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 March 31, 2016
 
 
 
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 May 5, 2016
Class A Common Stock, without par value
 
24,850,871
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 MARCH 31, 2016
TABLE OF CONTENTS


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

 
March 31,
2016
 
December 31,
2015
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2016 - $6,371,089; 2015 - $6,379,919)
$
6,788,657

 
$
6,637,776

Equity securities - available for sale, at fair value (cost: 2016 - $125,137; 2015 - $116,336)
130,755

 
121,667

Mortgage loans
769,387

 
744,303

Real estate
1,955

 
1,955

Policy loans
186,959

 
185,784

Short-term investments
13,323

 
28,251

Other investments
4,079

 
3,017

Total investments
7,895,115

 
7,722,753

 
 
 
 
Cash and cash equivalents
23,447

 
29,490

Securities and indebtedness of related parties
129,300

 
134,570

Accrued investment income
84,990

 
78,274

Amounts receivable from affiliates
3,722

 
2,834

Reinsurance recoverable
104,947

 
103,898

Deferred acquisition costs
286,789

 
335,783

Value of insurance in force acquired
20,148

 
20,913

Current income taxes recoverable

 
2,421

Other assets
79,675

 
75,811

Assets held in separate accounts
607,739

 
625,257

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,235,872

 
$
9,132,004


 


2




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

 
March 31,
2016
 
December 31,
2015
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
4,813,464

 
$
4,764,159

Traditional life insurance and accident and health products
1,654,105

 
1,637,322

Other policy claims and benefits
36,395

 
44,157

Supplementary contracts without life contingencies
340,322

 
339,929

Advance premiums and other deposits
262,224

 
254,276

Amounts payable to affiliates
633

 
575

Short-term debt payable to non-affiliates

 
15,000

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

 
97,000

Current income taxes
3,021

 

Deferred income taxes
174,701

 
135,063

Other liabilities
73,116

 
84,792

Liabilities related to separate accounts
607,739

 
625,257

Total liabilities
8,062,720

 
7,997,530

 
 
 
 
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 24,840,893 shares in 2016 and 24,796,763 shares in 2015
150,779

 
149,248

Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 11,413 shares in 2016 and 2015
72

 
72

Accumulated other comprehensive income
185,918

 
114,532

Retained earnings
833,341

 
867,574

Total FBL Financial Group, Inc. stockholders' equity
1,173,110

 
1,134,426

Noncontrolling interest
42

 
48

Total stockholders' equity
1,173,152

 
1,134,474

Total liabilities and stockholders' equity
$
9,235,872

 
$
9,132,004


See accompanying notes.


3




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

 
Three months ended March 31,
 
2016
 
2015
Revenues:
 
 
 
Interest sensitive product charges
$
28,111

 
$
28,121

Traditional life insurance premiums
50,138

 
47,148

Net investment income
98,385

 
98,773

Net realized capital gains (losses) on sales of investments
1,590

 
(366
)
 
 
 
 
Total other-than-temporary impairment losses
(3,719
)
 

Non-credit portion in other comprehensive income
1,522

 

Net impairment losses recognized in earnings
(2,197
)
 

Other income
3,639

 
4,270

Total revenues
179,666

 
177,946

 
 
 
 
Benefits and expenses:
 
 
 
Interest sensitive product benefits
54,419

 
55,808

Traditional life insurance benefits
44,569

 
45,709

Policyholder dividends
3,040

 
2,961

Underwriting, acquisition and insurance expenses
37,714

 
35,541

Interest expense
1,212

 
1,212

Other expenses
4,358

 
4,530

Total benefits and expenses
145,312

 
145,761

 
34,354

 
32,185

Income taxes
(11,069
)
 
(10,384
)
Equity income, net of related income taxes
2,652

 
1,769

Net income
25,937

 
23,570

Net loss attributable to noncontrolling interest
9

 
21

Net income attributable to FBL Financial Group, Inc.
$
25,946

 
$
23,591

 
 
 
 
Earnings per common share
$
1.04

 
$
0.95

Earnings per common share - assuming dilution
$
1.04

 
$
0.94

 
 
 
 
Cash dividend per common share
$
0.42

 
$
0.40

Special cash dividend per common share
$
2.00

 
$
2.00


See accompanying notes.


4




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
Three months ended March 31,
 
2016
 
2015
Net income
$
25,937

 
$
23,570

Other comprehensive income (1)
 
 
 
Change in net unrealized investment gains/losses
72,203

 
29,187

Non-credit impairment losses
(952
)
 

Change in underfunded status of postretirement benefit plans
135

 
231

Total other comprehensive income, net of tax
71,386

 
29,418

Total comprehensive income net of tax
97,323

 
52,988

Comprehensive loss attributable to noncontrolling interest
9

 
21

Total comprehensive income applicable to FBL Financial Group, Inc.
$
97,332

 
$
53,009


(1)
Other comprehensive income is recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities.


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
 
FBL Financial Group, Inc. Stockholders' Equity
 
 
 
 
 
Series B Preferred Stock
 
Class A and Class B Common Stock
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Non-
controlling Interest
 
Total Stockholders' Equity
Balance at January 1, 2015
$
3,000

 
$
144,697

 
$
258,410

 
$
846,737

 
$
38

 
$
1,252,882

Net income - three months ended March 31, 2015

 

 

 
23,591

 
(21
)
 
23,570

Other comprehensive income

 

 
29,418

 

 

 
29,418

Issuance of common stock under compensation plans

 
2,682

 

 

 

 
2,682

Dividends on preferred stock

 

 

 
(38
)
 

 
(38
)
Dividends on common stock

 

 

 
(59,440
)
 

 
(59,440
)
Receipts related to noncontrolling interest

 

 

 

 
14

 
14

Balance at March 31, 2015
$
3,000

 
$
147,379

 
$
287,828

 
$
810,850

 
$
31

 
$
1,249,088

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
3,000

 
$
149,320

 
$
114,532

 
$
867,574

 
$
48

 
$
1,134,474

Net income - three months ended March 31, 2016

 

 

 
25,946

 
(9
)
 
25,937

Other comprehensive income

 

 
71,386

 

 

 
71,386

Issuance of common stock under compensation plans

 
1,535

 

 

 

 
1,535

Purchase of common stock

 
(4
)
 

 
(36
)
 

 
(40
)
Dividends on preferred stock

 

 

 
(38
)
 

 
(38
)
Dividends on common stock

 

 

 
(60,105
)
 

 
(60,105
)
Receipts related to noncontrolling interest

 

 

 

 
3

 
3

Balance at March 31, 2016
$
3,000

 
$
150,851

 
$
185,918

 
$
833,341

 
$
42

 
$
1,173,152


See accompanying notes.


5




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

 
Three months ended March 31,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
25,937

 
$
23,570

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
37,317

 
37,964

Charges for mortality, surrenders and administration
(27,603
)
 
(26,977
)
Net realized losses on investments
607

 
366

Change in fair value of derivatives
1,582

 
(97
)
Increase in liabilities for life insurance and other future policy benefits
20,715

 
16,184

Deferral of acquisition costs
(9,941
)
 
(10,354
)
Amortization of deferred acquisition costs and value of insurance in force
10,224

 
9,054

Change in reinsurance recoverable
(1,049
)
 
(5,669
)
Provision for deferred income taxes
1,213

 
2,036

Other
(11,603
)
 
(281
)
Net cash provided by operating activities
47,399

 
45,796

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
102,822

 
123,134

Equity securities - available for sale
600

 
420

Mortgage loans
9,007

 
14,257

Derivative instruments
65

 
1,078

Policy loans
9,185

 
9,222

Securities and indebtedness of related parties
5,866

 
4,892

Acquisitions:
 
 
 
Fixed maturities - available for sale
(103,354
)
 
(179,351
)
Equity securities - available for sale
(1,326
)
 
(8,130
)
Mortgage loans
(34,057
)
 
(58,235
)
Derivative instruments
(1,715
)
 
(896
)
Policy loans
(10,360
)
 
(9,152
)
Securities and indebtedness of related parties
(2,219
)
 
(7,956
)
Short-term investments, net change
14,928

 
25,323

Purchases and disposals of property and equipment, net
(1,427
)
 
(3,443
)
Net cash used in investing activities
(11,985
)
 
(88,837
)




6




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

 
Three months ended March 31,
 
2016
 
2015
Financing activities
 
 
 
Contract holder account deposits
$
127,190

 
$
196,491

Contract holder account withdrawals
(94,709
)
 
(128,679
)
Repayments of debt
(15,000
)
 

Receipts related to noncontrolling interests, net
3

 
14

Excess tax deductions on stock-based compensation
244

 
620

Issuance or repurchase of common stock, net
958

 
1,717

Dividends paid
(60,143
)
 
(59,478
)
Net cash provided by (used in) financing activities
(41,457
)
 
10,685

Decrease in cash and cash equivalents
(6,043
)
 
(32,356
)
Cash and cash equivalents at beginning of period
29,490

 
76,632

Cash and cash equivalents at end of period
$
23,447

 
$
44,276

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,216

 
$
1,213

Income taxes
1

 
2,001


See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2016

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 quarter ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2015 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 February 2015, the Financial Accounting Standards Board (FASB) issued guidance that amends existing consolidation guidance. The decision to consolidate an entity that a company has an ownership stake in is based on one of two consolidation models: the voting interest entity model and the variable interest entity model. The new guidance revises certain criteria used to determine which consolidation model to use, as well as the criteria considered in each model to determine whether consolidation is required. We adopted the new guidance on January 1, 2016. Adoption of the guidance had no impact on our financial statements as it did not alter any of our prior consolidation decisions. Adoption did result in certain entities which were previously evaluated under the voting interest entity model to be evaluated under the variable interest entity model. See Note 2 for details regarding our variable interest entities.

In March 2016, the FASB adopted guidance that will impact the accounting for share-based compensation. The guidance will impact several areas including the accounting for excess tax benefits and deficiencies, classification of excess tax benefits within the consolidated statement of cash flows, and the accounting for forfeitures. The guidance becomes effective for fiscal years beginning after December 15, 2016. Certain requirements must be adopted prospectively, while others are required to be adopted on a modified prospective basis, or retroactively. We are currently evaluating the impact of this new guidance on our consolidated financial statements.

In January 2016, the FASB issued guidance that amends certain aspects of the recognition and measurement of financial instruments. The new guidance primarily affects the accounting for equity investments, the presentation and disclosure requirements for financial instruments and the methodology for assessing the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale fixed maturity securities. The guidance becomes effective for fiscal years beginning after December 15, 2017. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance, including industry-specific guidance. Although insurance contracts are specifically excluded from the scope of this guidance, almost all entities will be affected to some extent by the significant increase in required disclosures. The new guidance is based on the principle that an entity should recognize revenue to reflect the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard, which becomes effective for fiscal years beginning after December 15, 2017; early adoption is not permitted. We are currently evaluating the impact of this new guidance on our consolidated financial statements.



8

Table of Contents

In February 2016, the FASB issued a new lease accounting standard, which, for most lessees, will result in a gross-up of the balance sheet. Under the new standard, lessees will recognize the leased assets on the balance sheet and will recognize a corresponding liability for the present value of lease payments over the lease term. The new standard requires the application of judgment and estimates. Also, there are a number of accounting policy elections that may be taken both at transition and for the accounting post-transition, including whether to adopt a short-term lease recognition exemption. The guidance becomes effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard will be applied as of the beginning of the earliest comparative period presented in the financial statements (date of initial application). We are currently evaluating the impact of this guidance on our consolidated financial statements.


2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
March 31, 2016
 
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)
$
3,452,908

 
$
258,227

 
$
(97,954
)
 
$
3,613,181

 
$
154

Residential mortgage-backed
418,814

 
38,147

 
(2,768
)
 
454,193

 
(1,582
)
Commercial mortgage-backed
523,358

 
58,253

 
(1,476
)
 
580,135

 

Other asset-backed
592,785

 
11,518

 
(10,066
)
 
594,237

 
2,850

United States Government and agencies
40,637

 
3,715

 
(1
)
 
44,351

 

State, municipal and other governments
1,342,587

 
160,169

 
(196
)
 
1,502,560

 

Total fixed maturities
$
6,371,089

 
$
530,029

 
$
(112,461
)
 
$
6,788,657

 
$
1,422

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
95,041

 
$
6,873

 
$
(1,626
)
 
$
100,288

 
 
Common stocks
30,096

 
400

 
(29
)
 
30,467

 
 
Total equity securities
$
125,137

 
$
7,273

 
$
(1,655
)
 
$
130,755

 
 


9

Table of Contents

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
December 31, 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)
$
3,464,402

 
$
192,149

 
$
(137,844
)
 
$
3,518,707

 
$
351

Residential mortgage-backed
436,969

 
33,880

 
(5,343
)
 
465,506

 
(3,584
)
Commercial mortgage-backed
514,195

 
42,284

 
(2,487
)
 
553,992

 

Other asset-backed
578,692

 
11,554

 
(7,124
)
 
583,122

 
3,058

United States Government and agencies
41,050

 
3,129

 
(81
)
 
44,098

 

State, municipal and other governments
1,344,611

 
129,923

 
(2,183
)
 
1,472,351

 

Total fixed maturities
$
6,379,919

 
$
412,919

 
$
(155,062
)
 
$
6,637,776

 
$
(175
)
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
87,029

 
$
6,095

 
$
(1,173
)
 
$
91,951

 
 
Common stocks
29,307

 
450

 
(41
)
 
29,716

 
 
Total equity securities
$
116,336

 
$
6,545

 
$
(1,214
)
 
$
121,667

 
 

(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 March 31, 2016 and December 31, 2015 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 $31.1 million at March 31, 2016 and $43.5 million at December 31, 2015. Corporate securities also include redeemable preferred stock with a carrying value of $25.3 million at March 31, 2016 and $24.8 million at December 31, 2015.

Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
 
 
 
 
March 31, 2016
 
Amortized
Cost
 

Fair Value
 
(Dollars in thousands)
Due in one year or less
$
69,531

 
$
70,600

Due after one year through five years
758,676

 
812,294

Due after five years through ten years
760,987

 
795,877

Due after ten years
3,246,938

 
3,481,321

 
4,836,132

 
5,160,092

Mortgage-backed and other asset-backed
1,534,957

 
1,628,565

Total fixed maturities
$
6,371,089

 
$
6,788,657


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.



10

Table of Contents

Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income
 
 
 
 
 
March 31,
2016
 
December 31,
2015
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
417,568

 
$
257,857

Equity securities - available for sale
5,618

 
5,331

 
423,186

 
263,188

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(123,606
)
 
(73,735
)
Value of insurance in force acquired
(3,304
)
 
(3,087
)
Unearned revenue reserve
6,135

 
3,352

Adjustments for assumed changes in policyholder liabilities
(7,166
)
 
(4,090
)
Provision for deferred income taxes
(103,321
)
 
(64,955
)
Net unrealized investment gains
$
191,924

 
$
120,673


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.

Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
March 31, 2016
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 

Fair Value
 
Unrealized Losses
 

Fair Value
 
Unrealized Losses
 
 Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
632,232

 
$
(48,204
)
 
$
180,810

 
$
(49,750
)
 
$
813,042

 
$
(97,954
)
 
87.1
%
Residential mortgage-backed
 
19,945

 
(225
)
 
25,376

 
(2,543
)
 
45,321

 
(2,768
)
 
2.5

Commercial mortgage-backed
 
26,171

 
(1,280
)
 
2,350

 
(196
)
 
28,521

 
(1,476
)
 
1.3

Other asset-backed
 
252,009

 
(4,984
)
 
71,884

 
(5,082
)
 
323,893

 
(10,066
)
 
8.9

United States Government and agencies
 
750

 
(1
)
 

 

 
750

 
(1
)
 

State, municipal and other governments
 
18,404

 
(196
)
 

 

 
18,404

 
(196
)
 
0.2

Total fixed maturities
 
$
949,511

 
$
(54,890
)
 
$
280,420

 
$
(57,571
)
 
$
1,229,931

 
$
(112,461
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
15,837

 
$
(1,126
)
 
$
4,500

 
$
(500
)
 
$
20,337

 
$
(1,626
)
 
 
Common stocks
 
2,546

 
(29
)
 

 

 
2,546

 
(29
)
 
 
Total equity securities
 
$
18,383

 
$
(1,155
)
 
$
4,500

 
$
(500
)
 
$
22,883

 
$
(1,655
)
 
 



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Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 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
 
$
1,115,324

 
$
(96,062
)
 
$
115,730

 
$
(41,782
)
 
$
1,231,054

 
$
(137,844
)
 
88.9
%
Residential mortgage-backed
 
21,646

 
(725
)
 
26,537

 
(4,618
)
 
48,183

 
(5,343
)
 
3.4

Commercial mortgage-backed
 
48,424

 
(1,947
)
 
7,657

 
(540
)
 
56,081

 
(2,487
)
 
1.6

Other asset-backed
 
285,395

 
(3,323
)
 
65,298

 
(3,801
)
 
350,693

 
(7,124
)
 
4.6

United States Government and agencies
 
4,807

 
(81
)
 

 

 
4,807

 
(81
)
 
0.1

State, municipal and other governments
 
77,980

 
(2,183
)
 

 

 
77,980

 
(2,183
)
 
1.4

Total fixed maturities
 
$
1,553,576

 
$
(104,321
)
 
$
215,222

 
$
(50,741
)
 
$
1,768,798

 
$
(155,062
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
21,280

 
$
(573
)
 
$
4,400

 
$
(600
)
 
$
25,680

 
$
(1,173
)
 
 
Common stocks
 
1,428

 
(41
)
 

 

 
1,428

 
(41
)
 
 
Total equity securities
 
$
22,708

 
$
(614
)
 
$
4,400

 
$
(600
)
 
$
27,108

 
$
(1,214
)
 
 

Fixed maturities in the above tables include 370 securities from 304 issuers at March 31, 2016 and 542 securities from 435 issuers at December 31, 2015. We do not intend 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 March 31, 2016.

Corporate securities: The largest unrealized losses were in the energy sector ($266.5 million fair value and $56.3 million unrealized loss) and the basic industrial sector ($137.1 million fair value and $18.2 million unrealized loss). The largest unrealized losses in the energy sector were in the midstream ($81.6 million fair value and $17.9 million unrealized loss) and the oil field services ($48.8 million fair value and $16.9 million unrealized loss) sub-sectors. The largest unrealized losses in the basic industrial sector were in the metal/mining ($69.4 million fair value and $13.7 million unrealized loss) and the chemicals ($55.0 million fair value and $4.0 million unrealized loss) sub-sectors. The majority of losses were attributable to credit spread widening across the energy sector and metal/mining sub-sector associated with sharp declines in commodity prices. The price of crude oil has decreased from $98.42 per barrel at December 31, 2013 to $37.04 per barrel at December 31, 2015 and then increased to $38.34 on March 31, 2016. Energy-related companies have been negatively impacted by the rapid decline in oil prices, which has pressured revenues and margins. The metal/mining sub-sector companies are experiencing lower demand for coal, copper, iron ore and other basic industrial minerals due to the economic slowdown in China in addition to sluggish demand in Europe and the U.S. Lower metal prices are leading metal and mining companies to shut down production at high-cost mines and defer capital expenditures at mines in the development stage.

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

Commercial mortgage-backed securities: The unrealized losses on commercial mortgage-backed securities were primarily due to spread widening and concerns regarding the potential for future defaults. The contractual cash flows of these investments are based on mortgages backing the securities. Unrealized losses on military housing bonds were mainly attributable to spread widening relative to spreads at which we acquired the bonds. Insured military housing bonds have also been impacted by the removal of their ratings following downgrades of the insurance providers after we purchased the bonds.

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.


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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 $4.6 million at March 31, 2016, 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 March 31, 2016 was $1.5 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 $0.8 million.

The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. When our review indicates a decline in fair value for a fixed maturity security is an OTTI and we do not intend to sell or believe we will be required to sell the security before recovery of our amortized cost, a specific write down is charged to earnings for the credit loss and a specific charge is recognized in accumulated other comprehensive income for the non-credit loss component. If we intend to sell or believe we will be required to sell a fixed maturity security before its recovery, the full amount of the impairment write down to fair value is charged to earnings. For all equity securities, the full amount of an OTTI write down is recognized as a realized loss on investments in the consolidated statements of operations and the new cost basis for the security is equal to its fair value.

We monitor the financial condition and operations of the issuers of fixed maturities and equity securities that could potentially have a credit impairment that is an OTTI. In determining whether or not an unrealized loss is an OTTI, we review factors such as:

historical operating trends;
business prospects;
status of the industry in which the company operates;
analyst ratings on the issuer and sector;
quality of management;
size of unrealized loss;
level of current market interest rates compared to market interest rates when the security was purchased; and
length of time the security has been in an unrealized loss position.

In order to determine the credit and non-credit impairment loss for fixed maturities, every quarter we estimate the future cash flows we expect to receive over the remaining life of the instrument as well as review our plans to hold or sell the instrument. Significant assumptions regarding the present value of expected cash flows for each security are used when an OTTI occurs and there is a non-credit portion of the unrealized loss that won't be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities include collateral pledged, guarantees, vintage, anticipated principal and interest payments, prepayments, default levels, severity assumptions, delinquency rates and the level of nonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturities include anticipated principal and interest payments and an estimated recovery value, generally based on a percentage return of the current fair value.

After an OTTI write down of all equity securities and any fixed maturities with a credit-only impairment, the cost basis is not adjusted for subsequent recoveries in fair value. For fixed maturities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the remaining life of the security. Amortization in this instance is computed using the prospective method and the current estimate of the amount and timing of future cash flows.



13

Table of Contents

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
 
 
 
 
Three months ended March 31,
 
2016

2015
 
(Dollars in thousands)
Balance at beginning of period
$
(11,498
)
 
$
(16,772
)
Increases to previously impaired investments
(2,172
)
 

Reductions due to investments sold
310

 
159

Balance at end of period
$
(13,360
)
 
$
(16,613
)

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 March 31,
 
 
2016
 
2015
 
 
(Dollars in thousands)
 
Realized gains (losses) on sales of investments
 
 
 
 
Fixed maturities:
 
 
 
 
Gross gains
$
1,590

 
$
220

 
Gross losses

 
(586
)
 
 
1,590

 
(366
)
 
Impairment losses recognized in earnings:
 
 
 
 
Credit-related portion of fixed maturity losses (1)
(2,172
)
 

 
Other credit-related
(25
)
 

 
Net realized losses on investments recorded in income
$
(607
)
 
$
(366
)
 

(1)
Amount represents the credit-related losses recognized for fixed maturities that were impaired to the present value of estimated future cash flows 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).

Proceeds from sales of fixed maturities totaled $8.9 million during the three months ended March 31, 2016 and $17.3 million during the three months ended March 31, 2015.

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

Mortgage Loans

Our mortgage loan portfolio consists of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to-value ratio that provides sufficient 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 March 31, 2016 and December 31, 2015, there were no non-performing loans over 90 days past due on contractual payments. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would


14

Table of Contents

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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
351,022

 
45.6
%
 
$
333,400

 
44.8
%
Retail
 
226,639

 
29.5

 
227,039

 
30.5

Industrial
 
141,344

 
18.4

 
133,085

 
17.9

Other
 
50,382

 
6.5

 
50,779

 
6.8

Total
 
$
769,387

 
100.0
%
 
$
744,303

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
233,986

 
30.4
%
 
$
233,522

 
31.4
%
Pacific
 
106,219

 
13.8

 
100,188

 
13.4

West North Central
 
101,433

 
13.2

 
102,555

 
13.8

East North Central
 
84,554

 
11.0

 
86,019

 
11.5

Mountain
 
77,650

 
10.1

 
78,750

 
10.6

West South Central
 
68,363

 
8.9

 
66,677

 
9.0

Other
 
97,182

 
12.6

 
76,592

 
10.3

Total
 
$
769,387

 
100.0
%
 
$
744,303

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
Loan-to-Value Ratio
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
260,642

 
33.9
%
 
$
264,605

 
35.6
%
51% - 60%
 
196,653

 
25.6

 
169,045

 
22.7

61% - 70%
 
250,207

 
32.4

 
234,544

 
31.5

71% - 80%
 
52,882

 
6.9

 
67,072

 
9.0

81% - 90%
 
9,003

 
1.2

 
9,037

 
1.2

Total
 
$
769,387

 
100.0
%
 
$
744,303

 
100.0
%

The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically including when there is indication of a possible significant collateral decline or there are loan modifications or refinance requests.



15

Table of Contents

Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2016
 
$
34,049

 
4.3
%
 
$

 
%
2015
 
153,675

 
20.0

 
154,582

 
20.9

2014
 
82,864

 
10.8

 
83,546

 
11.2

2013
 
79,155

 
10.3

 
79,879

 
10.7

2012
 
65,154

 
8.5

 
65,817

 
8.8

2011 and prior
 
354,490

 
46.1

 
360,479

 
48.4

Total
 
$
769,387

 
100.0
%
 
$
744,303

 
100.0
%

 Impaired Mortgage Loans
 
 
 
March 31, 2016
 
December 31, 2015
 
(Dollars in thousands)
Unpaid principal balance
$
21,707

 
$
21,766

Less:
 
 
 
Related allowance
(851
)
 
(851
)
Discount
(40
)
 
(87
)
Carrying value of impaired mortgage loans
$
20,816

 
$
20,828

 Allowance on Mortgage Loans
 
March 31, 2016
 
December 31, 2015
 
2016
 
2015
 
(Dollars in thousands)
Balance at beginning of period
$
851

 
$
857

Charge offs

 
(6
)
Balance at end of period
$
851

 
$
851


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 quarter of 2016 or of 2015.

Low Income Housing Tax Credit Investments (LIHTC)

We invest in non-guaranteed federal LIHTC, which are included in securities and indebtedness of related parties on the balance sheet. The carrying value of these investments totaled $94.3 million at March 31, 2016 and $94.2 million at December 31, 2015. There were no impairment losses recorded on these investments during the first quarter of 2016 or 2015. We use the equity method of accounting for these investments and recorded the following in our consolidated statement of operations.


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Table of Contents

LIHTC Equity Income (Loss), Net of Related Income Taxes
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2016
 
2015
 
 
 
(Dollars in thousands)
Equity losses from LIHTC
 
$
(1,539
)
 
$
(1,845
)
 
Income benefits:
 
 
 
 
 
Tax benefits from equity losses
 
539

 
646

 
Investment tax credits
 
3,450

 
3,187

 
Equity income from LIHTC, net of related income benefits
 
$
2,450

 
$
1,988

 

At March 31, 2016, we had committed to provide additional funds for limited partnerships and limited liability companies in which we invest. The amounts of these unfunded commitments totaled $29.5 million, including $6.8 million for LIHTC commitments, which are summarized by year in the following table.

LIHTC Commitments by year
 
 
March 31, 2016
 
(Dollars in thousands)
2016
$
5,405

2017
899

2018-2024
468

Total
$
6,772


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. After determining that a VIE exists, we review our involvement in the VIE to determine whether we have both the power to direct activities that most significantly impact the economic performance of the VIE, and the obligation to absorb losses or the rights to receive benefits that could be potentially significant to the VIE. This analysis included a review of the purpose and design of the VIE as well as the role that we played in the formation of the entity and how that role could impact our ability to control the VIE. We also review the activities and decisions considered significant to the economic performance of the VIE and assess what power we have in directing those activities and decisions. Finally, we review the agreements in place to determine if there are any guarantees that would affect our maximum exposure to loss.

We have reviewed the circumstances surrounding our investments in our VIEs, which are classified as securities and indebtedness of related parties and consist of non-guaranteed federal LIHTC, limited partnerships or limited liability companies accounted for under the equity method. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carry value and any unfunded commitments that exist for each particular VIE. Based on this analysis, none of our VIEs were required to be consolidated for any reporting periods presented in this Form 10-Q. In adopting the new guidance referred to in Note 1, additional entities were deemed to be VIEs, and are disclosed below for both periods presented.

There were no circumstances that occurred during the reporting period that resulted in any changes in our decision not to consolidate any of our VIEs. We also have not provided additional support or other guarantees that was not previously contractually required (financial or otherwise) to any of the VIEs as of March 31, 2016 or December 31, 2015.



17

Table of Contents

VIE Investments by category
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value (1)
 
Maximum Exposure to Loss (1)
 
(Dollars in thousands)
LIHTC
$
94,310

 
$
101,082

 
$
94,170

 
$
102,626

Investment companies
14,969

 
29,825

 
20,004

 
35,604

Real estate limited partnerships
9,044

 
15,088

 
9,554

 
15,610

Other
635

 
2,445

 
637

 
2,448

Total
$
118,958

 
$
148,440

 
$
124,365

 
$
156,288

(1)
Prior year values have been restated for comparability with the amounts as presented under the new accounting guidance discussed in Note 1.

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 $11.0 million at March 31, 2016 and $9.9 million at December 31, 2015. At March 31, 2016, 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 $2.3 million at March 31, 2016, which is held in a separate custodial account and not recorded on the balance sheet. Our derivative assets consist of an interest-only bond, derivatives embedded within our modified coinsurance agreements and call options that provide an economic hedge for our index contracts. Derivative liabilities totaled $10.7 million at March 31, 2016 and $9.4 million at December 31, 2015 and include derivatives embedded within our index contracts and derivatives embedded within our modified coinsurance agreements. The net gain or loss recognized on these derivatives is included in net investment income and interest sensitive benefits.

Net gain (loss) recognized on these derivatives totaled $(1.2) million for the quarter ended March 31, 2016 and $0.3 million for the quarter ended March 31, 2015.


3. Fair Values

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

Fair Values and Carrying Values
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities - available for sale
$
6,788,657

 
$
6,788,657

 
$
6,637,776

 
$
6,637,776

Equity securities - available for sale
130,755

 
130,755

 
121,667

 
121,667

Mortgage loans
769,387

 
819,166

 
744,303

 
780,624

Policy loans
186,959

 
240,315

 
185,784

 
230,153

Other investments
3,992

 
5,255

 
2,331

 
2,331

Cash, cash equivalents and short-term investments
36,770

 
36,770

 
57,741

 
57,741

Reinsurance recoverable
2,741

 
2,741

 
2,636

 
2,636

Assets held in separate accounts
607,739

 
607,739

 
625,257

 
625,257



18

Table of Contents

Fair Values and Carrying Values (continued)
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
3,788,720

 
$
3,696,482

 
$
3,750,186

 
$
3,618,145

Supplementary contracts without life contingencies
340,322

 
345,016

 
339,929

 
339,717

Advance premiums and other deposits
252,367

 
252,367

 
245,269

 
245,269

Short-term debt

 

 
15,000

 
15,000

Long-term debt
97,000

 
64,864

 
97,000

 
68,133

Other liabilities

 

 
56

 
56

Liabilities related to separate accounts
607,739

 
603,549

 
625,257

 
620,676


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,


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securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread.

Level 3 fixed maturities include corporate, mortgage- and asset-backed, United States Government sponsored agencies, state and municipal 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 that 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 for the non-redeemable preferred stock is obtained from external pricing sources using a matrix pricing approach.



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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 that are actively traded. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.

In the case where external pricing services are used for certain Level 1 and Level 2 equity securities, our review process is consistent with the process used to determine the fair value of fixed maturities discussed above.

Mortgage loans:

Mortgage loans are not measured at fair value on a recurring basis. Mortgage loans are a Level 3 measurement as there is no current market for the loans. The fair value of our mortgage loans is estimated internally using a matrix pricing approach. Along with specific loan terms, two key management assumptions are required including the risk rating of the loan (our current rating system is A-highest quality, B-moderate quality, C-low quality, W-watch or F-foreclosure) and estimated spreads for new loans over the U.S. Treasury yield curve. Spreads are updated quarterly and loans are reviewed and rated annually with quarterly adjustments should significant changes occur. Our determination of each loan's risk rating as well as selection of the credit spread requires significant judgment. A higher risk rating, as well as an increase in spreads, would result in a decrease in discounted cash flows used, and accordingly the fair value of the loan.

Policy loans:

Policy loans are not measured at fair value on a recurring basis. Policy loans are a Level 3 measurement as there is no current market since they are specifically tied to the underlying insurance policy. The loans are relatively risk free as they cannot exceed the cash surrender value of the insurance policy. Fair values are estimated by discounting expected cash flows using a risk-free interest rate based on the U.S. Treasury curve. An increase in the risk-free interest rate would result in a decrease in discounted cash flows used, and accordingly the fair value of the loan.

Other investments:

Level 2 other investments measured at fair value on a recurring basis include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral received. Level 3 other investments, which are not measured at fair value on a recurring basis, include a promissory note that is priced internally using a discounted cash flow based on our assessment of the credit risk of the borrower.

Cash, cash equivalents and short-term investments:

Level 1 cash, cash equivalents and short-term investments are highly liquid instruments for which historical cost approximates fair value.

Reinsurance recoverable:

Level 2 reinsurance recoverable includes embedded derivatives in our modified coinsurance contracts under which we cede or assume business. Fair values of these embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturities, which are valued consistent with the discussion of fixed maturities above.

Assets held in separate accounts:

Level 1 assets held in separate accounts consist of mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value.

Future policy benefits, supplementary 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


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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 that 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 that 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.

Short-term debt:

Short-term debt is not measured at fair value on a recurring basis and is a Level 3 measurement. Our short-term debt consists of advances with interest set to the debt issuer’s current lending rate during December 2015, repayable in less than one month. Given the recent issuance of this short-term debt, its carrying value approximates fair value.

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
 
 
 
March 31, 2016
 
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
$

 
$
3,563,649

 
$
49,532

 
$
3,613,181

Residential mortgage-backed securities

 
454,193

 

 
454,193

Commercial mortgage-backed securities

 
490,977

 
89,158

 
580,135

Other asset-backed securities

 
536,181

 
58,056

 
594,237

United States Government and agencies
14,745

 
20,692

 
8,914

 
44,351

State, municipal and other governments

 
1,500,059

 
2,501

 
1,502,560

Non-redeemable preferred stocks

 
92,702

 
7,586

 
100,288

Common stocks
5,810

 
24,657

 

 
30,467

Other investments

 
3,393

 

 
3,393

Cash, cash equivalents and short-term investments
36,770

 

 

 
36,770

Reinsurance recoverable

 
2,741

 

 
2,741

Assets held in separate accounts
607,739

 

 

 
607,739

Total assets
$
665,064

 
$
6,689,244

 
$
215,747

 
$
7,570,055

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$

 
$

 
$
10,650

 
$
10,650

Total liabilities
$

 
$

 
$
10,650

 
$
10,650


 
December 31, 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
$

 
$
3,469,631

 
$
49,076

 
$
3,518,707

Residential mortgage-backed securities

 
461,777

 
3,729

 
465,506

Commercial mortgage-backed securities

 
465,812

 
88,180

 
553,992

Other asset-backed securities

 
527,565

 
55,557

 
583,122

United States Government and agencies
14,760

 
20,612

 
8,726

 
44,098

State, municipal and other governments

 
1,472,351

 

 
1,472,351

Non-redeemable preferred stocks

 
84,480

 
7,471

 
91,951

Common stocks
4,728

 
24,988

 

 
29,716

Other investments

 
2,331

 

 
2,331

Cash, cash equivalents and short-term investments
57,741

 

 

 
57,741

Reinsurance recoverable

 
2,636

 

 
2,636

Assets held in separate accounts
625,257

 

 

 
625,257

Total assets
$
702,486

 
$
6,532,183

 
$
212,739

 
$
7,447,408

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$

 
$

 
$
9,374

 
$
9,374

Other liabilities

 
56

 

 
56

Total liabilities
$

 
$
56

 
$
9,374

 
$
9,430



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Table of Contents

Level 3 Fixed Maturities by Valuation Source - Recurring Basis
 
 
 
March 31, 2016
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
9,120

 
$
40,412

 
$
49,532

Commercial mortgage-backed securities
89,158

 

 
89,158

Other asset-backed securities
37,492

 
20,564

 
58,056

United States Government and agencies

 
8,914

 
8,914

State, municipal and other governments
2,501

 

 
2,501

Total
$
138,271

 
$
69,890

 
$
208,161

Percent of total
66.4
%
 
33.6
%
 
100.0
%

 
December 31, 2015
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
17,208

 
$
31,868

 
$
49,076

Residential mortgage-backed securities

 
3,729

 
3,729

Commercial mortgage-backed securities
88,180

 

 
88,180

Other asset-backed securities
35,420

 
20,137

 
55,557

United States Government and agencies

 
8,726

 
8,726

Total
$
140,808

 
$
64,460

 
$
205,268

Percent of total
68.6
%
 
31.4
%
 
100.0
%

Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
March 31, 2016
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
41,978

 
Discounted cash flow
 
Credit spread
 
1.29% - 22.94% (12.80%)
Commercial mortgage-backed
74,074

 
Discounted cash flow
 
Credit spread
 
1.20% - 4.35% (3.30%)
Other asset-backed securities
19,164

 
Discounted cash flow
 
Credit spread
 
1.11% - 7.38% (5.13%)
United States Government and agencies
8,914

 
Discounted cash flow
 
Credit spread
 
2.50% (2.50%)
States, municipal and other governments
2,501

 
Discounted cash flow
 
Credit spread
 
1.89% (1.89%)
Non-redeemable preferred stocks
7,586

 
Discounted cash flow
 
Credit spread
 
5.11% (5.11%)
Total Assets
$
154,217

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
10,650

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.80% - 2.45% (1.60%)
0.15% - 0.40% (0.25%)



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Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
December 31, 2015
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
33,508

 
Discounted cash flow
 
Credit spread
 
1.16% - 17.50% (11.26%)
Commercial mortgage-backed
71,100

 
Discounted cash flow
 
Credit spread
 
1.10% - 4.15% (3.12%)
Other asset-backed securities
13,737

 
Discounted cash flow
 
Credit spread
 
1.25% - 7.90% (5.61%)
United States Government and agencies
8,727

 
Discounted cash flow
 
Credit spread
 
2.59% (2.59%)
Non-redeemable preferred stocks
7,471

 
Discounted cash flow
 
Credit spread
 
4.55% (4.55%)
Total Assets
$
134,543

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
9,374

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.80% - 2.25% (1.45%)
0.15% - 0.40% (0.25%)

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

Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
 
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, March 31, 2016
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
49,076

 
$
2,000

 
$
(2,180
)
 
$

 
$
(1,584
)
 
$
9,354

 
$
(7,125
)
 
$
(9
)
 
$
49,532

Residential mortgage-backed securities
3,729

 

 
(3,722
)
 

 
(137
)
 

 

 
130

 

Commercial mortgage-backed securities
88,180

 

 
(219
)
 

 
2,487

 

 
(1,335
)
 
45

 
89,158

Other asset-backed securities
55,557

 
12,999

 
(807
)
 

 
147

 
920

 
(10,762
)
 
2

 
58,056

United States Government and agencies
8,726

 

 

 

 
186

 

 

 
2

 
8,914

State, municipal and other governments

 

 

 

 
108

 
2,393

 

 

 
2,501

Non-redeemable preferred stocks
7,471

 

 

 

 
115

 

 

 

 
7,586

Total Assets
$
212,739

 
$
14,999

 
$
(6,928
)
 
$

 
$
1,322

 
$
12,667

 
$
(19,222
)
 
$
170

 
$
215,747

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
9,374

 
$
1,208

 
$
(314
)
 
$
382

 
$

 
$

 
$

 
$

 
$
10,650

Total Liabilities
$
9,374

 
$
1,208

 
$
(314
)
 
$
382

 
$

 
$

 
$

 
$

 
$
10,650




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Table of Contents

Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 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,
March 31, 2015
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
64,239

 
$
2,993

 
$
(3,613
)
 
$

 
$
(4,190
)
 
$
14,165

 
$

 
$
105

 
$
73,699

Residential mortgage-backed securities

 
5,052

 

 

 
(6
)
 

 

 

 
5,046

Commercial mortgage-backed securities
77,891

 

 
(193
)
 

 
780

 

 

 
24

 
78,502

Other asset-backed securities
116,141

 
19,742

 
(3,876
)
 

 
(77
)
 

 
(39,095
)
 
53

 
92,888

United States Government and agencies
9,065

 

 

 

 
89

 

 

 
2

 
9,156

Non-redeemable preferred stocks
8,054

 

 

 

 
298

 

 

 

 
8,352

Total Assets
$
275,390

 
$
27,787

 
$
(7,682
)
 
$

 
$
(3,106
)
 
$
14,165

 
$
(39,095
)
 
$
184

 
$
267,643

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

 
$
1,067

 
$
(183
)
 
$
26

 
$

 
$

 
$

 
$

 
$
9,591

Total Liabilities
$
8,681

 
$
1,067

 
$
(183
)
 
$
26

 
$

 
$

 
$

 
$

 
$
9,591


(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, which is 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.



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Table of Contents

Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels
 
 
 
March 31, 2016
 
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
$

 
$

 
$
819,166

 
$
819,166

Policy loans

 

 
240,315

 
240,315

Other investments

 

 
1,862

 
1,862

Total assets
$

 
$

 
$
1,061,343

 
$
1,061,343

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
3,685,832

 
$
3,685,832

Supplementary contracts without life contingencies

 

 
345,016

 
345,016

Advance premiums and other deposits

 

 
252,367

 
252,367

Long-term debt

 

 
64,864

 
64,864

Liabilities related to separate accounts

 

 
603,549

 
603,549

Total liabilities
$

 
$

 
$
4,951,628

 
$
4,951,628


 
December 31, 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
$

 
$

 
$
780,624

 
$
780,624

Policy loans

 

 
230,153

 
230,153

Total assets
$

 
$

 
$
1,010,777

 
$
1,010,777

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
3,608,771

 
$
3,608,771

Supplementary contracts without life contingencies

 

 
339,717

 
339,717

Advance premiums and other deposits

 

 
245,269

 
245,269

Short-term debt

 

 
15,000

 
15,000

Long-term debt

 

 
68,133

 
68,133

Liabilities related to separate accounts

 

 
620,676

 
620,676

Total liabilities
$

 
$

 
$
4,897,566

 
$
4,897,566


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 that have been deemed to be impaired during the reporting period. There were no mortgage loans or real estate impaired to fair value during the quarters ended March 31, 2016 or March 31, 2015.


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.



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Table of Contents

Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Multiemployer Plan
 
 
 
 
 
Three months ended March 31,
 
 
2016
 
2015
 
(Dollars in thousands)
Service cost
 
$
1,448

 
$
1,488

Interest cost
 
3,612

 
3,300

Expected return on assets
 
(4,466
)
 
(4,463
)
Amortization of prior service cost
 
36

 
36

Amortization of actuarial loss
 
2,358

 
2,598

Net periodic pension cost
 
$
2,988

 
$
2,959

 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
 
$
952

 
$
959


Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Other Plans
 
 
 
 
 
Three months ended March 31,
 
 
2016
 
2015
 
(Dollars in thousands)
Service cost
 
$
84

 
$
109

Interest cost
 
241

 
250

Amortization of prior service cost
 

 
(3
)
Amortization of actuarial loss
 
230

 
382

Net periodic pension cost
 
$
555

 
$
738

 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
 
$
315

 
$
418

 

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 2014 and 2016, our Board of Directors approved programs to repurchase our Class A common stock. These repurchase programs authorize us to make repurchases in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. In connection with the Class A repurchase programs, we repurchased 720 shares for less than $0.1 million during the three months ended March 31, 2016 and we made no repurchases during the three months ended March 31, 2015. At March 31, 2016, $50.0 million remains available for repurchase under the program announced in 2016. 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.



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Table of Contents

Special Dividend

In March 2016, the Board of Directors approved a special $2.00 per share cash dividend payable to Class A and Class B common shareholders totaling $49.7 million. In March 2015, the Board of Directors approved a special $2.00 per share cash dividend payable to Class A and Class B common shareholders totaling $49.5 million.

Reconciliation of Outstanding Common Stock
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
(Dollars in thousands)
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
81,568

 
2,682

 

 

 
81,568

 
2,682

Purchase of common stock

 

 

 

 

 

Outstanding at March 31, 2015
24,785,471

 
$
147,307

 
11,413

 
$
72

 
24,796,884

 
$
147,379

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2016
24,796,763

 
$
149,248

 
11,413

 
$
72

 
24,808,176

 
$
149,320

Issuance of common stock under compensation plans
44,850

 
1,535

 

 

 
44,850

 
1,535

Purchase of common stock
(720
)
 
(4
)
 

 

 
(720
)
 
(4
)
Outstanding at March 31, 2016
24,840,893

 
$
150,779

 
11,413

 
$
72

 
24,852,306

 
$
150,851


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, 2015
$
266,211

 
$
1,131

 
$
(8,932
)
 
$
258,410

Other comprehensive income before reclassifications
28,515

 
425

 

 
28,940

Reclassification adjustments
247

 

 
231

 
478

Balance at March 31, 2015
$
294,973

 
$
1,556

 
$
(8,701
)
 
$
287,828

 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
120,787

 
$
(114
)
 
$
(6,141
)
 
$
114,532

Other comprehensive income before reclassifications
71,283

 
1,991

 

 
73,274

Reclassification adjustments
(1,071
)
 
$
(952
)
 
135

 
(1,888
)
Balance at March 31, 2016
$
190,999

 
$
925

 
$
(6,006
)
 
$
185,918


(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
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
 
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
$
(1,590
)
 
$

 
$

 
$
(1,590
)
Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
(58
)
 
58

 

 

Other-than-temporary impairment losses

 
(1,522
)
 

 
(1,522
)
Other expenses: Change in unrecognized postretirement items:
 
 
 
 
 
 


Net actuarial loss

 

 
208

 
208

Reclassifications before income taxes
(1,648
)
 
(1,464
)
 
208

 
(2,904
)
Income taxes
577

 
512

 
(73
)
 
1,016

Reclassification adjustments
$
(1,071
)
 
$
(952
)
 
$
135

 
$
(1,888
)

 
Three months ended March 31, 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
$
366

 
$

 
$

 
$
366

Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
14

 

 

 
14

Other expenses: Change in unrecognized postretirement items:
 
 
 
 
 
 


Prior service costs

 

 
(3
)
 
(3
)
Net actuarial loss

 

 
358

 
358

Reclassifications before income taxes
380

 

 
355

 
735

Income taxes
(133
)
 

 
(124
)
 
(257
)
Reclassification adjustments
$
247

 
$

 
$
231

 
$
478


(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 March 31,
 
 
2016
 
2015
 
 
(Dollars in thousands, except per share data)
Numerator:
 
 
 
 
Net income attributable to FBL Financial Group, Inc.
$
25,946

 
$
23,591

 
Less: Dividends on Series B preferred stock
38

 
38

 
Income available to common stockholders
$
25,908

 
$
23,553

 
 
 
 
 
 
Denominator:
 
 
 
 
Weighted average shares - basic
24,949,840

 
24,899,278

 
Effect of dilutive securities - stock-based compensation
57,957

 
109,300

 
Weighted average shares - diluted
25,007,797

 
25,008,578

 
 
 
 
 
 
Earnings per common share
$
1.04

 
$
0.95

 
Earnings per common share - assuming dilution:
$
1.04

 
$
0.94

 
 
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, although it should not be viewed as a substitute for net income as a measure of financial performance. Operating income is not a measure used in financial statements prepared in accordance with GAAP, but is a common life insurance industry measure of performance. 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 March 31,
 
 
2016
 
2015
 
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
Annuity
$
52,179

 
$
52,759

 
Life Insurance
103,603

 
102,010

 
Corporate and Other
23,424

 
23,705

 
 
179,206

 
178,474

 
Net realized losses on investments (1)
(607
)
 
(366
)
 
Change in net unrealized gains/losses on derivatives (1)
1,067

 
(162
)
 
Consolidated revenues
$
179,666

 
$
177,946

 
 
 
 
 
 
Pre-tax operating income:
 
 
 
 
Annuity
$
17,148

 
$
17,088

 
Life Insurance
14,071

 
9,785

 
Corporate and Other
2,489

 
3,496

 
 
33,708

 
30,369

 
Income taxes on operating income
(7,390
)
 
(6,554
)
 
Net realized gains/losses on investments (1)
(397
)
 
(247
)
 
Change in net unrealized gains/losses on derivatives (1)
25

 
23

 
Consolidated net income attributable to FBL Financial Group, Inc.
$
25,946

 
$
23,591

 

(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 March 31, 2016 and December 31, 2015 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. Premiums collected is a common life insurance industry measure of agent productivity. Net premiums collected totaled $173.2 million for the quarter ended March 31, 2016 and $166.2 million for the same period in 2015.

Under GAAP, premiums on whole life and term life policies are recognized as revenues over the premium-paying period and reported in the Life Insurance segment. The following chart provides a reconciliation of life insurance premiums collected to those reported in the GAAP financial statements.

Reconciliation of Traditional Life Insurance Premiums, Net of Reinsurance
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2016

2015
 
 
(Dollars in thousands)
Traditional and universal life insurance premiums collected
$
71,713

 
$
71,215

 
Premiums collected on interest sensitive products
(21,036
)
 
(23,691
)
 
Traditional life insurance premiums collected
50,677

 
47,524

 
Change in due premiums and other
(539
)
 
(376
)
 
Traditional life insurance premiums
$
50,138

 
$
47,148

 

There is no comparable GAAP financial measure for premiums collected on annuities and universal life-type products. GAAP revenues for those interest sensitive and variable products consist of various policy charges and fees assessed on those contracts, as summarized in the chart below.


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Table of Contents


Interest Sensitive Product Charges by Segment
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2016

2015
 
 
(Dollars in thousands)
Annuity
 
 
 
 
Surrender charges and other
$
942

 
$
613

 
 
 
 
 
 
Life Insurance
 
 
 
 
Administration charges
$
3,504

 
$
3,697

 
Cost of insurance charges
11,825

 
11,492

 
Surrender charges
216

 
217

 
Amortization of policy initiation fees
228

 
499

 
Total
$
15,773

 
$
15,905

 
 
 
 
 
 
Corporate and Other
 
 
 
 
Administration charges
$
1,441

 
$
1,517

 
Cost of insurance charges
7,516

 
7,424

 
Surrender charges
26

 
108

 
Separate account charges
1,978

 
2,239

 
Amortization of policy initiation fees
435

 
315

 
Total
$
11,396

 
$
11,603

 
 
 
 
 
 
Consolidated interest sensitive product charges
$
28,111

 
$
28,121

 



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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, 2015 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, 2015 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 life insurance 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 that may impact our business include, but are not limited to, the following:

Gross Domestic Product increased at an annual rate of 0.5% during the first quarter 2016 based on recent estimates.
U.S. unemployment was estimated to be 5.0% during March 2016.
U.S. net farm income is forecast to decrease 3.0% and farm real estate value is forecast to decrease 1.2% during 2016 according to recent U.S. Department of Agriculture forecasts.
The U.S. 10-year Treasury yield decreased during the first quarter of 2016 to 1.78% at March 31, 2016.
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 expanded the fiduciary responsibilities for sales of insurance products to be used in retirement plans. See Part II, Item 1A for further discussion.


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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. 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. During 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 an increase in the fair value of our fixed maturity security portfolio during the first quarter of 2016 primarily due to a decrease 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 March 31, 2016 and 2015

 
Three months ended March 31,
 
2016
 
2015
 
Change
 
(Dollars in thousands, except per share data)
Pre-tax operating income:
 
 
 
 
 
Annuity segment
$
17,148

 
$
17,088

 
 %
Life Insurance segment
14,071

 
9,785

 
44
 %
Corporate and Other segment
2,489

 
3,496

 
(29
)%
Total pre-tax operating income
33,708

 
30,369

 
11
 %
Income taxes on operating income
(7,390
)
 
(6,554
)
 
13
 %
Operating income
26,318

 
23,815

 
11
 %
 
 
 
 
 
 
Realized gains/losses on investments (1)
(397
)
 
(247
)
 
61
 %
Change in net unrealized gains/losses on derivatives (1)
25

 
23

 
9
 %
Net income attributable to FBL Financial Group, Inc.
$
25,946

 
$
23,591

 
10
 %
 
 
 
 
 

Operating income per common share - assuming dilution
$
1.05

 
$
0.95

 
11
 %
Earnings per common share - assuming dilution
1.04

 
0.94

 
11
 %
Effective tax rate on operating income
22
%
 
22
%
 

Average invested assets, at amortized cost
$
7,458,604

 
$
7,153,345

 
4
 %
Annualized yield on average invested assets
5.42
%
 
5.66
%
 


(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 increased in the first quarter of 2016, compared to the prior year quarter, primarily due to a decrease in death benefits and the impact of an increase in the volume of business in force, partially offset by lower investment fee income. See the discussion that follows for details regarding operating income by segment.



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Table of Contents

Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2016
 
2015
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
Interest sensitive product charges and other income
$
942

 
$
613

 
54
 %
Net investment income
51,237

 
52,146

 
(2
)%
Total operating revenues
52,179

 
52,759

 
(1
)%
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
Interest sensitive product benefits
26,486

 
27,453

 
(4
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
Commissions net of deferrals
570

 
546

 
4
 %
Amortization of deferred acquisition costs
2,338

 
2,729

 
(14
)%
Amortization of value of insurance in force
175

 
202

 
(13
)%
Other underwriting expenses
5,462

 
4,741

 
15
 %
Total underwriting, acquisition and insurance expenses
8,545

 
8,218

 
4
 %
Total benefits and expenses
35,031

 
35,671

 
(2
)%
Pre-tax operating income
$
17,148

 
$
17,088

 
 %
Other data
 
 
 
 
 
Annuity premiums collected, direct
$
85,675

 
$
76,335

 
12
 %
Policy liabilities and accruals, end of period
3,960,035

 
3,806,556

 
4
 %
Average invested assets, at amortized cost
4,071,448

 
3,883,858

 
5
 %
Investment fee income included in net investment income (1)
1,484

 
2,398

 
(38
)%
Average individual annuity account value
2,804,675

 
2,624,384

 
7
 %
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
Weighted average yield on cash and invested assets
5.33
%
 
5.57
%
 
 
Weighted average interest crediting rate
2.69
%
 
2.81
%
 
 
Spread
2.64
%
 
2.76
%
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
4.2
%
 
4.4
%
 
 

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

Pre-tax operating income for the Annuity segment increased in the first quarter of 2016, compared to the prior year quarter, primarily due to higher spread income earned from an increase in the volume of business in force, partially offset by lower investment fee income.

The average aggregate account value for individual annuity contracts in force increased in the first quarter of 2016, compared to the prior year quarter, due to continued sales and the crediting of interest. Continued growth in our business in force contributes to increases in interest sensitive product charges and expenses. Premiums collected were higher in the first quarter of 2016 primarily due to increased sales of index annuity products as well as the reintroduction of a multi-year guaranteed annuity product in the first quarter of 2016. 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 FHLB. Outstanding funding agreements totaled $366.4 million at March 31, 2016 and $400.9 million at March 31, 2015.

Amortization of deferred acquisition costs changed during the first quarter of 2016, compared to prior year quarter, due to changes in actual and expected profits on the underlying business.



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Table of Contents

The weighted average yield on cash and invested assets for individual annuities decreased for the first quarter of 2016, compared to the prior year quarter, primarily due to lower investment fee income and 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 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 in response to the declining portfolio yield and a change in the underlying product mix.
 
 
 
 
 
Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2016
 
2015
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
Interest sensitive product charges and other income
$
15,711

 
$
15,818

 
(1
)%
Traditional life insurance premiums
50,138

 
47,148

 
6
 %
Net investment income
37,754

 
39,044

 
(3
)%
Total operating revenues
103,603

 
102,010

 
2
 %
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 

Interest sensitive product benefits:
 
 
 
 

Interest credited
8,266

 
8,185

 
1
 %
Death benefits and other
8,803

 
12,515

 
(30
)%
Total interest sensitive product benefits
17,069

 
20,700

 
(18
)%
Traditional life insurance benefits:
 
 
 
 

Death benefits
21,123

 
24,375

 
(13
)%
Surrender and other benefits
8,641

 
7,282

 
19
 %
Increase in traditional life future policy benefits
14,801

 
14,052

 
5
 %
Total traditional life insurance benefits
44,565

 
45,709

 
(3
)%
Distributions to participating policyholders
3,040

 
2,961

 
3
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 

Commission expense, net of deferrals
4,470

 
4,627

 
(3
)%
Amortization of deferred acquisition costs
5,224

 
3,966

 
32
 %
Amortization of value of insurance in force
377

 
379

 
(1
)%
Other underwriting expenses
14,787

 
13,883

 
7
 %
Total underwriting, acquisition and insurance expenses
24,858

 
22,855

 
9
 %
Total benefits and expenses
89,532

 
92,225

 
(3
)%
Pre-tax operating income
$
14,071

 
$
9,785

 
44
 %



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Table of Contents

Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2016
 
2015
 
Change
 
(Dollars in thousands)
Other data
 
 
 
 
 
Life premiums collected, net of reinsurance
$
71,713

 
$
71,215

 
1
 %
Policy liabilities and accruals, end of period
2,699,524

 
2,613,024

 
3
 %
Life insurance in force, end of period
54,395,493

 
52,533,816

 
4
 %
Average invested assets, at amortized cost
2,766,273

 
2,637,202

 
5
 %
Investment fee income included in net investment income (1)
121

 
2,454

 
(95
)%
Average interest sensitive life account value
804,681

 
783,116

 
3
 %
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
Weighted average yield on cash and invested assets
5.44
%
 
6.58
%
 
 
Weighted average interest crediting rate
3.82
%
 
3.89
%
 
 
Spread
1.62
%
 
2.69
%
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
5.7
%
 
5.4
%
 
 
Death benefits, net of reinsurance and reserves released
$
18,702

 
$
24,491

 
(24
)%

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

Pre-tax operating income for the Life Insurance segment increased in the first quarter of 2016, compared to the prior year quarter, primarily due to a decrease in death benefits and the impact of an increase in the volume of business in force, partially offset by lower investment fee income.

Continued growth in our business in force contributes to the increase in revenues and expenses.

Amortization of deferred acquisition costs changed during the first quarter of 2016, compared to the prior year quarter, due to changes in actual and expected profits on the underlying business.

Death benefits, net of reinsurance and reserves released, decreased in the first quarter of 2016, compared to the prior year quarter, due to a decrease in the number of claims and decreases in the average size of claims for the quarter.

The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in the first quarter of 2016, compared to the prior year quarter, due to lower investment fee income and 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 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 in response to the declining portfolio yield.
 
 
 
 
 



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Table of Contents

Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2016
 
2015
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
Interest sensitive product charges
$
11,396

 
$
11,603

 
(2
)%
Net investment income
8,327

 
7,745

 
8
 %
Other income
3,701

 
4,357

 
(15
)%
Total operating revenues
23,424

 
23,705

 
(1
)%
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
Interest sensitive product benefits
9,698

 
7,672

 
26
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
Commission expense, net of deferrals
757

 
964

 
(21
)%
Amortization of deferred acquisition costs
1,988

 
1,763

 
13
 %
Other underwriting expenses
1,703

 
1,908

 
(11
)%
Total underwriting, acquisition and insurance expenses
4,448

 
4,635

 
(4
)%
Interest expense
1,212

 
1,212

 
 %
Other expenses
4,358

 
4,530

 
(4
)%
Total benefits and expenses
19,716

 
18,049

 
9
 %
 
3,708

 
5,656

 
(34
)%
Net loss attributable to noncontrolling interest
9

 
21

 
(57
)%
Equity loss, before tax
(1,228
)
 
(2,181
)
 
(44
)%
Pre-tax operating income
$
2,489

 
$
3,496

 
(29
)%
 
 
 
 
 
 
Other data
 
 
 
 
 
Average invested assets, at amortized cost
$
620,882

 
$
632,284

 
(2
)%
Investment fee income included in net investment income (1)
3

 
200

 
(99
)%
Average interest sensitive life account value
346,262

 
337,161

 
3
 %
Death benefits, net of reinsurance and reserves released
6,453

 
4,649

 
39
 %
Estimated impact on pre-tax income from separate account performance on amortization of deferred acquisition costs
(600
)
 
(48
)
 
1,150
 %

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

Pre-tax operating income decreased for the Corporate and Other segment in the first quarter of 2016, compared to the prior year quarter, primarily due to increases in death benefits, partially offset by a decrease in pre-tax equity loss.

Death benefits, net of reinsurance and reserves released, increased in the first quarter of 2016, compared to the prior year quarter, due to an increase in the average size of claims for the quarter.

Amortization of deferred acquisition costs and unearned revenue reserves changed during the first quarter of 2016, compared to the prior year quarter, primarily due to the impact of market performance in the separate accounts.

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 loss, before tax, 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


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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. Our low income housing tax credit investments generate pre-tax losses and 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
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2016
 
2015
 
 
(Dollars in thousands)
Equity income (loss):
 
 
 
 
Low income housing tax credit partnerships
$
(1,539
)
 
$
(1,845
)
 
Other equity method investments
311

 
(336
)
 
 
(1,228
)
 
(2,181
)
 
Income taxes:
 
 
 
 
Taxes on equity income (loss)
430

 
763

 
Investment tax credits
3,450

 
3,187

 
Equity income, net of related income taxes
$
2,652

 
$
1,769

 
 
 
 
 
 
Income Taxes on Operating Income

The effective tax rate on operating income was 21.9% for the first quarter of 2016 and 21.6% for the first quarter of 2015. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of low-income housing tax credits and tax-exempt interest and dividend income.

Impact of Operating Income Adjustments on FBL Net Income
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2016
 
2015
 
 
(Dollars in thousands)
Net realized losses on investments
$
(607
)
 
$
(366
)
 
Change in net unrealized gains/losses on derivatives
(101
)
 
(145
)
 
Change in amortization of:
 
 
 
 
Deferred acquisition costs
132

 
168

 
Value of insurance in force acquired
3

 
(1
)
 
Income tax offset
201

 
120

 
Net impact of operating income adjustments
$
(372
)
 
$
(224
)
 

Summary of adjustments noted above after offsets and income taxes:
 
 
 
 
Net realized gains/losses on investments
$
(397
)
 
$
(247
)
 
Change in net unrealized gains/losses on derivatives
25

 
23

 
Net impact of operating income adjustments
$
(372
)
 
$
(224
)
 
Net impact per common share - basic
$
(0.01
)
 
$
(0.01
)
 
Net impact per common share - assuming dilution
$
(0.01
)
 
$
(0.01
)
 

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.



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Table of Contents

Realized Gains (Losses) on Investments
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2016
 
2015
 
 
(Dollars in thousands)
Realized gains (losses) on investments:
 
 
 
 
Realized gains on sales
$
1,590

 
$
220

 
Realized losses on sales

 
(586
)
 
Total other-than-temporary impairment charges
(3,719
)
 

 
Net realized investment losses
(2,129
)
 
(366
)
 
Non-credit losses included in other comprehensive income
1,522

 

 
Total reported in statements of operations
$
(607
)
 
$
(366
)
 

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 March 31, 2016 and December 31, 2015.

Investment Credit Impairment Losses Recognized in Net Income
 
 
 
 
 
 

Three months ended March 31,
 

2016

2015
 
 
(Dollars in thousands)
Residential mortgage-backed
 
$
2,172

 
$

Other
 
25

 

Total other-than-temporary impairment losses reported in net income
 
$
2,197

 
$


Other-than-temporary credit impairment losses for the first quarter of 2016 were incurred within residential mortgage-backed securities due to reduced reliance on insurance credit support resulting in a decline in the present value of expected cash flows. An impairment charge was also recognized on other assets due to uncollectibility.


Financial Condition

Investments

Our investment portfolio increased 2.2% to $7,895.1 million at March 31, 2016 compared to $7,722.8 million at December 31, 2015. The portfolio increased due to positive cash flows from operating activities, as well as an increase of $159.7 million of net unrealized appreciation of fixed maturities during 2016. Additional details regarding securities in an unrealized loss position at March 31, 2016 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.



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Table of Contents

Fixed Maturity Acquisitions Selected Information
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2016
 
2015
 
 
(Dollars in thousands)
Cost of acquisitions:
 
 
 
 
Corporate
 
$
53,099

 
$
77,511

Mortgage- and asset-backed
 
44,922

 
79,230

United States Government and agencies
 

 
1,500

Tax-exempt municipals
 

 
3,975

Taxable municipals
 
3,000

 
28,174

Total
 
$
101,021

 
$
190,390

Effective annual yield
 
4.80
%
 
4.08
%
Credit quality
 
 
 
 
NAIC 1 designation
 
62.9
%
 
55.2
%
NAIC 2 designation
 
37.1
%
 
44.3
%
Non-investment grade
 
%
 
0.5
%
Weighted-average life in years
 
14.0

 
14.0
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 non-callable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call or maturity date that produces the lowest yield. The weighted-average maturity is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average maturity is equal to the stated maturity date.

A portion of the securities acquired during the three months ended March 31, 2015, were acquired with the proceeds from advances on our funding agreements with the FHLB. There were no securities acquired during the three months ended March 31, 2016 for these agreements. 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. There were no tax-exempt securities acquired during the three months ended March 31, 2016. 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 4.50% during the quarter ended March 31, 2015.

Investment Portfolio Summary 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
(Dollars in thousands)
Fixed maturities - available for sale:
 
 
 
 
 
 
 
Public
$
5,239,021

 
66.5
%
 
$
5,102,378

 
66.1
%
144A private placement
1,293,635

 
16.4

 
1,278,017

 
16.5

Private placement
256,001

 
3.2

 
257,381

 
3.4

Total fixed maturities - available for sale
6,788,657

 
86.1

 
6,637,776

 
86.0

Equity securities
130,755

 
1.7

 
121,667

 
1.6

Mortgage loans
769,387

 
9.6

 
744,303

 
9.6

Real estate
1,955

 

 
1,955

 

Policy loans
186,959

 
2.3

 
185,784

 
2.4

Short-term investments
13,323

 
0.2

 
28,251

 
0.4

Other investments
4,079

 
0.1

 
3,017

 

Total investments
$
7,895,115

 
100.0
%
 
$
7,722,753

 
100.0
%

As of March 31, 2016, 95.7% (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-


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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 March 31, 2016, no single non-investment grade holding exceeded 0.2% of total investments.

Credit Quality by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
NAIC Designation
 
Equivalent Rating (1)
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
4,411,874

 
65.0
%
 
$
4,351,813

 
65.6
%
2
 
BBB
 
2,082,718

 
30.7

 
2,053,484

 
30.9

 
 
Total investment grade
 
6,494,592

 
95.7

 
6,405,297

 
96.5

3
 
BB
 
192,046

 
2.8

 
162,246

 
2.4

4
 
B
 
76,079

 
1.1

 
37,459

 
0.6

5
 
CCC
 
15,264

 
0.2

 
21,601

 
0.3

6
 
In or near default
 
10,676

 
0.2

 
11,173

 
0.2

 
 
Total below investment grade
 
294,065

 
4.3

 
232,479

 
3.5

 
 
Total fixed maturities - available for sale
 
$
6,788,657

 
100.0
%
 
$
6,637,776

 
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. This may result in a final designation being higher or lower than the equivalent credit rating.
 
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
 
 
 
March 31, 2016
 
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
$
339,778

 
$
202,679

 
$
14,689

 
$
137,099

 
$
(18,164
)
Capital goods
252,066

 
230,670

 
21,276

 
21,396

 
(4,361
)
Communications
142,540

 
97,973

 
10,722

 
44,567

 
(2,758
)
Consumer cyclical
113,498

 
99,305

 
8,750

 
14,193

 
(418
)
Consumer non-cyclical
430,850

 
370,653

 
31,753

 
60,197

 
(3,183
)
Energy
518,468

 
251,936

 
17,368

 
266,532

 
(56,265
)
Finance
702,454

 
560,636

 
42,686

 
141,818

 
(4,411
)
Transportation
104,489

 
93,509

 
7,410

 
10,980

 
(2,297
)
Utilities
839,703

 
757,290

 
95,802

 
82,413

 
(4,336
)
Other
169,335

 
135,488

 
7,771

 
33,847

 
(1,761
)
Total corporate securities
3,613,181

 
2,800,139

 
258,227

 
813,042

 
(97,954
)
Mortgage- and asset-backed securities
1,628,565

 
1,230,830

 
107,918

 
397,735

 
(14,310
)
United States Government and agencies
44,351

 
43,601

 
3,715

 
750

 
(1
)
State, municipal and other governments
1,502,560

 
1,484,156

 
160,169

 
18,404

 
(196
)
Total
$
6,788,657

 
$
5,558,726

 
$
530,029

 
$
1,229,931

 
$
(112,461
)



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Table of Contents

Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
328,324

 
$
158,935

 
$
10,434

 
$
169,389

 
$
(32,490
)
Capital goods
240,666

 
179,367

 
15,554

 
61,299

 
(4,532
)
Communications
137,290

 
89,237

 
6,930

 
48,053

 
(4,264
)
Consumer cyclical
123,702

 
107,309

 
7,013

 
16,393

 
(275
)
Consumer non-cyclical
404,439

 
237,336

 
16,466

 
167,103

 
(8,640
)
Energy
483,988

 
214,232

 
14,748

 
269,756

 
(62,431
)
Finance
722,855

 
533,159

 
37,895

 
189,696

 
(6,894
)
Transportation
102,669

 
70,039

 
5,331

 
32,630

 
(3,690
)
Utilities
822,297

 
622,549

 
73,894

 
199,748

 
(10,537
)
Other
152,477

 
75,490

 
3,884

 
76,987

 
(4,091
)
Total corporate securities
3,518,707

 
2,287,653

 
192,149

 
1,231,054

 
(137,844
)
Mortgage- and asset-backed securities
1,602,620

 
1,147,663

 
87,718

 
454,957

 
(14,954
)
United States Government and agencies
44,098

 
39,291

 
3,129

 
4,807

 
(81
)
State, municipal and other governments
1,472,351

 
1,394,371

 
129,923

 
77,980

 
(2,183
)
Total
$
6,637,776

 
$
4,868,978

 
$
412,919

 
$
1,768,798

 
$
(155,062
)

Gross Unrealized Gains and Gross Unrealized Losses by Energy Classification
 
 
 
March 31, 2016
 
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)
Energy securities:
 
 
 
 
 
 
 
 
 
Midstream
$
148,277

 
$
66,699

 
$
3,101

 
$
81,578

 
$
(17,946
)
Oil field services
76,102

 
27,254

 
1,640

 
48,848

 
(16,931
)
Independent exploration & production
151,291

 
48,691

 
3,826

 
102,600

 
(16,816
)
Integrated energy
90,402

 
70,433

 
5,996

 
19,969

 
(2,216
)
Refiners
52,396

 
38,859

 
2,805

 
13,537

 
(2,356
)
Total
$
518,468

 
$
251,936

 
$
17,368

 
$
266,532

 
$
(56,265
)



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Table of Contents

Gross Unrealized Gains and Gross Unrealized Losses by Energy Classification
 
 
 
December 31, 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)
Energy securities:
 
 
 
 
 
 
 
 
 
Midstream
$
131,364

 
$
48,886

 
$
2,727

 
$
82,478

 
$
(23,557
)
Oil field services
72,565

 
23,476

 
1,691

 
49,089

 
(15,687
)
Independent exploration & production
131,328

 
52,075

 
4,107

 
79,253

 
(12,346
)
Integrated energy
123,621

 
76,556

 
5,807

 
47,065

 
(8,639
)
Refiners
25,110

 
13,239

 
416

 
11,871

 
(2,202
)
Total
$
483,988

 
$
214,232

 
$
14,748

 
$
269,756

 
$
(62,431
)

At March 31, 2016, 82.7% of our energy holdings were investment grade. Our non-investment grade holdings included oil field services with a carrying value of $36.7 million and an unrealized loss of $15.3 million and independent energy with a carrying value of $25.3 million and an unrealized loss of $8.4 million.

Non-Sovereign European Debt Exposure
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
Italy
$
19,715

 
$
20,870

 
$
19,713

 
$
20,107

Spain
27,166

 
30,553

 
27,178

 
29,617

Ireland
14,046

 
15,638

 
14,046

 
15,546

Subtotal
60,927

 
67,061

 
60,937

 
65,270

United Kingdom
180,405

 
182,481

 
183,897

 
180,291

Netherlands
58,836

 
62,103

 
60,061

 
61,617

France
29,323

 
32,210

 
29,325

 
31,012

Other countries
89,473

 
94,770

 
85,520

 
86,620

Subtotal
358,037

 
371,564

 
358,803

 
359,540

Total European exposure
$
418,964

 
$
438,625

 
$
419,740

 
$
424,810


The table above reflects our exposure to non-sovereign European debt. This represents 6.5% of total fixed maturities as of March 31, 2016 and 6.4% as of December 31, 2015. 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.



45

Table of Contents

Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
NAIC Designation
 
Equivalent Rating
 
Carrying Value of Securities with Gross Unrealized Losses
 
Percent of Total
 
Gross Unrealized Losses
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
487,228

 
39.6
%
 
$
(16,216
)
 
14.4
%
2
 
BBB
 
551,249

 
44.8

 
(46,593
)
 
41.4

 
 
Total investment grade
 
1,038,477

 
84.4

 
(62,809
)
 
55.8

3
 
BB
 
107,810

 
8.8

 
(27,598
)
 
24.6

4
 
B
 
67,757

 
5.5

 
(18,306
)
 
16.3

5
 
CCC
 
8,863

 
0.7

 
(2,719
)
 
2.4

6
 
In or near default
 
7,024

 
0.6

 
(1,029
)
 
0.9

 
 
Total below investment grade
 
191,454

 
15.6

 
(49,652
)
 
44.2

 
 
Total
 
$
1,229,931

 
100.0
%
 
$
(112,461
)
 
100.0
%

 
 
 
 
December 31, 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
 
$
830,141

 
46.9
%
 
$
(31,439
)
 
20.3
%
2
 
BBB
 
796,367

 
45.0

 
(84,057
)
 
54.2

 
 
Total investment grade
 
1,626,508

 
91.9

 
(115,496
)
 
74.5

3
 
BB
 
88,719

 
5.0

 
(24,938
)
 
16.1

4
 
B
 
32,233

 
1.8

 
(7,125
)
 
4.6

5
 
CCC
 
14,146

 
0.8

 
(6,652
)
 
4.3

6
 
In or near default
 
7,192

 
0.5

 
(851
)
 
0.5

 
 
Total below investment grade
 
142,290

 
8.1

 
(39,566
)
 
25.5

 
 
Total
 
$
1,768,798

 
100.0
%
 
$
(155,062
)
 
100.0
%

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
March 31, 2016
 
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
$

 
$
219,654

 
$

 
$
(2,745
)
Greater than three months to six months
2,999

 
294,789

 
(881
)
 
(11,574
)
Greater than six months to nine months
18,200

 
82,748

 
(6,488
)
 
(6,847
)
Greater than nine months to twelve months
14,375

 
371,636

 
(4,737
)
 
(21,618
)
Greater than twelve months
82,877

 
255,114

 
(29,695
)
 
(27,876
)
Total
$
118,451

 
$
1,223,941

 
$
(41,801
)
 
$
(70,660
)



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Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 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
$
2,999

 
$
780,222

 
$
(1,229
)
 
$
(17,467
)
Greater than three months to six months
25,007

 
151,010

 
(9,174
)
 
(9,377
)
Greater than six months to nine months
29,344

 
572,298

 
(9,047
)
 
(39,654
)
Greater than nine months to twelve months
36,907

 
60,110

 
(12,116
)
 
(6,257
)
Greater than twelve months
87,870

 
178,093

 
(32,804
)
 
(17,937
)
Total
$
182,127

 
$
1,741,733

 
$
(64,370
)
 
$
(90,692
)

Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
 
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
$
1,736

 
$
(53
)
 
$
4,289

 
$
(75
)
Due after one year through five years
78,609

 
(7,499
)
 
77,367

 
(9,356
)
Due after five years through ten years
161,495

 
(12,756
)
 
235,609

 
(20,499
)
Due after ten years
590,356

 
(77,843
)
 
996,576

 
(110,178
)
 
832,196

 
(98,151
)
 
1,313,841

 
(140,108
)
Mortgage- and asset-backed
397,735

 
(14,310
)
 
454,957

 
(14,954
)
Total
$
1,229,931

 
$
(112,461
)
 
$
1,768,798

 
$
(155,062
)

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.

The repayment pattern on mortgage and other asset-backed securities is more variable than that of more traditional fixed maturity securities because the repayment terms are tied to underlying debt obligations that are subject to prepayments, which in the current economic environment includes defaults. The prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that cannot be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy.

At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed. See Note 1 to our consolidated financial statements included in Item 8 of our 2015 Form 10-K for more detail on accounting for the amortization of premium and accrual of discount on mortgage-backed and asset-backed securities.

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 March 31, 2016 and at December 31, 2015, 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 $7.3 million at March 31, 2016 and $7.6 million at December 31, 2015.



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Mortgage- and Asset-Backed Securities by Collateral Type
 
 
 
March 31, 2016
 
December 31, 2015
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
(Dollars in thousands)
Government agency
$
208,621

 
$
229,686

 
3.4
%
 
$
212,065

 
$
225,886

 
3.4
%
Prime
118,133

 
126,531

 
1.9

 
122,900

 
132,221

 
2.0

Alt-A
125,642

 
136,015

 
2.0

 
136,830

 
147,196

 
2.2

Subprime
85,781

 
79,828

 
1.2

 
77,255

 
73,064

 
1.1

Commercial mortgage
523,358

 
580,135

 
8.5

 
514,195

 
553,992

 
8.3

Non-mortgage
473,422

 
476,370

 
7.0

 
466,611

 
470,261

 
7.1

Total
$
1,534,957

 
$
1,628,565

 
24.0
%
 
$
1,529,856

 
$
1,602,620

 
24.1
%

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

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" that provide sequential retirement of the bonds. We primarily invest in sequential tranches that provide cash flow stability since principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class and targeted amortization class securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to excessive risk.

Residential Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
March 31, 2016
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
125,979

 
$
131,113

 
$
88,511

 
$
103,488

 
$
192,456

 
$
209,241

 
$
406,946

 
$
443,842

3

 

 
11,855

 
10,339

 

 

 
11,855

 
10,339

5
13

 
12

 

 

 

 

 
13

 
12

Total
$
125,992

 
$
131,125

 
$
100,366

 
$
113,827

 
$
192,456

 
$
209,241

 
$
418,814

 
$
454,193


 
December 31, 2015
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
133,963

 
$
139,773

 
$
88,142

 
$
104,361

 
$
200,453

 
$
210,675

 
$
422,558

 
$
454,809

3

 

 
1,927

 
1,954

 

 

 
1,927

 
1,954

5
13

 
13

 
12,471

 
8,730

 

 

 
12,484

 
8,743

Total
$
133,976

 
$
139,786

 
$
102,540

 
$
115,045

 
$
200,453

 
$
210,675

 
$
436,969

 
$
465,506


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.



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Table of Contents

Commercial Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
March 31, 2016
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
10,062

 
$
10,562

 
$
126,095

 
$
141,069

 
$
345,249

 
$
384,518

 
$
481,406

 
$
536,149

2

 

 
31,407

 
32,975

 

 

 
31,407

 
32,975

3

 

 
8,000

 
8,661

 

 

 
8,000

 
8,661

4

 

 
2,545

 
2,350

 

 

 
2,545

 
2,350

Total (1)
$
10,062

 
$
10,562

 
$
168,047

 
$
185,055

 
$
345,249

 
$
384,518

 
$
523,358

 
$
580,135


 
December 31, 2015
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
10,413

 
$
10,723

 
$
139,188

 
$
154,864

 
$
325,046

 
$
347,631

 
$
474,647

 
$
513,218

2

 

 
22,770

 
23,573

 
6,222

 
6,749

 
28,992

 
30,322

3

 

 
8,000

 
8,197

 

 

 
8,000

 
8,197

4

 

 
2,556

 
2,255

 

 

 
2,556

 
2,255

Total (1)
$
10,413

 
$
10,723

 
$
172,514

 
$
188,889

 
$
331,268

 
$
354,380

 
$
514,195

 
$
553,992


(1) The CMBS portfolio included government agency-backed securities with a carrying value of $408.9 million at March 31, 2016 and $382.8 million at December 31, 2015.

Also included in the commercial mortgage-backed securities are military housing bonds totaling $124.6 million at March 31, 2016 and $122.5 million at December 31, 2015. 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.

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.
Other Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
March 31, 2016
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
11,689

 
11,265

 
140,526

 
141,310

 
345,848

 
346,321

 
$
498,063

 
$
498,896

2
2,209

 
2,311

 
12,869

 
12,352

 
53,659

 
53,551

 
68,737

 
68,214

3

 

 

 

 
8,757

 
8,628

 
8,757

 
8,628

4
215

 
213

 

 

 
1,250

 
1,239

 
1,465

 
1,452

5

 

 

 

 
6,400

 
6,400

 
6,400

 
6,400

6
1,368

 
3,629

 
7,995

 
7,018

 

 

 
9,363

 
10,647

Total
$
15,481

 
$
17,418

 
$
161,390

 
$
160,680

 
$
415,914

 
$
416,139

 
$
592,785

 
$
594,237


 


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Table of Contents

Other Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
December 31, 2015
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
12,303

 
$
11,962

 
$
138,431

 
$
141,869

 
$
341,855

 
$
341,899

 
$
492,589

 
$
495,730

2
2,261

 
2,366

 
12,888

 
12,421

 
44,914

 
44,841

 
60,063

 
59,628

3

 

 

 

 
8,816

 
8,792

 
8,816

 
8,792

4
221

 
218

 

 

 
1,250

 
1,210

 
1,471

 
1,428

5

 

 

 

 
6,400

 
6,400

 
6,400

 
6,400

6
1,367

 
3,958

 
7,986

 
7,186

 

 

 
9,353

 
11,144

Total
$
16,152

 
$
18,504

 
$
159,305

 
$
161,476

 
$
403,235

 
$
403,142

 
$
578,692

 
$
583,122


State, Municipal and Other Government Securities

State, municipal and other government securities totaled $1,502.6 million, or 22.1% of total fixed maturities, at March 31, 2016, and $1,472.4 million, or 22.2% of total fixed maturities at December 31, 2015 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 1.6% of our total fixed maturities at March 31, 2016. As of March 31, 2016, our Illinois-related portfolio holdings were rated investment grade, and were trading at 111.2% of amortized cost. Our municipal bond exposure had an average rating of Aa2/AA and our holdings were trading at 111.9% of amortized cost at March 31, 2016.

Equity Securities

Equity securities totaled $130.8 million at March 31, 2016 and $121.7 million at December 31, 2015. Gross unrealized gains totaled $7.3 million and gross unrealized losses totaled $1.7 million at March 31, 2016. At December 31, 2015, gross unrealized gains totaled $6.5 million and gross unrealized losses totaled $1.2 million on these securities. The unrealized losses were primarily attributable to non-redeemable perpetual preferred securities from issuers in the financial sector. See Note 2 to our consolidated financial statements for further discussion regarding our analysis of unrealized losses related to these securities.
 
Mortgage Loans

Mortgage loans totaled $769.4 million at March 31, 2016 and $744.3 million at December 31, 2015. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of commercial mortgage loans outstanding was 172 at March 31, 2016 and 167 at December 31, 2015. In the first three months of 2016, new loans ranged from $2.8 million to $8.8 million in size, with an average loan size of $4.9 million, an average loan term of 18 years and an average yield of 4.02%. 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 7.5% that are interest only loans at March 31, 2016. At March 31, 2016, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 55.4% 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


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Table of Contents

at March 31, 2016 and December 31, 2015. The effective duration of the fixed maturity and mortgage loan portfolios backing our annuity products was 6.2 years at March 31, 2016 and 6.1 years at December 31, 2015. The effective duration of our annuity liabilities was approximately 6.6 years at March 31, 2016 and 6.4 years at December 31, 2015. While it can be difficult to maintain asset and liability durations that are closely matched in a dynamic environment, we have identified various strategies that can be implemented if duration mismatches exceed acceptable tolerances.

Other Assets

Deferred acquisition costs decreased 14.6% to $286.8 million at March 31, 2016, primarily due to a $49.9 million increase in the impact of the change in net unrealized appreciation on fixed maturity securities during the period. Assets held in separate accounts decreased 2.8% to $607.7 million primarily due to policy surrenders and product charges.

Liabilities

Future policy benefits increased 1.0% to $6,467.6 million at March 31, 2016, primarily due to an increase in the volume of annuity and life business in force. Deferred income taxes increased 29.3% to $174.7 million primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments. Liabilities related to separate accounts decreased 2.8% to $607.7 million primarily due to policy surrenders and product charges.

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 2016. 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 5% to $0.42 per share during March 2016.

Our stockholders' equity increased 3.4% to $1,173.1 million at March 31, 2016, compared to $1,134.4 million at December 31, 2015, primarily due to the change in unrealized appreciation of fixed maturity securities during the period and net income, partially offset by dividends paid.

At March 31, 2016, FBL's common stockholders' equity was $1,170.1 million, or $47.08 per share, compared to $1,131.4 million, or $45.61 per share, at December 31, 2015. Included in stockholders' equity per common share is $7.48 at March 31, 2016 and $4.62 at December 31, 2015 attributable to accumulated other comprehensive income.

Liquidity and Capital Resources

Cash Flows

During the first three months of 2016, our operating activities generated cash flows totaling $47.4 million, consisting of net income of $25.9 million adjusted for non-cash operating revenues and expenses netting to $21.5 million. We used cash of $12.0 million in our investing activities during the 2016 period. The primary uses were $153.0 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $127.5 million in sales, maturities and repayments of investments. Our financing activities used cash of $41.5 million during the 2016 period. The primary financing uses were $94.7 million for return of policyholder account balances on interest sensitive products and $60.1 million for dividends paid to stockholders, which was partially offset by $127.2 million in receipts from interest sensitive products credited to policyholder account balances.

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 quarter ended March 31, 2016 included management fees from subsidiaries and affiliates totaling $2.2 million and dividends of $42.5 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 programs approved by our Board


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Table of Contents

of Directors. Under the expired $50 million Class A common stock 2014 repurchase program, we repurchased 720 shares for less than $0.1 million during the three months ended March 31, 2016. At March 31, 2016, $50.0 million remains available for repurchase under the 2016 Class A common stock repurchase program. 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 $1.2 million for the three months ended March 31, 2016 and March 31, 2015. Interest payments on our debt outstanding at March 31, 2016 are estimated to be $3.6 million for the remainder of 2016.

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 $85.1 million for the three months ended March 31, 2016 and $120.0 million for the prior year quarter.

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, 2015, Farm Bureau Life’s statutory unassigned surplus was $469.6 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, 2015 included in our Annual Report on Form 10-K. During the remainder of 2016, the maximum amount legally available for distribution to the parent company without further regulatory approval is $57.5 million.

We paid regular cash dividends on our common and preferred stock during the quarter ended March 31 totaling $10.5 million in 2016 and $9.9 million in 2015. In addition, we paid a special $2.00 per common share cash dividend in March 2016 totaling $49.7 million and in March 2015 totaling $49.5 million. It is anticipated that quarterly cash dividend requirements for 2016 will be $0.0075 per Series B preferred share and $0.42 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 $31.4 million for the remainder of 2016. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2016. The parent company had available cash and investments totaling $52.8 million at March 31, 2016. FBL Financial Group, Inc. expects to rely on available cash resources, dividends from Farm Bureau Life 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 March 31, 2016.

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 that 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 March 31, 2016, our statutory total adjusted capital is estimated at $649.4 million, resulting in a RBC ratio of 539%, based on company action level capital of $120.5 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


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Table of Contents

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 that 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, 2015.


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, 2015.


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 March 31, 2016, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

On April 8, 2016, the U.S. Department of Labor (DOL) issued regulations (the Final Rule) addressing when companies and individuals providing investment advice with respect to certain employee benefit plans or individual retirement accounts (IRAs) are considered a fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. The Final Rule offers a very broad definition of fiduciary investment advice which includes services currently offered to some of our customers with such plans or IRAs. The DOL has also issued 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 Final Rule the agents who sell fixed indexed annuities and the registered representatives who sell variable annuities or investment products for use in certain employee benefit plans or IRAs would be considered fiduciaries, and could subject themselves and one or more of our companies to additional disclosures, reporting, record keeping and other regulatory requirements. It is not uncommon for our customers to utilize products we offer in such plans. We believe the Final Rule will require adjustments and refinements to our current practices and procedures in order to comply with the Final Rule. The effective date of the Final Rule is June 7, 2016, but the provisions of the Final Rule will not apply until April 10, 2017. Limited additional transition relief is available until January 1, 2018, under exemptions released with the Final Rule. We continue to analyze the potential effect of the Final Rule on our businesses.

The performance of our company is subject to a variety of risks that 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, 2015.


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 March 31, 2016.

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
January 1, 2016 through January 31, 2016
 

 
$

 
 
$38,960,397
February 1, 2016 through February 29, 2016
 
720

 
55.78

 
720
 
$38,920,232
March 1, 2016 through March 31, 2016
 

 

 
 
$50,000,000
Total
 
720

 
$
55.78

 
 
 
 

Activity in this table represents Class A common shares repurchased by the Company in connection with the repurchase plan announced February 20, 2014, which expired on March 31, 2016. The plan authorized 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.

On March 3, 2016, the Company announced an additional repurchase plan commencing March 31, 2016, which authorizes us to make up to $50.0 million in repurchases of Class A common stock in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Completion of the program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.



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ITEM 6. EXHIBITS

(a) Exhibits:
10.1*+
Form of 2016 Restricted Stock Unit Agreement between the Company and its executive officers
10.2*+
Form of 2016 Restricted Stock Unit Agreement between the Company and participants (other than executive officers)
10.3*+
Form of 2016 Restricted Surplus Unit Agreement between the Company and its executive officers
10.4*+
Form of 2016 Restricted Surplus Unit Agreement between the Company and participants (other than executive officers)
10.5*+
Management Performance Plan, effective January 1, 2016
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 March 31, 2016 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
*
Exhibit relates to a compensatory plan for management or directors.
#
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: May 9, 2016                


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



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