dilution
$
(0.03
)
 
$
0.03

 
$
0.15

 
$
0.12


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 September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Realized gains (losses) on investments:
 
 
 
 
 
 
 
Realized gains on sales
$
136

 
$
1,437

 
$
9,341

 
$
4,345

Realized losses on sales
(229
)
 
(164
)
 
(1,832
)
 
(806
)
Total other-than-temporary impairment charges
(559
)
 
(273
)
 
(719
)
 
(273
)
Net realized investment gains (losses)
(652
)
 
1,000

 
6,790

 
3,266

Non-credit losses included in other comprehensive income (loss)
146

 

 
146

 

Total reported in statements of operations
$
(506
)
 
$
1,000

 
$
6,936

 
$
3,266


The level of realized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate, economic environment and 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 September 30, 2015 and December 31, 2014.



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Table of Contents

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

Nine months ended September 30,
 
2015

2014

2015

2014
 
(Dollars in thousands)
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
Manufacturing
$

 
$
273

 
$

 
$
273

Residential mortgage-backed
363

 

 
363

 

Real estate and other
50

 

 
210

 

Total other-than-temporary impairment losses reported in net income
$
413

 
$
273

 
$
573

 
$
273


Other-than-temporary credit impairment losses for the three months ended September 30, 2015 were incurred within residential mortgage-backed securities due to changes in the amount and timing of future cash flows resulting in a decline in the present value and within other assets due to uncollectibility. Losses for the nine months ended September 30, 2015 were also incurred in real estate due to an appraisal declining below our current carrying value. Impairment losses for the three and nine months ended September 30, 2014 occurred in the manufacturing sector due to our plans to sell a security in the future.


Financial Condition

Investments

Our investment portfolio increased 0.8% to $7,741.9 million at September 30, 2015 compared to $7,681.0 million at December 31, 2014. The portfolio increased due to positive cash flows from operating and financing activities, offset by a reduction of $202.1 million of net unrealized appreciation of fixed maturities during 2015. Additional details regarding securities in an unrealized loss position at September 30, 2015 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
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
 
2015
 
2014
 
 
(Dollars in thousands)
Cost of acquisitions:
 
 
 
 
Corporate
 
$
346,104

 
$
284,527

Mortgage- and asset-backed
 
235,349

 
278,280

United States Government and agencies
 
6,834

 
499

Tax-exempt municipals
 
41,903

 
8,000

Taxable municipals
 
60,569

 
20,955

Total
 
$
690,759

 
$
592,261

Effective annual yield
 
4.33
%
 
4.60
%
Credit quality
 
 
 
 
NAIC 1 designation
 
62.9
%
 
68.3
%
NAIC 2 designation
 
36.4
%
 
31.7
%
Non-investment grade
 
0.7
%
 
%
Weighted-average life in years
 
17.0

 
17.0
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,


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Table of Contents

the worst-call date is the call or maturity date that produces the lowest yield. The weighted-average maturity is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average maturity is equal to the stated maturity date.

A portion of the securities acquired during the nine months ended September 30, 2015 and September 30, 2014, 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, certain 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 4.61% during the nine-month period ended September 30, 2015 and 4.78% during the nine-month period ended September 30, 2014.

Investment Portfolio Summary 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
(Dollars in thousands)
Fixed maturities - available for sale:
 
 
 
 
 
 
 
Public
$
5,156,472

 
66.6
%
 
$
5,151,922

 
67.1
%
144A private placement
1,291,949

 
16.7

 
1,245,474

 
16.2

Private placement
271,707

 
3.5

 
303,302

 
4.0

Total fixed maturities - available for sale
6,720,128

 
86.8

 
6,700,698

 
87.3

Equity securities
120,543

 
1.6

 
112,623

 
1.5

Mortgage loans
694,069

 
9.0

 
629,296

 
8.2

Real estate
3,438

 

 
3,622

 

Policy loans
185,353

 
2.4

 
182,502

 
2.4

Short-term investments
17,314

 
0.2

 
48,585

 
0.6

Other investments
1,075

 

 
3,644

 

Total investments
$
7,741,920

 
100.0
%
 
$
7,680,970

 
100.0
%

As of September 30, 2015, 96.1% (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 September 30, 2015, no single non-investment grade holding exceeded 0.2% of total investments.



45

Table of Contents

Credit Quality by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
NAIC Designation
 
Equivalent Rating (1)
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
4,329,489

 
64.4
%
 
$
4,252,851

 
63.5
%
2
 
BBB
 
2,127,876

 
31.7

 
2,204,791

 
32.9

 
 
Total investment grade
 
6,457,365

 
96.1

 
6,457,642

 
96.4

3
 
BB
 
190,786

 
2.8

 
166,757

 
2.5

4
 
B
 
43,367

 
0.6

 
37,887

 
0.5

5
 
CCC
 
11,061

 
0.2

 
18,771

 
0.3

6
 
In or near default
 
17,549

 
0.3

 
19,641

 
0.3

 
 
Total below investment grade
 
262,763

 
3.9

 
243,056

 
3.6

 
 
Total fixed maturities - available for sale
 
$
6,720,128

 
100.0
%
 
$
6,700,698

 
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
 
 
 
September 30, 2015
 
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
$
351,180

 
$
224,558

 
$
15,879

 
$
126,622

 
$
(19,530
)
Capital goods
228,896

 
182,052

 
18,003

 
46,844

 
(2,930
)
Communications
133,662

 
97,624

 
8,044

 
36,038

 
(2,735
)
Consumer cyclical
125,532

 
125,532

 
9,137

 

 

Consumer non-cyclical
405,741

 
250,786

 
19,496

 
154,955

 
(6,748
)
Energy
378,104

 
235,799

 
20,469

 
142,305

 
(25,375
)
Finance
759,312

 
648,948

 
47,852

 
110,364

 
(3,751
)
Transportation
103,463

 
84,920

 
6,584

 
18,543

 
(2,706
)
Utilities
972,945

 
761,779

 
94,683

 
211,166

 
(17,759
)
Other
157,505

 
104,836

 
5,523

 
52,669

 
(2,756
)
Total corporate securities
3,616,340

 
2,716,834

 
245,670

 
899,506

 
(84,290
)
Mortgage- and asset-backed securities
1,613,758

 
1,375,141

 
105,840

 
238,617

 
(10,764
)
United States Government and agencies
44,700

 
42,690

 
4,056

 
2,010

 
(5
)
State, municipal and other governments
1,445,330

 
1,358,415

 
128,776

 
86,915

 
(2,133
)
Total
$
6,720,128

 
$
5,493,080

 
$
484,342

 
$
1,227,048

 
$
(97,192
)



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Table of Contents

Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
356,761

 
$
299,688

 
$
25,221

 
$
57,073

 
$
(3,505
)
Capital goods
229,901

 
221,692

 
22,954

 
8,209

 
(73
)
Communications
124,387

 
117,560

 
12,420

 
6,827

 
(123
)
Consumer cyclical
196,957

 
187,587

 
14,536

 
9,370

 
(22
)
Consumer non-cyclical
402,033

 
365,482

 
32,353

 
36,551

 
(1,653
)
Energy
409,642

 
319,393

 
35,579

 
90,249

 
(6,571
)
Finance
777,484

 
738,003

 
61,405

 
39,481

 
(491
)
Transportation
87,172

 
84,190

 
8,457

 
2,982

 
(295
)
Utilities
1,008,174

 
923,312

 
130,003

 
84,862

 
(4,807
)
Other
74,395

 
63,635

 
6,009

 
10,760

 
(26
)
Total corporate securities
3,666,906

 
3,320,542

 
348,937

 
346,364

 
(17,566
)
Mortgage- and asset-backed securities
1,543,490

 
1,291,575

 
105,271

 
251,915

 
(9,412
)
United States Government and agencies
42,804

 
41,834

 
4,581

 
970

 
(4
)
State, municipal and other governments
1,447,498

 
1,435,026

 
157,571

 
12,472

 
(113
)
Total
$
6,700,698

 
$
6,088,977

 
$
616,360

 
$
611,721

 
$
(27,095
)

Non-Sovereign European Debt Exposure
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
Italy
$
19,712

 
$
21,273

 
$
19,707

 
$
22,547

Spain
15,430

 
19,802

 
15,430

 
20,281

Ireland
14,045

 
15,739

 
12,744

 
15,028

Subtotal
49,187

 
56,814

 
47,881

 
57,856

United Kingdom
181,130

 
185,364

 
182,879

 
196,476

Netherlands
60,175

 
63,469

 
54,576

 
60,225

France
28,203

 
31,011

 
37,218

 
41,086

Other countries
89,506

 
91,864

 
86,370

 
93,955

Subtotal
359,014

 
371,708

 
361,043

 
391,742

Total European exposure
$
408,201

 
$
428,522

 
$
408,924

 
$
449,598


The table above reflects our exposure to non-sovereign European debt. This represents 6.4% of total fixed maturities as of September 30, 2015 and 6.7% as of December 31, 2014. The exposures are primarily in the industrial, financial and utility sectors. We do not own any securities issued by European governments or companies based in Greece.



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Table of Contents

Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
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
 
$
594,771

 
48.5
%
 
$
(20,539
)
 
21.1
%
2
 
BBB
 
517,959

 
42.2

 
(53,902
)
 
55.5

 
 
Total investment grade
 
1,112,730

 
90.7

 
(74,441
)
 
76.6

3
 
BB
 
81,126

 
6.6

 
(18,896
)
 
19.5

4
 
B
 
25,169

 
2.0

 
(3,411
)
 
3.5

5
 
CCC
 
3,601

 
0.3

 
(338
)
 
0.3

6
 
In or near default
 
4,422

 
0.4

 
(106
)
 
0.1

 
 
Total below investment grade
 
114,318

 
9.3

 
(22,751
)
 
23.4

 
 
Total
 
$
1,227,048

 
100.0
%
 
$
(97,192
)
 
100.0
%

 
 
 
 
December 31, 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
 
$
296,390

 
48.5
%
 
$
(7,410
)
 
27.4
%
2
 
BBB
 
240,308

 
39.3

 
(10,795
)
 
39.8

 
 
Total investment grade
 
536,698

 
87.8

 
(18,205
)
 
67.2

3
 
BB
 
61,995

 
10.1

 
(7,667
)
 
28.3

4
 
B
 
6,134

 
1.0

 
(636
)
 
2.3

5
 
CCC
 
6,894

 
1.1

 
(587
)
 
2.2

 
 
Total below investment grade
 
75,023

 
12.2

 
(8,890
)
 
32.8

 
 
Total
 
$
611,721

 
100.0
%
 
$
(27,095
)
 
100.0
%

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
September 30, 2015
 
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
$
5,323

 
$
251,135

 
$
(1,779
)
 
$
(8,407
)
Greater than three months to six months
5,945

 
660,974

 
(1,586
)
 
(30,665
)
Greater than six months to nine months
22,947

 
90,163

 
(6,288
)
 
(7,202
)
Greater than nine months to twelve months
28,202

 
33,015

 
(9,965
)
 
(2,647
)
Greater than twelve months
36,086

 
190,449

 
(11,183
)
 
(17,470
)
Total
$
98,503

 
$
1,225,736

 
$
(30,801
)
 
$
(66,391
)



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Table of Contents

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 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
$

 
$
223,846

 
$

 
$
(5,883
)
Greater than three months to six months

 
110,035

 

 
(5,425
)
Greater than six months to nine months

 
16,353

 

 
(625
)
Greater than nine months to twelve months

 
22,855

 

 
(487
)
Greater than twelve months
7,397

 
258,330

 
(2,341
)
 
(12,334
)
Total
$
7,397

 
$
631,419

 
$
(2,341
)
 
$
(24,754
)

Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
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
$
4,414

 
$
(56
)
 
$
4,518

 
$
(496
)
Due after one year through five years
39,102

 
(4,688
)
 
17,499

 
(477
)
Due after five years through ten years
132,781

 
(12,068
)
 
61,928

 
(4,332
)
Due after ten years
812,134

 
(69,616
)
 
275,861

 
(12,378
)
 
988,431

 
(86,428
)
 
359,806

 
(17,683
)
Mortgage- and asset-backed
238,617

 
(10,764
)
 
251,915

 
(9,412
)
Total
$
1,227,048

 
$
(97,192
)
 
$
611,721

 
$
(27,095
)

See Note 2 to our consolidated financial statements for additional analysis of these unrealized losses.

Mortgage- and Asset-Backed Securities

Mortgage-backed 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
 
 
 
 
 
 
 
 
 
September 30, 2015
 
Amortized Cost
 
Par Value
 
Carrying
Value
 
Percent of Fixed Maturities
 
(Dollars in thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Sequential
$
279,502

 
$
330,745

 
$
302,328

 
4.5
%
Pass-through
17,470

 
17,463

 
19,513

 
0.3

Planned and targeted amortization class
136,908

 
137,729

 
146,252

 
2.2

Other
6,134

 
8,604

 
7,392

 
0.1

Total residential mortgage-backed securities
440,014

 
494,541

 
475,485

 
7.1

Commercial mortgage-backed securities
510,629

 
533,517

 
559,160

 
8.3

Other asset-backed securities
568,039

 
603,314

 
579,113

 
8.6

Total
$
1,518,682

 
$
1,631,372

 
$
1,613,758

 
24.0
%



49

Table of Contents

Mortgage and Asset-Backed Securities by Type
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized Cost
 
Par Value
 
Carrying
Value
 
Percent of Fixed Maturities
 
(Dollars in thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Sequential
$
291,569

 
$
346,546

 
$
316,556

 
4.7
%
Pass-through
20,223

 
20,193

 
22,407

 
0.3

Planned and targeted amortization class
135,534

 
133,976

 
144,670

 
2.2

Other
6,281

 
9,019

 
7,901

 
0.1

Total residential mortgage-backed securities
453,607

 
509,734

 
491,534

 
7.3

Commercial mortgage-backed securities
485,934

 
506,091

 
530,695

 
7.9

Other asset-backed securities
508,090

 
546,440

 
521,261

 
7.8

Total
$
1,447,631

 
$
1,562,265

 
$
1,543,490

 
23.0
%

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 September 30, 2015 and at December 31, 2014, that own securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The funds are reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of $11.0 million at September 30, 2015 and $14.2 million at December 31, 2014.

Mortgage- and Asset-Backed Securities by Collateral Type
 
 
 
September 30, 2015
 
December 31, 2014
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
(Dollars in thousands)
Government agency
$
207,290

 
$
225,299

 
3.4
%
 
$
206,397

 
$
223,478

 
3.3
%
Prime
127,227

 
138,149

 
2.1

 
127,434

 
139,954

 
2.1

Alt-A
141,632

 
153,446

 
2.3

 
160,111

 
174,230

 
2.6

Subprime
75,194

 
71,451

 
1.1

 
72,132

 
69,421

 
1.0

Commercial mortgage
510,629

 
559,160

 
8.3

 
485,934

 
530,695

 
7.9

Non-mortgage
456,710

 
466,253

 
6.9

 
395,623

 
405,712

 
6.1

Total
$
1,518,682

 
$
1,613,758

 
24.1
%
 
$
1,447,631

 
$
1,543,490

 
23.0
%

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


50

Table of Contents

 
Residential Mortgage-Backed Securities by Collateral Type and Origination Year
 
 
 
 
 
September 30, 2015
 
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)
2015-2008
$
193,975

 
$
207,995

 
$
142

 
$
142

 
$

 
$

 
$
194,117

 
$
208,137

2007
25,996

 
30,892

 
22,658

 
23,932

 

 

 
48,654

 
54,824

2006
15,625

 
18,568

 
23,947

 
27,662

 

 

 
39,572

 
46,230

2005
9,836

 
11,272

 
6,029

 
6,480

 
938

 
925

 
16,803

 
18,677

2004 and prior
71,175

 
76,456

 
69,693

 
71,161

 

 

 
140,868

 
147,617

Total
$
316,607

 
$
345,183

 
$
122,469

 
$
129,377

 
$
938

 
$
925

 
$
440,014

 
$
475,485


 
December 31, 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
$
169,261

 
$
181,427

 
$
260

 
$
261

 
$

 
$

 
$
169,521

 
$
181,688

2007
27,881

 
33,557

 
26,052

 
27,232

 

 

 
53,933

 
60,789

2006
18,004

 
21,248

 
25,318

 
30,301

 

 

 
43,322

 
51,549

2005
10,969

 
12,560

 
6,278

 
6,928

 
912

 
921

 
18,159

 
20,409

2004 and prior
88,941

 
95,158

 
79,731

 
81,941

 

 

 
168,672

 
177,099

Total
$
315,056

 
$
343,950

 
$
137,639

 
$
146,663

 
$
912

 
$
921

 
$
453,607

 
$
491,534


Residential Mortgage-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
NAIC
Designation
 
Equivalent Rating
 
Carrying Value
 
Percent of
Total
 
Carrying Value
 
Percent of
Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
445,601

 
93.7
%
 
$
455,505

 
92.7
%
2
 
BBB
 
9,309

 
2.0

 
10,944

 
2.2

3
 
BB
 
14,736

 
3.1

 
13,065

 
2.7

4
 
B
 
5,826

 
1.2

 
12,006

 
2.4

5
 
CCC
 
13

 

 
14

 

 
 
Total
 
$
475,485

 
100.0
%
 
$
491,534

 
100.0
%
Commercial Mortgage-Backed Securities by Origination Year
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
2015
$
47,589

 
$
49,388

 
$

 
$

2014
131,846

 
144,904

 
131,365

 
140,872

2013
28,753

 
30,062

 
28,732

 
29,409

2011
95,849

 
106,468

 
95,935

 
103,485

2010 and prior
206,592

 
228,338

 
229,902

 
256,929

Total
$
510,629

 
$
559,160

 
$
485,934

 
$
530,695




51

Table of Contents

Commercial Mortgage-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
NAIC
Designation
 
Equivalent Rating
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
GNMA
 
$
364,212

 
65.1
%
 
$
324,315

 
61.1
%
1
 
FNMA
 
14,109

 
2.5

 
14,110

 
2.7

1
 
AAA, AA, A
 
 
 
 
 
 
 
 
 
 
Generic
 
97,010

 
17.3

 
91,035

 
17.2

 
 
Super Senior
 
12,819

 
2.3

 
19,725

 
3.7

 
 
Mezzanine
 
11,547

 
2.1

 
17,528

 
3.3

 
 
Junior
 
17,900

 
3.2

 
20,097

 
3.8

 
 
Total AAA, AA, A
 
139,276

 
24.9

 
148,385

 
28.0

2
 
BBB
 
31,106

 
5.6

 
32,904

 
6.2

3
 
BB
 
8,309

 
1.5

 
8,493

 
1.6

4
 
B
 
2,148

 
0.4

 
2,488

 
0.4

 
 
Total
 
$
559,160

 
100.0
%
 
$
530,695

 
100.0
%

The 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 $125.3 million at September 30, 2015 and $120.5 million at December 31, 2014. 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
 
 
 
September 30, 2015
 
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)
2015
$

 
$

 
$

 
$

 
$

 
$

 
$
115,942

 
$
116,720

 
$
115,942

 
$
116,720

2014

 

 

 

 

 

 
113,095

 
113,838

 
113,095

 
113,838

2013

 

 

 

 

 

 
50,977

 
51,386

 
50,977

 
51,386

2012

 

 

 

 

 

 
88,572

 
89,896

 
88,572

 
89,896

2011

 

 

 

 

 

 
13,176

 
13,231

 
13,176

 
13,231

2010 and prior
17,910

 
18,265

 
19,163

 
24,069

 
74,256

 
70,526

 
74,948

 
81,182

 
186,277

 
194,042

Total
$
17,910

 
$
18,265

 
$
19,163

 
$
24,069

 
$
74,256

 
$
70,526

 
$
456,710

 
$
466,253

 
$
568,039

 
$
579,113




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Other Asset-Backed Securities by Collateral Type and Origination Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$

 
$

 
$

 
$

 
$

 
$

 
102,612

 
102,405

 
$
102,612

 
$
102,405

2013

 

 

 

 

 

 
60,296

 
60,600

 
60,296

 
60,600

2012

 

 

 

 

 

 
115,851

 
117,975

 
115,851

 
117,975

2011

 

 

 

 

 

 
16,736

 
16,942

 
16,736

 
16,942

2010 and prior
18,775

 
19,482

 
22,472

 
27,567

 
71,220

 
68,500

 
100,128

 
107,790

 
212,595

 
223,339

Total
$
18,775

 
$
19,482

 
$
22,472

 
$
27,567

 
$
71,220

 
$
68,500

 
$
395,623

 
$
405,712

 
$
508,090

 
$
521,261


Other Asset-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
NAIC
Designation
 
Equivalent Ratings
 
Carrying
Value
 
Percent of
Total
 
Carrying
Value
 
Percent of
Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
484,113

 
83.6
%
 
$
457,154

 
87.7
%
2
 
BBB
 
51,515

 
8.9

 
32,664

 
6.3

3
 
BB
 
14,478

 
2.5

 
11,400

 
2.2

4
 
B
 
9,100

 
1.6

 
1,561

 
0.3

5
 
CCC
 
7,289

 
1.3

 
6,400

 
1.2

6
 
In or near default
 
12,618

 
2.1

 
12,082

 
2.3

 
 
Total
 
$
579,113

 
100.0
%
 
$
521,261

 
100.0
%
 
State, Municipal and Other Government Securities

State, municipal and other government securities totaled $1,445.3 million, or 21.5% of total fixed maturities, at September 30, 2015, and $1,447.5 million, or $21.6% of total fixed maturities at December 31, 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 any Puerto Rico-related bonds, which has been in the news given its financial issues. Exposure to the state of Illinois and municipalities within the state accounted for 1.7% of our total fixed maturities at September 30, 2015. As of September 30, 2015, our Illinois-related portfolio holdings were rated investment grade, and were trading at 108.1% of amortized cost. Our municipal bond exposure had an average rating of Aa2/AA and our holdings were trading at 109.6% of amortized cost at September 30, 2015.

Equity Securities

Equity securities totaled $120.5 million at September 30, 2015 and $112.6 million at December 31, 2014. Gross unrealized gains totaled $5.1 million and gross unrealized losses totaled $1.4 million at September 30, 2015. At December 31, 2014, gross unrealized gains totaled $5.9 million and gross unrealized losses totaled $0.7 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 $694.1 million at September 30, 2015 and $629.3 million at December 31, 2014. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of


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commercial mortgage loans outstanding was 156 at September 30, 2015 and 146 at December 31, 2014. In the first nine months of 2015, new loans ranged from $1.9 million to $10.2 million in size, with an average loan size of $6.1 million, an average loan term of 15 years and an average yield of 4.22%. 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 2.2% that are interest only loans at September 30, 2015. At September 30, 2015, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 56.1% and the weighted average debt service coverage ratio was 1.6 based on the results of our 2014 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 10.9 years at September 30, 2015 and 10.6 years at December 31, 2014. The effective duration of the fixed maturity and mortgage loan portfolios backing our annuity products was 6.0 years at September 30, 2015 and 5.9 years at December 31, 2014. The effective duration of our annuity liabilities was approximately 6.5 years at September 30, 2015 and 6.4 years at December 31, 2014. 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 increased 32.5% to $292.5 million at September 30, 2015, primarily due to a $66.8 million decrease in the impact of the change in net unrealized appreciation on fixed maturity securities during the period. Assets held in separate accounts decreased 9.6% to $617.2 million primarily due to market performance on the underlying investment portfolios. Cash and cash equivalents decreased 57.4% to $32.6 million primarily due to payment of a special $2.00 per share dividend on common stock in the first quarter of 2015 and normal fluctuations in timing of payments made and received.

Liabilities

Future policy benefits increased 3.6% to $6,343.2 million at September 30, 2015, primarily due to an increase in the volume of annuity and life business in force. Liabilities related to separate accounts decreased 9.6% to $617.2 million primarily due to the impact of changes in market performance. Deferred income taxes decreased 25.6% to $153.0 million primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments.

Stockholders' Equity

As discussed in Note 6 to our consolidated financial statements, stockholders' equity was impacted by capital deployment actions during the first quarter of 2015. We paid a special cash dividend of $2.00 per share on Class A and Class B common stock and increased our regular quarterly dividend by 14% to $0.40 per share during March 2015.

Our stockholders' equity decreased 6.8% to $1,167.3 million at September 30, 2015, compared to $1,252.8 million at December 31, 2014, primarily due to the change in unrealized appreciation of fixed maturity securities during the period and dividends paid, partially offset by net income.

At September 30, 2015, FBL's common stockholders' equity was $1,164.3 million, or $46.99 per share, compared to $1,249.8 million, or $50.57 per share, at December 31, 2014. Included in stockholders' equity per common share is $6.84 at September 30, 2015 and $10.46 at December 31, 2014 attributable to accumulated other comprehensive income.

Liquidity and Capital Resources

Cash Flows

During the first nine months of 2015, our operating activities generated cash flows totaling $143.4 million, consisting of net income of $82.6 million adjusted for non-cash operating revenues and expenses netting to $60.8 million. We used cash of $267.4 million in our investing activities during the 2015 period. The primary uses were $856.3 million of investment


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acquisitions, mostly in fixed maturity securities, partially offset by $566.0 million in sales, maturities and repayments of investments. Our financing activities provided cash of $80.0 million during the 2015 period. The primary financing source was $476.7 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $316.9 million for return of policyholder account balances on interest sensitive products and $79.4 million for dividends paid to stockholders.

Sources and Uses of Capital Resources

Parent company cash inflows from operations consist primarily of fees that it charges various subsidiaries and affiliates for management of their operations, expense reimbursements and tax settlements from subsidiaries and affiliates, proceeds from the exercise of employee stock options, investment income and dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during the nine months ended September 30, 2015 included management fees from subsidiaries and affiliates totaling $6.1 million and dividends of $37.5 million. Cash outflows are principally for salaries, taxes and other expenses related to providing management services, dividends on outstanding stock, stock repurchases and interest on our parent company debt.

As discussed in Note 6 to our consolidated financial statements, we have periodically taken advantage of opportunities to repurchase our outstanding Class A common stock through Class A common stock repurchase plans approved by our Board of Directors. There was $39.0 million remaining available for repurchases at September 30, 2015 under the current $50 million Class A common stock repurchase plan. Under this plan, we repurchased 66,904 shares for $3.7 million during the nine months ended September 30, 2015. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.

Interest payments on our debt totaled $3.6 million for the nine months ended September 30, 2015 and September 30, 2014. Interest payments on our debt outstanding at September 30, 2015 are estimated to be $1.2 million for the remainder of 2015.

Farm Bureau Life's cash inflows primarily consist of premiums; 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 $303.4 million for the nine months ended September 30, 2015 and $300.0 million for the prior year period.

Farm Bureau Life's ability to pay dividends to the parent company 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, 2014, Farm Bureau Life’s statutory unassigned surplus was $418.5 million. There are certain additional limits on the amount of dividends that may be paid within a year without approval of the Insurance Division, Department of Commerce of the State of Iowa (the Iowa Insurance Division) as discussed in Note 7 to our consolidated financial statements for the year ended December 31, 2014 included in our Annual Report on Form 10-K. During the remainder of 2015, the maximum amount legally available for distribution to the parent company without further regulatory approval is $60.3 million. However, due to the timing of dividend payments during the prior 12 months, the maximum dividend available to be paid without further regulatory approval during the period from September 30, 2015 to December 19, 2015 is $15.3 million.

We paid regular cash dividends on our common and preferred stock during the nine-month period ended September 30 totaling $29.9 million in 2015 and $26.1 million in 2014. In addition, we paid a special $2.00 per common share cash dividend on March 26, 2015 totaling $49.5 million. It is anticipated that quarterly cash dividend requirements for 2015 will be $0.0075 per Series B preferred share and $0.40 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 $9.9 million for the remainder of 2015. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2015. The parent company had available cash and investments totaling $63.3 million at September 30, 2015. FBL Financial Group, Inc. expects to rely on available cash resources, dividends from Farm Bureau Life


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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 September 30, 2015.

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 NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against a statutory "authorized control level" RBC at which point regulators have the option to assume control of the insurance company. The company action level RBC is 200% of the authorized control level and is the first point at which any action would be triggered. 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 September 30, 2015, our statutory total adjusted capital is estimated at $651.2 million, resulting in a RBC ratio of 564%, based on company action level capital of $115.5 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. Farm Bureau Life is 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, our 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, 2014.


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, 2014.



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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 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. While changes have taken place in our internal controls during the quarter ended September 30, 2015, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

The performance of our company is subject to a variety of risks which you should review. Occurrence of these risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company.

Please refer to Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.We are updating the risk factor labeled "All segments of our business are highly regulated and these regulations or changes in them could affect our profitability" by adding the following to the existing language set forth under such risk factor:

During the second quarter of 2015, the U.S. Department of Labor (DOL) proposed regulations addressing when a person providing investment advice with respect to an employee benefit plan or individual retirement account (IRA) is considered a fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. The proposed regulations offer a very broad definition of fiduciary investment advice which includes sales and services currently offered to our customers with such plans or IRAs. The DOL has also proposed a new set of prohibited transaction exemptions (PTEs) and amendments to existing PTEs to permit certain common fee and compensation practices to continue. Under the proposal the agents who sell our fixed annuities, variable annuities and investment products for use in employee benefit plans or IRAs, would subject themselves and the Company to additional disclosures, reporting, record keeping and other regulatory requirements. It is common for our customers to utilize products we offer in such plans and the proposals could have an adverse impact to our operations. It is uncertain if the proposals will be adopted in their current form. The impact of the proposed regulations on sales and operating expenses is uncertain at this time.



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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 September 30, 2015.

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
July 1, 2015 through July 31, 2015
 
38,743

 
$
55.96

 
38,743
 
$40,533,393
August 1, 2015 through August 31, 2015
 
24,716

 
55.84

 
24,716
 
$39,153,341
September 1, 2015 through September 30, 2015
 
3,445

 
56.01

 
3,445
 
$38,960,397
Total
 
66,904

 
$
55.92

 
 
 
 
 
 
 
 
 
 
 
 
 

Activity in this table represents Class A common shares repurchased by the Company in connection with the repurchase plan announced February 20, 2014, which will expire on March 31, 2016. The plan authorizes us to make 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.

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 September 30, 2015 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: November 3, 2015                


 
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)



59