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

(Mark one)
 
 
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended September 30, 2018
 
 
 
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
ffglogoa02.jpg
(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 every Interactive Data File required to be submitted 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 such files). [X] Yes [ ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 Title of each class
 
Outstanding at October 30, 2018
Class A Common Stock, without par value
 
24,786,498
Class B Common Stock, without par value
 
11,413


















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FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
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)

 
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2018 - $6,925,616; 2017 - $6,757,250)
$
7,099,025

 
$
7,291,967

Equity securities at fair value (cost: 2018 - $99,882; 2017 - $96,715)
103,896

 
104,145

Mortgage loans
1,015,618

 
971,812

Real estate
1,543

 
1,543

Policy loans
195,723

 
191,398

Short-term investments
25,569

 
17,007

Other investments
48,636

 
42,371

Total investments
8,490,010

 
8,620,243

 
 
 
 
Cash and cash equivalents
14,425

 
52,696

Securities and indebtedness of related parties
59,546

 
47,823

Accrued investment income
81,199

 
76,468

Amounts receivable from affiliates
7,617

 
3,561

Reinsurance recoverable
104,550

 
108,948

Deferred acquisition costs
412,046

 
302,611

Value of insurance in force acquired
10,821

 
4,560

Current income taxes recoverable
1,454

 
6,764

Other assets
171,754

 
177,764

Assets held in separate accounts
651,797

 
651,963

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
10,005,219

 
$
10,053,401


 


2




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

 
September 30,
2018
 
December 31,
2017
Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
5,451,535

 
$
5,299,961

Traditional life insurance and accident and health products
1,789,650

 
1,750,504

Other policy claims and benefits
51,820

 
44,475

Supplementary contracts without life contingencies
310,152

 
322,630

Advance premiums and other deposits
268,935

 
267,023

Amounts payable to affiliates
1,379

 
1,164

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

 
97,000

Deferred income taxes
77,958

 
130,425

Other liabilities
111,195

 
111,131

Liabilities related to separate accounts
651,797

 
651,963

Total liabilities
8,811,421

 
8,676,276

 
 
 
 
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 24,806,796 shares in 2018 and 24,919,113 shares in 2017
153,160

 
153,589

Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 11,413 shares in 2018 and 2017
72

 
72

Accumulated other comprehensive income
88,961

 
284,983

Retained earnings
948,530

 
935,423

Total FBL Financial Group, Inc. stockholders’ equity
1,193,723

 
1,377,067

Noncontrolling interest
75

 
58

Total stockholders’ equity
1,193,798

 
1,377,125

Total liabilities and stockholders’ equity
$
10,005,219

 
$
10,053,401


See accompanying notes.


3




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

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Interest sensitive product charges
$
31,161

 
$
28,004

 
$
92,165

 
$
86,661

Traditional life insurance premiums
48,124

 
47,087

 
148,712

 
145,783

Net investment income
105,757

 
102,950

 
310,753

 
307,852

Net realized capital gains (losses)
(709
)
 
81

 
(1,615
)
 
599

Net other-than-temporary impairment losses recognized in earnings
(50
)
 
(67
)
 
(1,090
)
 
(133
)
Other income
3,828

 
3,501

 
12,065

 
11,711

Total revenues
188,111

 
181,556

 
560,990

 
552,473

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Interest sensitive product benefits
70,145

 
67,206

 
194,127

 
188,217

Traditional life insurance benefits
44,168

 
42,633

 
133,349

 
128,197

Policyholder dividends
2,480

 
2,487

 
7,591

 
7,597

Underwriting, acquisition and insurance expenses
30,834

 
27,535

 
107,621

 
98,229

Interest expense
1,212

 
1,213

 
3,638

 
3,638

Other expenses
5,061

 
4,971

 
16,281

 
13,862

Total benefits and expenses
153,900

 
146,045

 
462,607

 
439,740

 
34,211

 
35,511

 
98,383

 
112,733

Income taxes
(4,818
)
 
(9,880
)
 
(14,462
)
 
(32,017
)
Equity income, net of related income taxes
1,642

 
487

 
3,441

 
2,629

Net income
31,035

 
26,118

 
87,362

 
83,345

Net loss (income) attributable to noncontrolling interest
(25
)
 
9

 
16

 
(20
)
Net income attributable to FBL Financial Group, Inc.
$
31,010

 
$
26,127

 
$
87,378

 
$
83,325

 
 
 
 
 
 
 
 
Earnings per common share
$
1.24

 
$
1.04

 
$
3.50

 
$
3.32

Earnings per common share - assuming dilution
$
1.24

 
$
1.04

 
$
3.50

 
$
3.32


See accompanying notes.


4




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
31,035

 
$
26,118

 
$
87,362

 
$
83,345

Other comprehensive income (loss) (1)
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses
(42,388
)
 
11,320

 
(191,339
)
 
73,751

Change in underfunded status of postretirement benefit plans
268

 
192

 
797

 
563

Total other comprehensive income (loss), net of tax
(42,120
)
 
11,512

 
(190,542
)
 
74,314

Total comprehensive income (loss), net of tax
(11,085
)
 
37,630

 
(103,180
)
 
157,659

Comprehensive (income) loss attributable to noncontrolling interest
(25
)
 
9

 
16

 
(20
)
Total comprehensive income (loss) applicable to FBL Financial Group, Inc.
$
(11,110
)
 
$
37,639

 
$
(103,164
)
 
$
157,639


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


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands)
 
FBL Financial Group, Inc. Stockholders’ Equity
 
 
 
 
 
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, 2017
$
3,000

 
$
152,975

 
$
149,555

 
$
882,672

 
$
56

 
$
1,188,258

Cumulative effect of change in accounting for low income housing tax credit investments

 

 

 
(4,703
)
 

 
(4,703
)
Net income - nine months ended September 30, 2017

 

 

 
83,325

 
20

 
83,345

Other comprehensive income

 

 
74,314

 

 

 
74,314

Stock-based compensation

 
644

 

 

 

 
644

Dividends on preferred stock

 

 

 
(112
)
 

 
(112
)
Dividends on common stock

 

 

 
(70,280
)
 

 
(70,280
)
Receipts related to noncontrolling interest

 

 

 

 
(34
)
 
(34
)
Balance at September 30, 2017
$
3,000

 
$
153,619

 
$
223,869

 
$
890,902

 
$
42

 
$
1,271,432

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
$
3,000

 
$
153,661

 
$
284,983

 
$
935,423

 
$
58

 
$
1,377,125

Cumulative effect of change in accounting principle related to net unrealized gains on equity securities

 

 
(5,480
)
 
5,480

 

 

Net income - nine months ended September 30, 2018

 

 

 
87,378

 
(16
)
 
87,362

Other comprehensive loss

 

 
(190,542
)
 

 

 
(190,542
)
Stock-based compensation

 
366

 

 

 

 
366

Purchase of common stock

 
(795
)
 

 
(8,054
)
 

 
(8,849
)
Dividends on preferred stock

 

 

 
(112
)
 

 
(112
)
Dividends on common stock

 

 

 
(71,585
)
 

 
(71,585
)
Receipts related to noncontrolling interest

 

 

 

 
33

 
33

Balance at September 30, 2018
$
3,000

 
$
153,232

 
$
88,961

 
$
948,530

 
$
75

 
$
1,193,798


See accompanying notes.


5




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

 
Nine months ended September 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
87,362

 
$
83,345

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
123,425

 
121,028

Charges for mortality, surrenders and administration
(89,958
)
 
(86,975
)
Net realized (gains) losses on investments
2,705

 
(466
)
Change in fair value of derivatives
(2,370
)
 
(5,450
)
Increase in liabilities for life insurance and other future policy benefits
61,112

 
67,802

Deferral of acquisition costs
(31,276
)
 
(31,819
)
Amortization of deferred acquisition costs and value of insurance in force
24,199

 
15,984

Change in reinsurance recoverable
2,370

 
(488
)
Provision for deferred income taxes
(1,816
)
 
3,005

Other
1,050

 
7,055

Net cash provided by operating activities
176,803

 
173,021

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
455,104

 
444,130

Equity securities - available for sale

 
9,168

Mortgage loans
51,680

 
39,880

Derivative instruments
13,203

 
9,054

Policy loans
28,416

 
27,092

Securities and indebtedness of related parties
4,945

 
6,245

Real estate

 
717

Other long-term investments
4,948

 
14

Acquisitions:
 
 
 
Fixed maturities - available for sale
(613,278
)
 
(457,988
)
Equity securities - available for sale
(2,799
)
 
(1,102
)
Mortgage loans
(95,336
)
 
(147,200
)
Derivative instruments
(10,480
)
 
(6,556
)
Policy loans
(32,741
)
 
(29,090
)
Securities and indebtedness of related parties
(15,922
)
 
(10,178
)
Other long-term investments
(6,611
)
 

Short-term investments, net change
(8,562
)
 
(9,051
)
Purchases and disposals of property and equipment, net
(8,483
)
 
(7,889
)
Net cash used in investing activities
(235,916
)
 
(132,754
)




6




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

 
Nine months ended September 30,
 
2018
 
2017
Financing activities
 
 
 
Contract holder account deposits
$
525,245

 
$
358,211

Contract holder account withdrawals
(423,714
)
 
(333,261
)
Dividends paid
(71,697
)
 
(70,392
)
Proceeds from issuance of short-term debt
27,000

 

Repayments of short-term debt
(27,000
)
 

Issuance or repurchase of common stock, net
(9,025
)
 
305

Other financing activities
33

 

Net cash provided by (used in) financing activities
20,842

 
(45,137
)
Decrease in cash and cash equivalents
(38,271
)
 
(4,870
)
Cash and cash equivalents at beginning of period
52,696

 
33,583

Cash and cash equivalents at end of period
$
14,425

 
$
28,713

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash (paid) received during the period for:
 
 
 
Interest
$
(3,656
)
 
$
(3,638
)
Income taxes
(2,027
)
 
(10,302
)

See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2018

1. Significant Accounting Policies

Basis of Presentation

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

Operating results for the three- and nine-month periods ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. We encourage you to refer to the notes to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2017 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.

Accounting Policy Change

During the third quarter of 2018, we voluntarily changed our accounting policy for low income housing tax credit (LIHTC) investments from the equity method to the proportional amortization method. We believe the proportional amortization method is preferable because it better reflects the economics of an investment that is made for the primary purpose of receiving tax credits and other tax benefits and is consistent with the accounting method used by most life insurance companies that have disclosed their accounting policies for LIHTC investments. In addition to a change in the timing of the recognition of income or loss on LIHTC investments, there are also differences in how these investments are reported within our consolidated financial statements, as the unamortized cost of the LIHTC investments is now reflected in the "Other asset" line instead of the "Securities and indebtedness of related parties" line on the consolidated balance sheets and income/expense from LIHTC investments is now reflected in the "Income taxes" line instead of the "Equity income" line on the consolidated statements of operations. Changes to the consolidated statements of cash flows were immaterial and included moving additional funding and return of capital from LIHTC investments from the “Securities and indebtedness of related parties” lines under investing to the “Other” line under operating cash flows.

As a result of this accounting policy change, the opening balance as of January 1, 2017 of retained earnings was reduced by $4.7 million, as shown on the consolidated statements of changes in stockholders’ equity. In addition, the following presents the effect of the change on financial statement line items for prior periods that were retrospectively adjusted:

Consolidated Balance Sheet Impact
 
December 31, 2017
 
 
 
As Originally Reported
 
As Adjusted
 
Effect of Change
 
(Dollars in thousands)
Assets
 
 
 
 
 
Securities and indebtedness of related parties
$
130,240

 
$
47,823

 
$
(82,417
)
Current income taxes recoverable
3,269

 
6,764

 
3,495

Other assets
112,054

 
177,764

 
65,710

Total assets
 
 
 
 
$
(13,212
)
 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
Deferred income taxes
$
131,912

 
$
130,425

 
$
(1,487
)
Retained earnings
947,148

 
935,423

 
(11,725
)
Total liabilities and stockholders’ equity
 
 
 
 
$
(13,212
)




8

Table of Contents

Consolidated Statements of Operations Impact
 
 
 
 
 
Three months ended September 30, 2017
 
 
 
Nine months ended September 30, 2017
 
 
 
As Originally Reported
 
As Adjusted
 
Effect of Change
 
As Originally Reported
 
As Adjusted
 
Effect of Change
 
(Dollars in thousands)
Income taxes
$
(11,220
)
 
$
(9,880
)
 
$
1,340

 
$
(35,844
)
 
$
(32,017
)
 
$
3,827

Equity income (loss), net of related income taxes
2,804

 
487

 
(2,317
)
 
8,959

 
2,629

 
(6,330
)
Net income (loss) attributable to FBL Financial Group, Inc.
 
 
 
 
$
(977
)
 
 
 
 
 
$
(2,503
)
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share - basic and assuming dilution
 
 
 
 
$
(0.04
)
 
 
 
 
 
$
(0.10
)

Net income would have been $0.1 million higher ($0.01 per basic and diluted share) for the three months ended September 30, 2018 and $0.2 million lower ($0.1 per basic and diluted share) for the nine months ended September 30, 2018 if the Company had continued to record LIHTC investments using the equity method.

New Accounting Pronouncements

Description
Date of adoption
Effect on our consolidated financial statements or other significant matters
Standards adopted:
Stockholders' equity
In February 2018, the Financial Accounting Standards Board (FASB) issued guidance allowing a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from changes in the federal income tax rate due to enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 2017 (Tax Act). Accounting guidance requires that deferred tax assets and liabilities, including those associated with components of AOCI, be remeasured during the period new tax laws are enacted, with any changes reflected as a component of income tax expense (benefit). Under the previous guidance, retained earnings would reflect the full amount of the change and AOCI would not be adjusted for the portion of the change related to its components, leaving the unadjusted change “stranded” in AOCI. The new guidance allows AOCI to be adjusted to reclassify these stranded tax effects to retained earnings.
October 1, 2017
The new guidance was effective for 2018, with early adoption permitted. We adopted the new guidance in 2017 by reporting the reclassification in our Consolidated Statement of Stockholders’ Equity. We consider the remeasurement of deferred tax assets and liabilities a provisional estimate, so any adjustments to this estimate associated with components of AOCI during 2018 would result in additional reclassification. There have been no such adjustments during the nine months ended September 30, 2018.

Financial instruments - recognition and measurement
In January 2016, the FASB issued guidance that amended certain aspects of the recognition and measurement of financial instruments. The new guidance primarily affected the accounting for equity securities, which are now carried at fair value with valuation changes recognized in the statement of operations rather than as other comprehensive income. 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 were also revised under the new guidance. The new standard required the use of a modified retrospective method at adoption.
January 1, 2018
Upon adoption, we reclassified $5.5 million of net unrealized investment gains, net of adjustments to deferred acquisition costs, interest sensitive policy reserves and income taxes, on our equity securities from AOCI to retained earnings as a cumulative effect adjustment. Adoption resulted in a decrease to net income of $2.4 million ($0.10 per basic and diluted earnings per share) during the nine months ended September 30, 2018 and $0.5 million ($0.02 per basic and diluted earnings per share) during the third quarter of 2018.


9

Table of Contents

Revenue recognition
In May 2014, the FASB issued guidance that outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Insurance contract and investment related revenue, which make up the majority of our earnings, were specifically excluded from the scope of this guidance. The new guidance was 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 required 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. We had the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard.
January 1, 2018
Our revenues that fall under the scope of the new guidance primarily consist of the net commissions on insurance and investment products we broker for others. We have evaluated those contracts and concluded that there was no change in timing or measurement of revenues, as the historical accounting is consistent with the new guidance. Accordingly, there was no impact from adoption.
Standards not yet adopted:
Leases
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 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.
January 1, 2019
We are currently evaluating the impact of this guidance on our consolidated financial statements, but do not believe it will be material. Our most significant lease is for our home office building. See Note 10 of Item 8 of our 2017 Form 10-K for a further description of this lease, including future commitments. Our other leases are primarily shorter term in nature, relating to equipment. This standard may be applied using the modified retrospective approach or prospectively, recognizing a cumulative effect adjustment.
Financial instruments - credit impairment
In June 2016, the FASB issued guidance amending the accounting for the credit impairment of financial instruments. Under the new guidance, impairment losses are required to be estimated using an expected loss model under which a valuation allowance is established and adjusted over time. The valuation allowance will be based on the probability of loss over the life of the instrument, considering historical, current and forecasted information. The new guidance differs significantly from the incurred loss model used today, and will result in the earlier recognition of impairment losses. The new guidance may also increase the volatility of earnings to the extent actual results differ from the assumptions used in the establishment of the valuation allowance. The financial instruments for which we will be required to use the new model include but are not limited to, mortgage loans, lease receivables and reinsurance recoverables. Our available-for-sale fixed maturities will continue to apply the incurred loss model. However, rather than impairment losses resulting in a permanent reduction of carrying value as they do today, such losses will be in the form of a valuation allowance, which can be increased in the case of future credit losses or decreased should conditions improve. 
January 1, 2020
We are currently evaluating the impact of this new guidance on our consolidated financial statements. We believe the most significant impact upon adoption will be the establishment of an additional valuation allowance for our mortgage loan investments. This guidance will be applied using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption.
Targeted improvements: long-duration contracts
In August 2018, the FASB issued guidance that will change the accounting for long-duration insurance contracts. The new guidance impacts several facets of the accounting for such contracts including the accounting for future policy benefits associated with traditional non-participating and limited payment insurance contracts as well as for guaranteed minimum benefits and the amortization model used for deferred acquisition costs. Disclosures as well as presentation of financial results will also change under the new guidance.
January 1, 2021

We are currently evaluating the impact of this guidance on our consolidated financial statements, but expect the impact to the timing of profit emergence for the impacted insurance contracts to be significant. Adoption of certain portions of the guidance may be applied on a modified retrospective basis and others on a full retrospective basis. Early adoption is allowed.



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Reclassifications

In addition to the LIHTC reclassifications discussed above, in 2018 we began reporting our holdings of Federal Home Loan Bank of Des Moines (FHLB) common stock, which we are required to hold as a member of the FHLB system, as other investments rather than equity securities as the stock is restricted in nature. The 2017 consolidated financial statements have been reclassified to conform to the current financial statement presentation.


2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity Securities by Investment Category
 
 
 
September 30, 2018
 
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
$
3,226,039

 
$
148,003

 
$
(60,509
)
 
$
3,313,533

 
$

Residential mortgage-backed
592,376

 
28,761

 
(13,668
)
 
607,469

 
3,026

Commercial mortgage-backed
883,023

 
14,063

 
(32,412
)
 
864,674

 

Other asset-backed
748,415

 
16,410

 
(4,700
)
 
760,125

 
1,364

United States Government and agencies
19,712

 
816

 
(295
)
 
20,233

 

States and political subdivisions
1,456,051

 
87,208

 
(10,268
)
 
1,532,991

 

Total fixed maturities
$
6,925,616

 
$
295,261

 
$
(121,852
)
 
$
7,099,025

 
$
4,390

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
December 31, 2017
 
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
$
3,374,927

 
$
329,299

 
$
(15,955
)
 
$
3,688,271

 
$
(504
)
Residential mortgage-backed
483,671

 
35,890

 
(3,280
)
 
516,281

 
339

Commercial mortgage-backed
674,076

 
34,464

 
(3,233
)
 
705,307

 

Other asset-backed
818,071

 
18,645

 
(3,214
)
 
833,502

 
845

United States Government and agencies
23,378

 
1,606

 
(79
)
 
24,905

 

States and political subdivisions
1,383,127

 
141,813

 
(1,239
)
 
1,523,701

 

Total fixed maturities
$
6,757,250

 
$
561,717

 
$
(27,000
)
 
$
7,291,967

 
$
680

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
92,951

 
$
7,146

 
$
(265
)
 
$
99,832

 
 
Common stocks
3,764

 
549

 

 
4,313

 
 
Total equity securities
$
96,715

 
$
7,695

 
$
(265
)
 
$
104,145

 
 

(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 residential mortgage-backed and other asset-backed securities at September 30, 2018 and December 31, 2017 were in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.




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Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
September 30, 2018
 
Amortized
Cost
 

Fair Value
 
(Dollars in thousands)
Due in one year or less
$
116,178

 
$
118,398

Due after one year through five years
545,151

 
562,662

Due after five years through ten years
699,717

 
708,989

Due after ten years
3,340,756

 
3,476,708

 
4,701,802

 
4,866,757

Mortgage-backed and other asset-backed
2,223,814

 
2,232,268

Total fixed maturities
$
6,925,616

 
$
7,099,025


Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed maturities not due at a single maturity date have been included in the above table in the year of final contractual maturity.

Net Unrealized Gains on Investments in Accumulated Other Comprehensive Income
 
September 30,
2018
 
December 31,
2017
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
173,409

 
$
534,718

Equity securities - available for sale

 
7,430

 
173,409

 
542,148

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(46,865
)
 
(147,173
)
Value of insurance in force acquired
(6,980
)
 
(14,870
)
Unearned revenue reserve
5,673

 
12,705

Adjustments for assumed changes in policyholder liabilities
(64
)
 
(18,499
)
Provision for deferred income taxes
(26,286
)
 
(78,605
)
Net unrealized investment gains
$
98,887

 
$
295,706


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 Securities with Unrealized Losses by Length of Time
 
 
 
 
September 30, 2018
 
 
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
 
$
1,008,619

 
$
(41,103
)
 
$
179,151

 
$
(19,406
)
 
$
1,187,770

 
$
(60,509
)
 
49.7
%
Residential mortgage-backed
 
321,318

 
(11,240
)
 
44,511

 
(2,428
)
 
365,829

 
(13,668
)
 
11.2

Commercial mortgage-backed
 
492,258

 
(22,110
)
 
97,859

 
(10,302
)
 
590,117

 
(32,412
)
 
26.6

Other asset-backed
 
301,551

 
(2,819
)
 
93,174

 
(1,881
)
 
394,725

 
(4,700
)
 
3.9

United States Government and agencies
 
3,889

 
(221
)
 
2,423

 
(74
)
 
6,312

 
(295
)
 
0.2

States and political subdivisions
 
218,383

 
(7,995
)
 
16,697

 
(2,273
)
 
235,080

 
(10,268
)
 
8.4

Total fixed maturities
 
$
2,346,018

 
$
(85,488
)
 
$
433,815

 
$
(36,364
)
 
$
2,779,833

 
$
(121,852
)
 
100.0
%


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Table of Contents

Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
December 31, 2017
 
 
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
 
$
85,019

 
$
(1,261
)
 
$
183,820

 
$
(14,694
)
 
$
268,839

 
$
(15,955
)
 
59.1
%
Residential mortgage-backed
 
76,393

 
(1,757
)
 
31,779

 
(1,523
)
 
108,172

 
(3,280
)
 
12.1

Commercial mortgage-backed
 
151,158

 
(2,078
)
 
16,398

 
(1,155
)
 
167,556

 
(3,233
)
 
12.0

Other asset-backed
 
159,111

 
(2,006
)
 
71,064

 
(1,208
)
 
230,175

 
(3,214
)
 
11.9

United States Government and agencies
 
5,698

 
(47
)
 
1,864

 
(32
)
 
7,562

 
(79
)
 
0.3

States and political subdivisions
 
5,904

 
(96
)
 
20,505

 
(1,143
)
 
26,409

 
(1,239
)
 
4.6

Total fixed maturities
 
$
483,283

 
$
(7,245
)
 
$
325,430

 
$
(19,755
)
 
$
808,713

 
$
(27,000
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
2,819

 
$
(71
)
 
$
4,807

 
$
(194
)
 
$
7,626

 
$
(265
)
 
 
Total equity securities
 
$
2,819

 
$
(71
)
 
$
4,807

 
$
(194
)
 
$
7,626

 
$
(265
)
 
 

Fixed maturities in the above tables include 763 securities from 473 issuers at September 30, 2018 and 247 securities from 154 issuers at December 31, 2017.

Unrealized losses increased during the nine months ended September 30, 2018 due to higher market interest rates. We do not consider securities to be OTTI when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality when recovery of all amounts due under the contractual terms of the security is anticipated. Based on our intent not to sell or our belief that we will not be required to sell these securities before recovery of their amortized cost basis, we do not consider these investments to be OTTI at September 30, 2018. We will continue to monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified.

As described more fully in Note 1 to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2017, we perform a regular evaluation of all investment classes for impairment in order to evaluate whether such investments are OTTI.

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
Nine months ended September 30,
 
2018

2017
 
(Dollars in thousands)
Balance at beginning of period
$
(12,392
)
 
$
(14,500
)
Reductions due to investments sold or paid down
3,648

 
1,154

Reduction for credit loss that no longer has a portion of the OTTI loss recognized in other comprehensive income
2,529

 
587

Balance at end of period
$
(6,215
)
 
$
(12,759
)



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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 the non-credit portion of the OTTI was recognized in other comprehensive income and corresponding changes in such amounts. Credit loss impairments with no portion of the loss recognized in other comprehensive income, such as securities for which OTTI was measured at fair value, are excluded from the table.
Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Gross gains
$
25

 
$
221

 
$
1,821

 
$
1,426

Gross losses
(1
)
 
(140
)
 
(2
)
 
(1,082
)
Equity securities

 

 

 
(90
)
Other long-term investments
(1
)
 

 
(19
)
 
40

Real estate

 

 

 
305

 
23

 
81

 
1,800

 
599

Net unrealized losses recognized during the period on equity securities held at the end of the period (1)
(732
)
 

 
(3,415
)
 

Net realized gains (losses)
(709
)
 
81

 
(1,615
)
 
599

 
 
 
 
 
 
 
 
Impairment losses recognized in earnings:
 
 
 
 
 
 
 
Other credit-related (2)
(50
)
 
(67
)
 
(1,090
)
 
(133
)
Net realized gains (losses) on investments recorded in income
$
(759
)
 
$
14

 
$
(2,705
)
 
$
466


(1)
See Note 1 to our consolidated financial statements for discussion of change in accounting policy for equity securities during 2018.
(2)
Amount represents credit-related losses for fixed maturities written down to fair value through income and impairment losses related to investments accounted for under the equity method of accounting, which are included in securities and indebtedness of related parties within our consolidated balance sheets.

Proceeds from sales of fixed maturities totaled $59.3 million during the nine months ended September 30, 2018 and $57.7 million during the nine months ended September 30, 2017.

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. 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 non-accrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely. At September 30, 2018 and December 31, 2017, there were no non-performing loans over 90 days past due on contractual payments. At September 30, 2018, we had committed to provide additional funding for


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mortgage loans totaling $21.1 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.
Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
425,459

 
41.9
%
 
$
410,090

 
42.2
%
Retail
 
306,614

 
30.2

 
292,257

 
30.1

Industrial
 
211,585

 
20.8

 
207,180

 
21.3

Other
 
71,960

 
7.1

 
62,285

 
6.4

Total
 
$
1,015,618

 
100.0
%
 
$
971,812

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
September 30, 2018
 
December 31, 2017
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
294,262

 
29.0
%
 
$
296,947

 
30.5
%
Pacific
 
164,405

 
16.2

 
146,320

 
15.0

West North Central
 
122,743

 
12.1

 
127,096

 
13.1

East North Central
 
105,982

 
10.4

 
91,971

 
9.5

Mountain
 
102,339

 
10.1

 
105,627

 
10.9

West South Central
 
91,402

 
9.0

 
85,566

 
8.8

East South Central
 
65,459

 
6.4

 
67,228

 
6.9

Middle Atlantic
 
35,123

 
3.5

 
16,052

 
1.7

New England
 
33,903

 
3.3

 
35,005

 
3.6

Total
 
$
1,015,618

 
100.0
%
 
$
971,812

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Loan-to-Value Ratio
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
404,171

 
39.8
%
 
$
334,037

 
34.4
%
51% - 60%
 
283,036

 
27.9

 
258,359

 
26.6

61% - 70%
 
288,808

 
28.4

 
297,404

 
30.6

71% - 80%
 
21,076

 
2.1

 
63,116

 
6.5

81% - 90%
 
18,527

 
1.8

 
18,896

 
1.9

Total
 
$
1,015,618

 
100.0
%
 
$
971,812

 
100.0
%

The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically 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
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2018
 
$
93,611

 
9.2
%
 
$

 
%
2017
 
209,307

 
20.6

 
214,365

 
22.1

2016
 
150,686

 
14.8

 
154,359

 
15.9

2015
 
134,529

 
13.3

 
144,890

 
14.9

2014
 
75,598

 
7.4

 
77,866

 
8.0

2013 and prior
 
351,887

 
34.7

 
380,332

 
39.1

Total
 
$
1,015,618

 
100.0
%
 
$
971,812

 
100.0
%

 Impaired Mortgage Loans
 
September 30, 2018
 
December 31, 2017
 
(Dollars in thousands)
Unpaid principal balance
$
18,724

 
$
19,027

Less:
 
 
 
Related allowance
(346
)
 
(497
)
Carrying value of impaired mortgage loans
$
18,378

 
$
18,530


 Allowance on Mortgage Loans
 
Nine months ended September 30,
 
2018
 
2017
 
(Dollars in thousands)
Balance at beginning of period
$
497

 
$
713

Recoveries
(151
)
 
(147
)
Balance at end of period
$
346

 
$
566


Mortgage Loan Modifications

Our commercial mortgage loan portfolio can include 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 nine months ended September 30, 2018 or September 30, 2017.

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 we have a variable interest, 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 includes 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 VIEs, which consist of (i) limited partnerships or limited liability companies accounted for under the equity method included in securities and indebtedness of related parties and (ii) non-guaranteed federal LIHTC investments included in other assets. LIHTC investments take the form of limited partnerships, which in turn invest in a number of low income housing projects. We use the proportional amortization method of accounting


16

Table of Contents

for these investments. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized along with the tax benefits as a component of federal income tax expense on our consolidated statements of operations. The net benefits reflected in federal income tax expense related to LIHTC investments were $0.9 million for the third quarter of 2018 and $2.7 million for the nine months ended September 30, 2018, compared to $1.3 million for the third quarter of 2017 and $3.8 million at for the nine months ended September 30, 2017. The carrying value of our LIHTC investments totaled $56.7 million at September 30, 2018 and $65.7 million at December 31, 2017. See Note 1 to our consolidated financial statements for discussion of a change in accounting method applied to these investments.

At September 30, 2018, 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 $56.4 million, including $1.6 million for LIHTC investment commitments, which are summarized by year in the following table.

LIHTC Investment Commitments by Year
 
 
September 30, 2018
 
(Dollars in thousands)
2018
$
341

2019
248

2020-2025
996

Total
$
1,585


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 carrying value and any unfunded commitments that exist for each particular VIE. 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 September 30, 2018 or December 31, 2017. Based on this analysis, none of our VIEs were required to be consolidated for any reporting periods presented in this Form 10-Q.

VIE Investments by Category
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value
 
Maximum Exposure to Loss
 
(Dollars in thousands)
LIHTC investments
$
56,715

 
$
58,300

 
$
65,710

 
$
67,396

Investment companies
37,388

 
82,167

 
25,335

 
62,372

Real estate limited partnerships
9,694

 
19,522

 
8,589

 
20,590

Other
455

 
649

 
1,182

 
1,488

Total
$
104,252

 
$
160,638

 
$
100,816

 
$
151,846


In addition, we make passive investments in the normal course of business in structured securities issued by VIEs for which we are not the investment manager. These structured securities include all of the residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities included in our fixed maturities. Our maximum exposure to loss on these securities is limited to our carrying value of the investment. We have determined that we are not the primary beneficiary of these structured securities because we do not have the power to direct the activities that most significantly impact the entities’ economic performance.



17

Table of Contents

Derivative Instruments

Our primary derivative exposure relates to purchased call options, which provide an economic hedge against the embedded derivatives in our indexed annuity and universal life insurance products. We also have embedded derivatives within our modified coinsurance agreements as well as an interest-only fixed maturity investment. We do not apply hedge accounting to any of our derivative positions, and they are held at fair value.

Derivatives Instruments by Type
 
 
September 30, 2018
 
December 31, 2017
 
(Dollars in thousands)
Assets
 
 
 
Freestanding derivatives:
 
 
 
Call options (reported in other investments)
$
19,140

 
$
14,824

Embedded derivatives:
 
 
 
Modified coinsurance assumed (reported in reinsurance recoverable)
98

 
2,125

Modified coinsurance ceded (reported in reinsurance recoverable)
20

 

Interest-only security (reported in fixed maturities)
1,422

 
2,096

Total assets
$
20,680

 
$
19,045

 
 
 
 
Liabilities
 
 
 
Embedded derivatives:
 
 
 
Indexed annuity and universal life products (reported in liability for future policy benefits)
$
42,017

 
$
27,774

Modified coinsurance agreements (reported in other liabilities)
288

 
268

Total liabilities
$
42,305

 
$
28,042


Derivative Income (Loss)
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Change in fair value of free standing derivatives:
 
 
 
 
 
 
 
Call options
$
5,999

 
$
2,482

 
$
7,039

 
$
6,247

Change in fair value of embedded derivatives:
 
 
 
 
 
 
 
Modified coinsurance agreements
(1,209
)
 
(86
)
 
(2,027
)
 
(1,508
)
Interest-only security
(1
)
 
28

 
(79
)
 
(167
)
Indexed annuity and universal life products
(5,509
)
 
560

 
(2,563
)
 
878

Total income (loss) from derivatives
$
(720
)
 
$
2,984

 
$
2,370

 
$
5,450


Derivative income is reported in net investment income except for the change in fair value of the embedded derivatives on our indexed annuity and universal life products, which is reported in interest sensitive product benefits.

We are exposed to credit losses in the event of nonperformance of the derivative counterparties. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings (currently rated A or better by nationally recognized statistical rating organizations). We have also entered into credit support agreements with the counterparties requiring them to post collateral when net exposures exceed pre-determined thresholds that vary by counterparty. The net amount of such exposure is essentially the market value less collateral held for such agreements with each counterparty. The call options are supported by securities collateral received of $14.3 million at September 30, 2018, which is held in a separate custodial account. Subject to certain constraints, we are permitted to sell or re-pledge this collateral, but do not have legal rights to the collateral; accordingly, it has not been recorded on our balance sheet. At September 30, 2018, none of the collateral had been sold or re-pledged. As of September 30, 2018, our net derivative exposure was $5.1 million.



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3. Fair Values

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, or, if 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 measured at fair value on a recurring basis:

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 political subdivisions 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 with no quoted market prices available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread.

Level 3 fixed maturities include corporate, mortgage- and asset-backed 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 for which 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


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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 that 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 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 non-redeemable preferred stock. Estimated fair value for the non-redeemable preferred stock is obtained from external pricing sources using a matrix pricing approach.

Level 3 equity securities consist of non-redeemable preferred stock for which fair value estimates are based on the value of comparable securities that are actively traded. Increases in spreads 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 that 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.

Other investments:

Level 2 other investments measured at fair value include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral received.



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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-indexed product embedded derivatives:

Certain index product 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.

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.




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Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
September 30, 2018
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Corporate securities
$

 
$
3,290,359

 
$
23,174

 
$
3,313,533

Residential mortgage-backed securities

 
603,591

 
3,878

 
607,469

Commercial mortgage-backed securities

 
788,162

 
76,512

 
864,674

Other asset-backed securities

 
747,771

 
12,354

 
760,125

United States Government and agencies
7,927

 
12,306

 

 
20,233

States and political subdivisions

 
1,532,991

 

 
1,532,991

Total fixed maturities
7,927

 
6,975,180

 
115,918

 
7,099,025

Non-redeemable preferred stocks

 
89,328

 
7,210

 
96,538

Common stocks (1)
5,622

 

 

 
5,622

Other investments

 
19,140

 

 
19,140

Cash, cash equivalents and short-term investments
39,994

 

 

 
39,994

Reinsurance recoverable

 
118

 

 
118

Assets held in separate accounts
651,797

 

 

 
651,797

Total assets
$
705,340

 
$
7,083,766

 
$
123,128

 
$
7,912,234

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$

 
$

 
$
42,017

 
$
42,017

Other liabilities

 
288

 

 
288

Total liabilities
$

 
$
288

 
$
42,017

 
$
42,305


(1)
A private equity fund with a fair value estimate of $1.7 million using net asset value per share as a practical expedient, has not been classified in the fair value hierarchy above per fair value reporting guidance. This fund invests in senior secured middle market loans and has unfunded commitments totaling $8.3 million at September 30, 2018. The investment is not currently eligible for redemption.


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Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
December 31, 2017
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Corporate securities
$

 
$
3,654,671

 
$
33,600

 
$
3,688,271

Residential mortgage-backed securities

 
507,157

 
9,124

 
516,281

Commercial mortgage-backed securities

 
619,606

 
85,701

 
705,307

Other asset-backed securities

 
780,022

 
53,480

 
833,502

United States Government and agencies
9,078

 
15,827

 

 
24,905

States and political subdivisions

 
1,523,701

 

 
1,523,701

Total fixed maturities
9,078

 
7,100,984

 
181,905

 
7,291,967

Non-redeemable preferred stocks

 
92,425

 
7,407

 
99,832

Common stocks
4,313

 

 

 
4,313

Other investments

 
14,824

 

 
14,824

Cash, cash equivalents and short-term investments
69,703

 

 

 
69,703

Reinsurance recoverable

 
2,125

 

 
2,125

Assets held in separate accounts
651,963

 

 

 
651,963

Total assets
$
735,057

 
$
7,210,358

 
$
189,312

 
$
8,134,727

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$

 
$

 
$
27,774

 
$
27,774

Other liabilities

 
268

 

 
268

Total liabilities
$

 
$
268

 
$
27,774

 
$
28,042


Level 3 Assets by Valuation Source - Recurring Basis
 
September 30, 2018
 
Third-party vendors
 
Priced
internally
 
Fair Value
 
(Dollars in thousands)
Corporate securities
$
2,128

 
$
21,046

 
$
23,174

Residential mortgage-backed securities
3,878

 

 
3,878

Commercial mortgage-backed securities
67,243

 
9,269

 
76,512

Other asset-backed securities
12,354

 

 
12,354

Non-redeemable preferred stocks

 
7,210

 
7,210

Total assets
$
85,603

 
$
37,525

 
$
123,128

Percent of total
69.5
%
 
30.5
%
 
100.0
%

 
December 31, 2017
 
Third-party vendors
 
Priced
internally
 
Fair Value
 
(Dollars in thousands)
Corporate securities
$
4,555

 
$
29,045

 
$
33,600

Residential mortgage-backed securities
9,124

 

 
9,124

Commercial mortgage-backed securities
85,701

 

 
85,701

Other asset-backed securities
47,080

 
6,400

 
53,480

Non-redeemable preferred stocks

 
7,407

 
7,407

Total assets
$
146,460

 
$
42,852

 
$
189,312

Percent of total
77.4
%
 
22.6
%
 
100.0
%



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Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
September 30, 2018
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
19,848

 
Discounted cash flow
 
Credit spread
 
0.92% - 5.75% (3.22%)
Commercial mortgage-backed
70,052

 
Discounted cash flow
 
Credit spread
 
1.08% - 3.51% (2.18%)
Non-redeemable preferred stocks
7,210

 
Discounted cash flow
 
Credit spread
 
3.05% (3.05%)
Total assets
$
97,110

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$
42,017

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.45% - 1.60% (1.05%)
0.15% - 0.40% (0.25%)

 
December 31, 2017
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
27,682

 
Discounted cash flow
 
Credit spread
 
0.91% - 6.20% (4.17%)
Commercial mortgage-backed
72,224

 
Discounted cash flow
 
Credit spread
 
1.40% - 4.10% (2.50%)
Non-redeemable preferred stocks
7,407

 
Discounted cash flow
 
Credit spread
 
2.94% (2.94%)
Total assets
$
107,313

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$
27,774

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.40% - 1.60% (0.90%)
0.15% - 0.40% (0.25%)

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



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Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
September 30, 2018
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
Purchases
 
Disposals
 
Included in net income
 
Included in other compre-hensive income
 
Transfers into
Level 3 (1)
 
Transfers
out of
Level 3 (1)
 
Amort-ization included in net income
 
Balance, September 30, 2018
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
33,600

 
$

 
$
(8,373
)
 
$

 
$
(878
)
 
$
7,082

 
$
(8,530
)
 
$
273

 
$
23,174

Residential mortgage-backed securities
9,124

 
27,818

 

 

 

 

 
(33,064
)
 

 
3,878

Commercial mortgage-backed securities
85,701

 
36,008

 
(659
)
 

 
(4,522
)
 

 
(39,990
)
 
(26
)
 
76,512

Other asset-backed securities
53,480

 
28,855

 
(2,622
)
 

 
(12
)
 

 
(67,347
)
 

 
12,354

Non-redeemable preferred stocks
7,407

 

 

 

 
(197
)
 

 

 

 
7,210

Total assets
$
189,312

 
$
92,681

 
$
(11,654
)
 
$

 
$
(5,609
)
 
$
7,082

 
$
(148,931
)
 
$
247

 
$
123,128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$
27,774

 
$
7,920

 
$
(3,919
)
 
$
10,242

 
$

 
$

 
$

 
$

 
$
42,017


 
September 30, 2017
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
Purchases
 
Disposals
 
Included in net income
 
Included in other compre-hensive income
 
Transfers into
Level 3 (1)
 
Transfers
out of
Level 3 (1)
 
Amort-ization included in net income
 
Balance,
September 30, 2017
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
59,119

 
$
3,000

 
$
(11,251
)
 
$
84

 
$
(1,015
)
 
$
13,440

 
$
(22,877
)
 
$
(30
)
 
$
40,470

Residential mortgage-backed securities

 
23,331

 

 

 
(1
)
 

 
(21,326
)
 
1

 
2,005

Commercial mortgage-backed securities
81,434

 
12,114

 
(613
)
 

 
6,850

 

 
(20,267
)
 
(63
)
 
79,455

Other asset-backed securities
54,368

 
81,867

 
(8,286
)
 

 
614

 
13,353

 
(48,392
)
 
(21
)
 
93,503

Non-redeemable preferred stocks
7,411

 

 

 

 
243

 

 

 

 
7,654

Total assets
$
202,332

 
$
120,312

 
$
(20,150
)
 
$
84

 
$
6,691

 
$
26,793

 
$
(112,862
)
 
$
(113
)
 
$
223,087

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$
15,778

 
$
4,893

 
$
(1,405
)
 
$
4,808

 
$

 
$

 
$

 
$

 
$
24,074


(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.

The Company has other financial assets and financial liabilities that are not carried at fair value but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy level of these financial assets and financial liabilities.



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Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels
 
 
 
September 30, 2018
 
 
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Fair Value
 
Carrying Value
 
(Dollars in thousands)
 
 
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$

 
$

 
$
1,005,598

 
$
1,005,598

 
$
1,015,618

Policy loans

 

 
229,408

 
229,408

 
195,723

Other investments

 

 
30,468

 
30,468

 
29,496

Total assets
$

 
$

 
$
1,265,474

 
$
1,265,474

 
$
1,240,837

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
4,005,338

 
$
4,005,338

 
$
4,276,325

Supplementary contracts without life contingencies

 

 
303,856

 
303,856

 
310,152

Advance premiums and other deposits

 

 
260,888

 
260,888

 
260,888

Long-term debt

 

 
71,761

 
71,761

 
97,000

Liabilities related to separate accounts

 

 
650,063

 
650,063

 
651,797

Total liabilities
$

 
$

 
$
5,291,906

 
$
5,291,906

 
$
5,596,162


 
December 31, 2017
 
 
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Fair Value
 
Carrying Value
 
(Dollars in thousands)
 
 
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$

 
$

 
$
989,503

 
$
989,503

 
$
971,812

Policy loans

 

 
236,223

 
236,223

 
191,398

Other investments

 

 
28,619

 
28,619

 
27,547

Total assets
$

 
$

 
$
1,254,345

 
$
1,254,345

 
$
1,190,757

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
4,119,880

 
$
4,119,880

 
$
4,164,593

Supplementary contracts without life contingencies

 

 
327,151

 
327,151

 
322,630

Advance premiums and other deposits

 

 
259,099

 
259,099

 
259,099

Long-term debt

 

 
78,628

 
78,628

 
97,000

Liabilities related to separate accounts

 

 
649,610

 
649,610

 
651,963

Total liabilities
$

 
$

 
$
5,434,368

 
$
5,434,368

 
$
5,495,285


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 nine months ended September 30, 2018 or September 30, 2017.



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4. Defined Benefit Plan

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

Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Multiemployer Plan
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Service cost
$
1,494

 
$
1,388

 
$
4,480

 
$
4,164

Interest cost
3,411

 
3,531

 
10,232

 
10,593

Expected return on assets
(5,562
)
 
(4,796
)
 
(16,686
)
 
(14,388
)
Amortization of prior service cost
11

 
32

 
34

 
98

Amortization of actuarial loss
3,126

 
2,531

 
9,380

 
7,591

Net periodic pension cost
$
2,480

 
$
2,686

 
$
7,440

 
$
8,058

 
 
 
 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
$
760

 
$
851

 
$
2,280

 
$
2,553


Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Other Plans
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Service cost
$
135

 
$
109

 
$
404

 
$
327

Interest cost
240

 
250

 
719

 
752

Amortization of actuarial loss
338

 
293

 
1,015

 
879

Net periodic pension cost
$
713

 
$
652

 
$
2,138

 
$
1,958

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

 
$
388

 
$
1,253

 
$
1,164

 

5. Income Taxes

The Tax Act made broad changes to the U.S. tax code impacting our companies, including reducing the federal corporate tax rate from 35% to 21% and numerous base-broadening provisions. We recorded a provisional estimate of the impact of the Tax Act on our income tax provisions and deferred tax assets and liabilities as of December 31, 2017. As of September 30, 2018, some guidance regarding the Tax Act has been issued, though a number of the Tax Act’s provisions still contain some level of uncertainty.

Our income tax provisions and deferred income taxes at September 30, 2018 reflect the lower corporate tax rate and the other provisions of the Tax Act, based on our current understanding of the legislation. Provisional estimates used in the determination of income tax provisions and deferred tax assets and liabilities at December 31, 2017 have been updated as of September 30, 2018 to reflect amounts reported in our 2017 income tax return. The impact of the change in the corporate tax rate on these updated estimates resulted in an increase to net income of approximately $0.6 million for the first nine months of 2018.

See Note 1 for discussion of the accounting policy change from the equity method to the proportional method for our LIHTC investments, the effects of which are now reported on the income tax line in the consolidated statements of operations.


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6. 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 claims threatened or pending against FBL Financial Group, Inc. or any of its subsidiaries for which a material loss is reasonably possible.


7. Stockholders’ Equity

Share Repurchases

We periodically repurchase our Class A common stock under programs approved by our Board of Directors. 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. Under these programs, we repurchased 129,011 shares for $8.8 million during the nine months ended September 30, 2018. No repurchases were made during the nine months ended September 30, 2017. Completion of the current 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. At September 30, 2018, $48.0 million remains available for repurchase under the active repurchase program.

Dividends
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Class A and B common stock:
 
 
 
 
 
 
 
Cash dividends per common share
$
0.46

 
$
0.44

 
$
1.38

 
$
1.32

Special cash dividend per common share

 

 
1.50

 
1.50

Total common stock dividends per share
$
0.46

 
$
0.44

 
$
2.88

 
$
2.82

 
 
 
 
 
 
 
 
Series B preferred stock dividends per share
$
0.0075

 
$
0.0075

 
$
0.0225

 
$
0.0225


In March 2018, the Board of Directors approved a special $1.50 per share cash dividend payable to Class A and Class B common shareholders totaling $37.3 million. In March 2017, the Board of Directors approved a special $1.50 per share cash dividend payable to Class A and Class B common shareholders totaling $37.4 million.

Reconciliation of Outstanding Common Stock
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
(Dollars in thousands)
Outstanding at January 1, 2017
24,882,542

 
$
152,903

 
11,413

 
$
72

 
24,893,955

 
$
152,975

Stock-based compensation
39,555

 
644

 

 

 
39,555

 
644

Outstanding at September 30, 2017
24,922,097

 
$
153,547

 
11,413

 
$
72

 
24,933,510

 
$
153,619

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2018
24,919,113

 
$
153,589

 
11,413

 
$
72

 
24,930,526

 
$
153,661

Stock-based compensation
16,694

 
366

 

 

 
16,694

 
366

Purchase of common stock
(129,011
)
 
(795
)
 

 

 
(129,011
)
 
(795
)
Outstanding at September 30, 2018
24,806,796

 
$
153,160

 
11,413

 
$
72

 
24,818,209

 
$
153,232



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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 (1)
 
Underfunded Status of Postretirement Benefit Plans
 
Total
 
(Dollars in thousands)
Balance at January 1, 2017
$
156,963

 
$
311

 
$
(7,719
)
 
$
149,555

Other comprehensive income before reclassifications
72,293

 
1,520

 

 
73,813

Reclassification adjustments
(61
)
 

 
562

 
501

Balance at September 30, 2017
$
229,195

 
$
1,831

 
$
(7,157
)
 
$
223,869

 
 
 
 
 
 
 
 
Balance at January 1, 2018
$
295,169

 
$
537

 
$
(10,723
)
 
$
284,983

Cumulative effect of change in accounting principle related to net unrealized gains on equity securities (2)
(5,480
)
 

 

 
(5,480
)
Other comprehensive income (loss) before reclassifications
(192,832
)
 
2,932

 

 
(189,900
)
Reclassification adjustments
(1,439
)
 

 
797

 
(642
)
Balance at September 30, 2018
$
95,418

 
$
3,469

 
$
(9,926
)
 
$
88,961


(1)
Includes the impact of taxes, deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves and policyholder liabilities. See Note 2 to our consolidated financial statements for further information.
(2)
See Note 1 to our consolidated financial statements for further discussion on this one-time adjustment related to an accounting change.

Accumulated Other Comprehensive Income Reclassification Adjustments
 
 
 
 
 
Nine months ended September 30, 2018
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses (1)
 
Underfunded Status of Postretirement Benefit
Plans
 
Total
 
(Dollars in thousands)
Realized capital gains on sales of investments
$
(1,819
)
 
$

 
$

 
$
(1,819
)
Adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
(3
)
 

 

 
(3
)
Other expenses - change in unrecognized postretirement items:
 
 
 
 
 
 


Net actuarial loss

 

 
1,009

 
1,009

Reclassifications before income taxes
(1,822
)
 

 
1,009

 
(813
)
Income taxes
383

 

 
(212
)
 
171

Reclassification adjustments
$
(1,439
)
 
$

 
$
797

 
$
(642
)


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Table of Contents

Accumulated Other Comprehensive Income Reclassification Adjustments
 
 
 
 
 
Nine months ended September 30, 2017
 
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
$
(254
)
 
$

 
$

 
$
(254
)
Adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
160

 

 

 
160

Other expenses - change in unrecognized postretirement items:
 
 
 
 
 
 


Net actuarial loss

 

 
865

 
865

Reclassifications before income taxes
(94
)
 

 
865

 
771

Income taxes
33

 

 
(303
)
 
(270
)
Reclassification adjustments
$
(61
)
 
$

 
$
562

 
$
501


(1)
See Note 2 to our consolidated financial statements for further information.


8. Earnings per Share

Computation of Earnings per Common Share
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income attributable to FBL Financial Group, Inc.
$
31,010

 
$
26,127

 
$
87,378

 
$
83,325

Less: Dividends on Series B preferred stock
37

 
37

 
112

 
112

Income available to common stockholders
$
30,973

 
$
26,090

 
$
87,266

 
$
83,213

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares - basic
24,918,725

 
25,037,020

 
24,946,752

 
25,036,258

Effect of dilutive securities - stock-based compensation
11,076

 
17,530

 
13,317

 
19,703

Weighted average shares - diluted
24,929,801

 
25,054,550

 
24,960,069

 
25,055,961

 
 
 
 
 
 
 
 
Earnings per common share
$
1.24

 
$
1.04

 
$
3.50

 
$
3.32

Earnings per common share - assuming dilution:
$
1.24

 
$
1.04

 
$
3.50

 
$
3.32

 
There were no antidilutive stock options outstanding in any of the periods presented.


9. 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 use non-GAAP operating income (a measure of earnings not recognized under GAAP), in addition to net income, to measure our performance. Non-GAAP operating income, for the periods presented, consists of net income adjusted to exclude the initial impact of changes in federal statutory income tax rates and tax laws, realized gains and losses on investments, and the change in net unrealized gains and losses on derivatives and equity securities, which can fluctuate greatly from period to period. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there


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is a mismatch between the valuation of the asset and liability when deriving net income (loss). Specifically, call options relating to our indexed business are one-year assets while the embedded derivatives in the indexed contracts represent the rights of the contract holder to receive index credits over the entire period the indexed products are expected to be in force.
Non-GAAP 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 non-GAAP 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.
We analyze our segment results based on pre-tax non-GAAP operating income. Accordingly, income taxes are not allocated to the segments. In addition, non-GAAP operating results are reported net of transactions between the segments. Adjustments to net income are net of amortization of unearned revenue reserves, deferred acquisition costs and value of insurance in force acquired, as well as changes in interest sensitive product reserves and income taxes attributable to these items. While not applicable for the periods reported herein, our non-GAAP operating income policy also calls for adjustments to net income relating to the following:

settlements or judgments arising from lawsuits, net of any recoveries from third parties,
the cumulative effect of changes in accounting principles and
discontinued operations.

Reconciliation Between Net Income and Non-GAAP Operating Income
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Net income attributable to FBL Financial Group, Inc. (1)
$
31,010

 
$
26,127

 
$
87,378

 
$
83,325

Net income adjustments:
 
 
 
 
 
 
 
Initial impact of the Tax Act (2)
(617
)
 

 
(617
)
 

Net realized gains/losses on investments (3) (4)
603

 
38

 
2,132

 
(196
)
Change in net unrealized gains/losses on derivatives (3)
876

 
(1,389
)
 
1,191

 
(2,074
)
Non-GAAP operating income (1)
$
31,872

 
$
24,776

 
$
90,084

 
$
81,055


(1)
Prior period amounts have been adjusted to reflect the accounting change for LIHTC investments. See Note 1 to our consolidated financial statements for additional information.
(2)
Amount represents a change in the provisional estimate of the impact of the Tax Act on our deferred tax assets and liabilities as of December 31, 2017. See Note 5 to our consolidated financial statements for additional information.
(3)
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired, interest sensitive policy reserves and income taxes attributable to these items.
(4)
Beginning in 2018, amounts include the change in net unrealized gains/losses on equity securities due to a change in accounting guidance. See Note 1 to our consolidated financial statements for additional information.




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Table of Contents

Financial Information Concerning our Operating Segments
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Pre-tax non-GAAP operating income:
 
 
 
 
 
 
 
Annuity
$
18,179

 
$
17,015

 
$
50,759

 
$
51,610

Life Insurance
11,958

 
12,620

 
39,236

 
44,000

Corporate and Other (1)
7,999

 
4,556

 
16,966

 
17,656

Total pre-tax non-GAAP operating income (1)
38,136

 
34,191

 
106,961

 
113,266

Income taxes on non-GAAP operating income (1)
(6,264
)
 
(9,415
)
 
(16,877
)
 
(32,211
)
Non-GAAP operating income (1)
$
31,872

 
$
24,776

 
$
90,084

 
$
81,055

 
 
 
 
 
 
 
 
Non-GAAP operating revenues:
 
 
 
 
 
 
 
Annuity
$
55,424

 
$
54,993

 
$
169,274

 
$
166,877

Life Insurance
106,546

 
102,627

 
323,854

 
313,838

Corporate and Other
22,779

 
22,701

 
70,759

 
70,471

 
184,749

 
180,321

 
563,887

 
551,186

Net realized gains/losses on investments (2) (3)
(758
)
 
(123
)
 
(2,885
)
 
190

Change in net unrealized gains/losses on derivatives (2)
4,120

 
1,358

 
(12
)
 
1,097

Consolidated revenues
$
188,111

 
$
181,556

 
$
560,990

 
$
552,473


(1)
Prior period amounts have been adjusted to reflect the accounting change for LIHTC investments. See Note 1 to our consolidated financial statements for additional information.
(2)
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired, interest sensitive policy reserves and income taxes attributable to these items.
(3)
Beginning in 2018, amounts include the change in net unrealized gains/losses on equity securities due to a change in accounting guidance. See Note 1 to our consolidated financial statements for additional information.

Interest expense is attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significant during the periods presented above. Goodwill at September 30, 2018 and December 31, 2017 was allocated among the segments as follows: Annuity ($3.9 million) and Life Insurance ($6.1 million).

Equity income or loss related to securities and indebtedness of related parties is attributable to the Life Insurance and Corporate and Other segments. LIHTC investments are no longer included in pre-tax non-GAAP operating income. See Note 1 to our consolidated financial statements for additional information. The following chart provides the related equity income by segment.

Equity Income by Operating Segment
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Pre-tax equity income:
 
 
 
 
 
 
 
Life Insurance
$
860

 
$
548

 
$
2,847

 
$
3,003

Corporate and Other
1,217

 
201

 
1,508

 
1,041

 
2,077

 
749

 
4,355

 
4,044

 

 

 

 

Income taxes
(435
)
 
(262
)
 
(914
)
 
(1,415
)
Equity income, net of related income taxes
$
1,642

 
$
487

 
$
3,441

 
$
2,629


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 $141.7 million for the quarter ended September 30, 2018 and $141.6 million for the same period in 2017. Net premiums collected totaled $482.7 million for the nine months ended September 30, 2018 and $477.4 million for the same period in 2017.



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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 September 30,
 
Nine months ended September 30,
 
2018

2017
 
2018
 
2017
 
(Dollars in thousands)
Traditional and universal life insurance premiums collected
$
73,867

 
$
71,214

 
$
228,030

 
$
219,949

Premiums collected on interest sensitive products
(25,507
)
 
(24,142
)
 
(79,938
)
 
(75,021
)
Traditional life insurance premiums collected
48,360

 
47,072

 
148,092

 
144,928

Change in due premiums and other
(236
)
 
15

 
620

 
855

Traditional life insurance premiums as included in the Consolidated Statements of Operations
$
48,124

 
$
47,087

 
$
148,712

 
$
145,783


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

Interest Sensitive Product Charges by Segment
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018

2017
 
2018
 
2017
 
(Dollars in thousands)
Annuity
 
 
 
 
 
 
 
Surrender charges and other
$
1,280

 
$
1,115

 
$
3,699

 
$
3,452

 
 
 
 
 
 
 
 
Life Insurance
 
 
 
 
 
 
 
Administration charges
$
4,100

 
$
3,740

 
$
12,340

 
$
11,504

Cost of insurance charges
13,160

 
12,638

 
38,378

 
37,042

Surrender charges
497

 
499

 
1,746

 
1,493

Amortization of policy initiation fees
1,629

 
(382
)
 
3,384

 
902

Total
$
19,386

 
$
16,495

 
$
55,848

 
$
50,941

 
 
 
 
 
 
 
 
Corporate and Other
 
 
 
 
 
 
 
Administration charges
$
1,185

 
$
1,272

 
$
3,826

 
$
4,074

Cost of insurance charges
7,698

 
7,431

 
22,033

 
22,025

Surrender charges
15

 
52

 
58

 
131

Separate account charges
2,155

 
2,071

 
6,465

 
6,100

Amortization of policy initiation fees
(558
)
 
(432
)
 
236

 
(62
)
Total
$
10,495

 
$
10,394

 
$
32,618

 
$
32,268

 
 
 
 
 
 
 
 
Interest sensitive product charges as included in the Consolidated Statements of Operations
$
31,161

 
$
28,004

 
$
92,165

 
$
86,661




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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 insurance subsidiaries Farm Bureau Life Insurance Company (Farm Bureau Life) and Greenfields Life Insurance Company (Greenfields 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, 2017 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, 2017 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 non-GAAP operating income, which excludes the impact of certain items that are included in net income. See Note 9 to our consolidated financial statements for further information regarding how we define our segments and non-GAAP 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 9 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 3.5% during the third quarter of 2018 based on recent estimates.
U.S. unemployment was estimated to be 3.7% at the end of the third quarter of 2018.
U.S. net farm income is forecast to decrease 13.0% and farm real estate value is estimated to increase 1.8% during 2018 according to recent U.S. Department of Agriculture estimates.
The impact to our business from tariffs recently imposed as well as proposed on the general U.S. and farm economies is uncertain.


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Table of Contents

The U.S. 10-year Treasury yield increased during 2018 to 3.05% at September 30, 2018 from 2.40% at December 31, 2017.
The impact of the enactment of the Tax Act during December 2017 on the general U.S. economy, business initiatives and consumer demand for our insurance products is uncertain.

The 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 continued to trend higher in the third quarter and finished at 3.05%, approximately 65 basis points higher than year-end 2017. Conversely, average corporate credit spreads tightened by approximately 18 basis points. Yields remain historically 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. We experienced a decrease in the fair value of our fixed maturity security portfolio during the third quarter of 2018 primarily due to an increase in market yields. See the segment discussion and “Financial Condition” section that follows for additional information regarding the impact of low market interest rates on our business.



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Table of Contents

Results of Operations for the Periods Ended September 30, 2018 and 2017

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in thousands, except per share data)
Net income attributable to FBL Financial Group, Inc. (1)
$
31,010

 
$
26,127

 
19
 %
 
$
87,378

 
$
83,325

 
5
 %
Adjustments to net income:
 
 
 
 
 
 
 
 
 
 
 
Initial impact of the Tax Act (2)
(617
)
 

 
N/A

 
(617
)
 

 
N/A

Realized gains/losses on investments (3)(4)
603

 
38

 
1,487
 %
 
2,132

 
(196
)
 
(1,188
)%
Change in net unrealized gains/losses on derivatives (3)
876

 
(1,389
)
 
(163
)%
 
1,191

 
(2,074
)
 
(157
)%
Non-GAAP operating income (1) (5)
$
31,872

 
$
24,776

 
29
 %
 
$
90,084

 
$
81,055

 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax non-GAAP operating income:
 
 
 
 
 
 
 
 
 
 
 
Annuity segment
$
18,179

 
$
17,015

 
7
 %
 
$
50,759

 
$
51,610

 
(2
)%
Life Insurance segment
11,958

 
12,620

 
(5
)%
 
39,236

 
44,000

 
(11
)%
Corporate and Other segment (1)
7,999

 
4,556

 
76
 %
 
16,966

 
17,656

 
(4
)%
Total pre-tax non-GAAP operating income (1)
38,136

 
34,191

 
12
 %
 
106,961

 
113,266

 
(6
)%
Income taxes on non-GAAP operating income (1)
(6,264
)
 
(9,415
)
 
(33
)%
 
(16,877
)
 
(32,211
)
 
(48
)%
Non-GAAP operating income (1) (5)
$
31,872

 
$
24,776

 
29
 %
 
$
90,084

 
$
81,055

 
11
 %
 
 
 
 
 
 
 
 
 
 
 

Earnings per common share - assuming dilution (1)
$
1.24

 
$
1.04

 
19
 %
 
$
3.50

 
$
3.32

 
5
 %
Non-GAAP operating income per common share - assuming dilution (1) (5)
1.28

 
0.99

 
29
 %
 
3.60

 
3.23

 
11
 %
Effective tax rate on non-GAAP operating income (1)
16
%
 
28
%
 

 
16
%
 
28
%
 

Average invested assets, at amortized cost (1) (6)
 
 
 
 

 
$
8,252,013

 
$
7,932,953

 
4
 %
Annualized yield on average invested assets (1) (6)
 
 
 
 
 
 
5.16
%
 
5.30
%
 

Impact on non-GAAP operating income of unlocking deferred acquisition costs, deferred sales inducements, unearned revenue reserve and interest sensitive product reserves, net of tax (5)
$
(227
)
 
$
682

 
(133
)%
 
$
(227
)
 
$
682

 
(133
)%

(1)
Prior period amounts have been adjusted to reflect the accounting change for LIHTC investments. See Note 1 to our consolidated financial statements for additional information.
(2)
Amount represents a change in the provisional estimate of the impact of the Tax Act on our deferred tax assets and liabilities as of December 31, 2017. See Note 5 to our consolidated financial statements for additional information.
(3)
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs and value of insurance in force acquired, as well as changes in interest sensitive product reserves and income taxes attributable to these items.
(4)
Beginning in 2018, amount includes changes in net unrealized gains/losses on equity securities.
(5)
See Note 9 to our consolidated financial statements for further information on non-GAAP operating income.
(6)
Average invested assets and annualized yield, including investments held as securities and indebtedness of related parties.

Net income and non-GAAP operating income were positively impacted in the third quarter of 2018 and the nine months ended September 30, 2018, compared to the prior year periods, by reduced income tax rates related to changes under the Tax Act, increased earnings from an increase in the volume of business in force and reductions in future policy benefit liabilities associated with guaranteed withdrawal benefits, partially offset by the impact of unlocking. The nine month period, compared to the prior year period, was also impacted by increases in death benefits, expenses and amortization of deferred acquisition


36

Table of Contents

costs from the impact of market performance on our variable business. Net income for the three and nine months ended September 30, 2018, compared to prior year periods was also negatively impacted by net realized losses from investments and decreases in net unrealized gains on derivatives. See the discussion that follows for details regarding non-GAAP operating income by segment.

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

Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in thousands)
Non-GAAP operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
1,280

 
$
1,115

 
15
 %
 
$
3,699

 
$
3,452

 
7
 %
Net investment income
54,144

 
53,878

 
 %
 
165,575

 
163,425

 
1
 %
Total non-GAAP operating revenues
55,424

 
54,993

 
1
 %
 
169,274

 
166,877

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP operating benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
29,037

 
31,385

 
(7
)%
 
91,716

 
91,128

 
1
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commissions net of deferrals
374

 
537

 
(30
)%
 
1,396

 
1,551

 
(10
)%
Amortization of deferred acquisition costs
2,319

 
505

 
359
 %
 
8,454

 
5,816

 
45
 %
Amortization of value of insurance in force
165

 
169

 
(2
)%
 
509

 
509

 
 %
Other underwriting expenses
5,350

 
5,382

 
(1
)%
 
16,440

 
16,263

 
1
 %
Total underwriting, acquisition and insurance expenses
8,208

 
6,593

 
24
 %
 
26,799

 
24,139

 
11
 %
Total non-GAAP operating benefits and expenses
37,245

 
37,978

 
(2
)%
 
118,515

 
115,267

 
3
 %
Pre-tax non-GAAP operating income (1)
$
18,179

 
$
17,015

 
7
 %
 
$
50,759

 
$
51,610

 
(2
)%

Other data
 
 
 
 
 
 
 
 
 
 
 
Annuity premiums collected, direct (2)
$
56,333

 
$
58,133

 
(3
)%
 
$
214,981

 
$
216,135

 
(1
)%
Policy liabilities and accruals, end of period
 
 
 
 
 
 
4,441,277

 
4,243,232

 
5
 %
Average invested assets, at amortized cost
 
 
 
 
 
 
4,533,009

 
4,336,465

 
5
 %
Other investment-related income included in net investment income (3)
854

 
953

 
(10
)%
 
4,744

 
4,068

 
17
 %
Average individual annuity account value
 
 
 
 
 
 
3,124,364

 
3,020,747

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
 
 
 
 
 
 
4.91
%
 
5.15
%
 
 
Weighted average crediting rate
 
 
 
 
 
 
2.50
%
 
2.62
%
 
 
Spread
 
 
 
 
 
 
2.41
%
 
2.53
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
 
 
 
 
 
 
5.3
%
 
4.1
%
 
 

(1)
See Note 9 to our consolidated financial statements for further information on non-GAAP operating income.


37

Table of Contents

(2)
Premiums collected is a non-GAAP measure of sales production, see Note 9 to our consolidated financial statements.
(3)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.

Pre-tax non-GAAP operating income for the Annuity segment increased in the third quarter of 2018, compared to the prior year period, primarily due to the impact from an increase in the volume of business in force and a reduction in future policy benefit liabilities associated with guaranteed living withdrawal benefits, partially offset by the impact of unlocking. Pre-tax non-GAAP operating income decreased in the nine months ended September 30, 2018, compared to the prior year period, primarily due to an increase in amortization of deferred acquisition costs and the impact of unlocking, partially offset by a benefit from a reduction in future policy benefit liabilities associated with guaranteed living withdrawal benefits.

The average aggregate account value for individual annuity contracts in force increased in the nine months ended September 30, 2018, compared to the prior year period, due to continued sales, advances on our funding agreements with FHLB and the crediting of interest. Continued growth in our business in force contributes to increases in revenues, benefits and expenses. Premiums collected were lower in the third quarter of 2018 and the nine months ended September 30, 2018, compared to the prior year periods, due to decreased sales of fixed rate deferred annuity products, partially offset by increased sales of indexed annuity products. Individual fixed rate deferred annuity collected premiums were $26.0 million in the third quarter of 2018 and $103.4 in the nine months ended September 30, 2018, compared to $27.7 million in the third quarter of 2017 and $131.5 million in the nine months ended September 30, 2017. Indexed annuity collected premiums were $29.2 million in the third quarter of 2018 and $104.3 in the nine months ended September 30, 2018, compared to $28.1 million in the third quarter of 2017 and $80.4 million in the nine months ended September 30, 2017. Outstanding funding agreements with FHLB totaled $457.5 million at September 30, 2018 and $393.2 million at September 30, 2017. During the third quarter of 2018, outstanding funding agreements with FHLB decreased $6.2 million and for the nine months ended September 30, 2018, outstanding funding agreements increased $42.4 million.

Amortization of deferred acquisition costs changed during the third quarter and the nine months ended September 30, 2018, compared to the prior year periods, due to changes in actual and expected profits on the underlying business. Amortization, as well as reserves held on certain interest sensitive products, also changed due to the impact of unlocking. Unlocking generally reflects changes in our projected earned spreads, policy lapses and mortality assumptions. The impact of unlocking on pre-tax operating income for the quarter and nine months ended September 30, 2018 and 2017 was as follows:

Impact of Unlocking on Pre-tax Non-GAAP Operating Income
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Amortization of deferred sales inducements reported in interest sensitive product benefits
$
13

 
$
10

 
$
13

 
$
10

Amortization of deferred acquisition costs
236

 
1,743

 
236

 
1,743

Changes in reserves reported in interest sensitive product benefits

 
(228
)
 

 
(228
)
Increase to pre-tax non-GAAP operating income (1)
$
249

 
$
1,525

 
$
249

 
$
1,525


(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 9 to our consolidated financial statements.

The reserve for guaranteed living withdrawal benefits decreased as a result of strong performance of the S&P index, as well as changes in the estimation of gross profits and option costs used in the calculation of this reserve.

The weighted average yield on cash and invested assets for individual annuities decreased in the nine months ended September 30, 2018, compared to the prior year period, primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. See the “Financial Condition” section for additional information regarding the yields obtained on investment acquisitions. Weighted average crediting rates on our individual annuity products decreased due to crediting rate actions taken in 2017 and 2018 in response to the declining portfolio yield and a change in the underlying product mix.



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Table of Contents

Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in thousands)
Non-GAAP operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
18,768

 
$
16,545

 
13
 %
 
$
55,474

 
$
50,855

 
9
 %
Traditional life insurance premiums
48,124

 
47,087

 
2
 %
 
148,712

 
145,783

 
2
 %
Net investment income
39,654

 
38,995

 
2
 %
 
119,668

 
117,200

 
2
 %
Total non-GAAP operating revenues
106,546

 
102,627

 
4
 %
 
323,854

 
313,838

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP operating benefits and expenses:
 
 
 
 
 
 
 
 
 
 

Interest sensitive product benefits:
 
 
 
 
 
 
 
 
 
 

Interest and index credits
8,697

 
8,289

 
5
 %
 
26,183

 
24,941

 
5
 %
Death benefits and other
18,475

 
16,569

 
12
 %
 
48,425

 
43,981

 
10
 %
Total interest sensitive product benefits
27,172

 
24,858

 
9
 %
 
74,608

 
68,922

 
8
 %
Traditional life insurance benefits:
 
 
 
 
 
 
 
 
 
 

Death benefits
21,888

 
21,530

 
2
 %
 
64,920

 
63,194

 
3
 %
Surrender and other benefits
8,110

 
7,409

 
9
 %
 
28,646

 
26,774

 
7
 %
Increase in traditional life future policy benefits
14,170

 
13,694

 
3
 %
 
39,770

 
38,231

 
4
 %
Total traditional life insurance benefits
44,168

 
42,633

 
4
 %
 
133,336

 
128,199

 
4
 %
Distributions to participating policyholders
2,480

 
2,487

 
 %
 
7,591

 
7,597

 
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 

Commission expense, net of deferrals
4,200

 
4,544

 
(8
)%
 
13,838

 
14,321

 
(3
)%
Amortization of deferred acquisition costs
2,148

 
1,122

 
91
 %
 
11,082

 
9,552

 
16
 %
Amortization of value of insurance in force
373

 
375

 
(1
)%
 
1,119

 
1,125

 
(1
)%
Other underwriting expenses
14,907

 
14,536

 
3
 %
 
45,891

 
43,125

 
6
 %
Total underwriting, acquisition and insurance expenses
21,628

 
20,577

 
5
 %
 
71,930

 
68,123

 
6
 %
Total non-GAAP operating benefits and expenses
95,448

 
90,555

 
5
 %
 
287,465

 
272,841

 
5
 %
 
11,098

 
12,072

 
(8
)%
 
36,389

 
40,997

 
(11
)%
Equity income, before tax
860

 
548

 
57
 %
 
2,847

 
3,003

 
(5
)%
Pre-tax non-GAAP operating income (1)
$
11,958

 
$
12,620

 
(5
)%
 
$
39,236

 
$
44,000

 
(11
)%



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Table of Contents

Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in thousands)
Other data
 
 
 
 
 
 
 
 
 
 
 
Life premiums collected, net of reinsurance (2)
$
73,867

 
$
71,214

 
4
%
 
$
228,030

 
$
219,949

 
4
%
Policy liabilities and accruals, end of period
 
 
 
 

 
2,975,533

 
2,863,901

 
4
%
Life insurance in force, end of period
 
 
 
 

 
59,373,168

 
57,559,618

 
3
%
Average invested assets, at amortized cost (3)
 
 
 
 

 
3,016,565

 
2,916,544

 
3
%
Other investment-related income included in net investment income (4)
353

 
167

 
111
%
 
2,225

 
1,051

 
112
%
Average interest sensitive life account value
 
 
 
 

 
850,390

 
826,589

 
3
%
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets (3)
 
 
 
 
 
 
5.36
%
 
5.54
%
 
 
Weighted average crediting rate
 
 
 
 
 
 
3.63
%
 
3.80
%
 
 
Spread
 
 
 
 
 
 
1.73
%
 
1.74
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
 
 
 
 
 
 
4.5
%
 
4.7
%
 
 
Death benefits, net of reinsurance and reserves released
24,050

 
21,193

 
13
%
 
$
72,913

 
$
65,466

 
11
%

(1)
See Note 9 to our consolidated financial statements for further information on non-GAAP operating income.
(2)
Premiums collected is a non-GAAP measure of sales production, see Note 9 to our consolidated financial statements.
(3)
Average invested assets and weighted average yield including investments held as securities and indebtedness of related parties.
(4)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.

Pre-tax non-GAAP operating income for the Life Insurance segment decreased in the third quarter of 2018 and the nine months ended September 30, 2018, compared to the prior year periods, primarily due to increases in death benefits, net of reinsurance and reserves released, and other underwriting expenses, partially offset by the impact of an increase in the volume of business in force and increases in investment-related income.

Continued growth in our business in force contributes to the increase in revenues, benefits and expenses. The increase in other underwriting expenses included increased expenses associated with salaries, including a one-time employee bonus in the first quarter of 2018 related to the enactment of the Tax Act, and additional expenses associated with system enhancements.

Amortization of deferred acquisition costs changed during the third quarter of 2018 and the nine months ended September 30, 2018, compared to the prior year periods, due to changes in actual and expected profits on the underlying business. Amortization, as well as reserves held on certain interest sensitive products, also changed due to the impact of unlocking. Unlocking generally reflects changes in our projected earned spreads, policy lapses, premium persistency and mortality assumptions. The impact of unlocking on pre-tax operating income for the quarter and nine months ended September 30, 2018 and 2017 was as follows:



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Table of Contents

Impact of Unlocking on Pre-tax Non-GAAP Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Amortization of unearned revenue reserve reported in interest sensitive product charges and other income
$
420

 
$
(1,166
)
 
$
420

 
$
(1,166
)
Amortization of deferred sales inducements reported in interest sensitive product benefits
(209
)
 
422

 
(209
)
 
422

Amortization of deferred sales inducements reported in traditional life insurance benefits
65

 
55

 
65

 
55

Amortization of deferred acquisition costs
2,152

 
3,873

 
2,152

 
3,873

Changes in reserves reported in interest sensitive product benefits
(4,755
)
 
(5,574
)
 
(4,755
)
 
(5,574
)
Decrease to pre-tax non-GAAP operating income (1)
$
(2,327
)
 
$
(2,390
)
 
$
(2,327
)
 
$
(2,390
)

(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 9 to our consolidated financial statements.

Death benefits, net of reinsurance and reserves released, increased in the third quarter of 2018 and the nine months ended September 30, 2018, compared to the prior year periods, primarily due to an increase in the average claim amount, net of reinsurance and reserves released. Surrenders and other benefits increased in the third quarter of 2018 and the nine months ended September 30, 2018, compared to the prior year periods, primarily due to an increase in the average size of policies surrendered. The increase in surrenders and other benefits for the nine months ended September 30, 2018, compared to the prior year period, was also impacted by an increase in matured endowment benefits.

We assign a portion of our investments held in securities and indebtedness of related parties to the Life Insurance segment. These investments include equity interests in limited liability partnerships and corporations, accounted for under the equity method of accounting. Equity income, before tax, consists of our proportionate share of gains and losses attributable to our relative ownership interest in these investments. See the Equity Income discussion that follows, and Note 9 to our consolidated financial statements, for additional information regarding these investments.

The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in the nine months ended September 30, 2018, compared to the prior year period, due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments. See the “Financial Condition” section for additional information regarding the yields obtained on investment acquisitions. Weighted average crediting rates on our interest sensitive life insurance products decreased due to crediting rate actions taken in 2017 and 2018 in response to the declining portfolio yield.



41

Table of Contents

Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(Dollars in thousands)
Non-GAAP operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
10,494

 
$
10,393

 
1
 %
 
$
32,617

 
$
32,265

 
1
 %
Net investment income
8,349

 
8,719

 
(4
)%
 
25,537

 
26,130

 
(2
)%
Other income
3,936

 
3,589

 
10
 %
 
12,605

 
12,076

 
4
 %
Total non-GAAP operating revenues
22,779

 
22,701

 
 %
 
70,759

 
70,471

 
 %
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP operating benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
8,465

 
11,697

 
(28
)%
 
25,521

 
29,650

 
(14
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
684

 
705

 
(3
)%
 
2,031

 
2,238

 
(9
)%
Amortization of deferred acquisition costs
(1,148
)
 
(2,276
)
 
(50
)%
 
3,240

 
(416
)
 
(879
)%
Other underwriting expenses
1,698

 
2,045

 
(17
)%
 
4,606

 
4,864

 
(5
)%
Total underwriting, acquisition and insurance expenses
1,234

 
474

 
160
 %
 
9,877

 
6,686

 
48
 %
Interest expense
1,212

 
1,213

 
 %
 
3,638

 
3,638

 
 %
Other expenses
5,061

 
4,971

 
2
 %
 
16,281

 
13,862

 
17
 %
Total non-GAAP operating benefits and expenses
15,972

 
18,355

 
(13
)%
 
55,317

 
53,836

 
3
 %
 
6,807

 
4,346

 
57
 %
 
15,442

 
16,635

 
(7
)%
Net loss (income) attributable to noncontrolling interest
(25
)
 
9

 
(378
)%
 
16

 
(20
)
 
(180
)%
Equity income, before tax (1)
1,217

 
201

 
505
 %
 
1,508

 
1,041

 
45
 %
Pre-tax non-GAAP operating income (1) (2)
$
7,999

 
$
4,556

 
76
 %
 
$
16,966

 
$
17,656

 
(4
)%
Other data
 
 
 
 
 
 
 
 
 
 
 
Average invested assets, at amortized cost (1) (3)
 
 
 
 

 
$
702,439

 
$
679,943

 
3
 %
Other investment-related income included in net investment income (4)
$
101

 
$
408

 
(75
)%
 
387

 
875

 
(56
)%
Average interest sensitive life account value
 
 
 
 

 
361,598

 
362,439

 
 %
Death benefits, net of reinsurance and reserves released
5,290

 
7,760

 
(32
)%
 
15,550

 
19,324

 
(20
)%
Estimated impact on pre-tax non-GAAP operating income from separate account performance on amortization of deferred acquisition costs (2)
300

 
370

 
(19
)%
 
(815
)
 
1,631

 
(150
)%

(1)
Prior period amounts have been adjusted to reflect the accounting change for LIHTC investments. See Note 1 to our consolidated financial statements for additional information.
(2)
See Note 9 to our consolidated financial statements for further information on non-GAAP operating income.
(3)
Average invested assets including investments held as securities and indebtedness of related parties.
(4)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.

Pre-tax non-GAAP operating income increased for the Corporate and Other segment in the third quarter of 2018, compared to the prior year period, primarily due to decreases in death benefits and increases in pre-tax income on equity method investments. Pre-tax non-GAAP operating income decreased for the nine months ended September 30, 2018, compared to the prior year period, primarily due to increases in amortization of deferred acquisition costs from the impact of market performance on our variable business and expenses, partially offset by decreases in death benefits.

Death benefits, net of reinsurance and reserves released, decreased in the third quarter of 2018 and the nine months ended September 30, 2018, compared to the prior year periods, primarily due to a decrease in the number of claims reported.


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Table of Contents


Amortization of deferred acquisition costs changed during the third quarter of 2018 and the nine months ended September 30, 2018, compared to the prior year periods, due to the impact of unlocking and market performance on our variable business. Unlocking generally reflects changes in projected earned spreads, separate account performance and withdrawal and mortality assumptions. The impact of unlocking on pre-tax operating income for the quarter and nine months ended September 30, 2018 and 2017 was as follows:
Impact of Unlocking on Pre-tax Non-GAAP Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Amortization of unearned revenue reserve reported in interest sensitive product charges
$
(667
)
 
$
(579
)
 
$
(667
)
 
$
(579
)
Amortization of deferred sales inducements reported in interest sensitive product benefits
76

 
98

 
76

 
98

Amortization of deferred acquisition costs
2,382

 
3,194

 
2,382

 
3,194

Changes in reserves reported in interest sensitive products benefits

 
(799
)
 

 
(799
)
Increase to pre-tax non-GAAP operating income (1)
$
1,791

 
$
1,914

 
$
1,791

 
$
1,914


(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 9 to our consolidated financial statements.

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.
Increases in other expenses, compared to the prior year periods, included $0.9 million for the third quarter of 2018 and $2.3 million for the nine months ended September 30, 2018 in expenses associated with expanding our wealth management offerings.

We assign a portion of our investments held in securities and indebtedness of related parties to the Corporate and Other segment. These investments include equity interests in limited liability partnerships and corporations, accounted for under the equity method of accounting. Equity income, before tax, consists of our proportionate share of gains and losses attributable to our relative ownership interest in these investments. Equity income increased in the quarter and nine-months ended September 30, 2018, compared to the prior year periods, due to income earned on equity investments in two real-estate partnerships that realized gains from the sale of parcels of real-estate. See the Equity Income discussion that follows and Note 9 to our consolidated financial statements for additional information regarding these investments.

Equity Income

Equity income includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies over which we exhibit some control but have a minority ownership interest. We consistently use the most recent financial information available, generally for periods not to exceed three months prior to the ending date of the period for which we are reporting, to account for equity income. Several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of bond and equity securities held by the investment partnerships, the timing and success of initial public offerings or exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures. See Note 2 to our consolidated financial statements for further information.

Results from our LIHTC investments are no longer included in equity income. See Note 1 for further discussion on this accounting change. Equity income, net of related taxes, was $1.6 million for the third quarter of 2018 compared with $0.5 million for the third quarter of 2017 and $3.4 million for the nine months ended September 30, 2018 compared with $2.6 million for the nine months ended September 30, 2017.



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Table of Contents

Income Taxes on Non-GAAP Operating Income

The effective tax rate on non-GAAP operating income was 16.4% for the third quarter of 2018 and 15.8% for the nine months ended September 30, 2018, compared with 27.5% for the third quarter of 2017 and 28.4% for the nine months ended September 30, 2017. The 2018 effective tax rate differs from the 2017 rate due to the decrease in the federal corporate tax rate from 35% to 21% under the Tax Act, effective for 2018. As discussed earlier, any impact related to the initial enactment of the Tax Act is excluded from non-GAAP operating income. The effective tax rates differ from the federal statutory rate of 21% in 2018 and 35% in 2017 primarily due to the impact of LIHTC investments and tax-exempt investment income.

As discussed in Note 1, the entire impact of LIHTC investments is now included in income tax and prior periods have been adjusted to reflect this change.
Income taxes
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Income tax benefit (expense)
$
(4,818
)
 
$
(9,880
)
 
$
(14,462
)
 
$
(32,017
)
Tax on equity income
(435
)
 
(262
)
 
(914
)
 
(1,415
)
Net income adjustments:
 
 
 
 
 
 
 
Impact of change in federal tax rate (1)
(617
)
 

 
(617
)
 

Income tax offset on net income adjustments
(394
)
 
727

 
(884
)
 
1,221

Income taxes on non-GAAP operating income
$
(6,264
)
 
(9,415
)
 
$
(16,877
)
 
$
(32,211
)
 
 
 
 
 
 
 
 
Income taxes on non-GAAP operating income before benefits of LIHTC investments
$
(7,148
)
 
(10,755
)
 
$
(19,614
)
 
$
(36,038
)
Amounts related to LIHTC investments
884

 
1,340

 
2,737

 
3,827

Income taxes on non-GAAP operating income
$
(6,264
)
 
(9,415
)
 
$
(16,877
)
 
$
(32,211
)

(1)
Amount represents a change in the provisional estimate of the impact of the Tax Act on our deferred tax assets and liabilities as of December 31, 2017. See Note 5 to our consolidated financial statements for additional information.

Impact of Adjustments to Net Income Attributable to FBL
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Initial impact of the Tax Act (1)
$
617

 
$

 
$
617

 
$

Realized gains (losses) on investments and change in net unrealized gains/losses on equity securities and derivatives
(2,658
)
 
1,911

 
(5,296
)
 
2,421

Offsets: (2)
 
 
 
 
 
 
 
Change in amortization
725

 
(20
)
 
837

 
455

Reserve change on interest sensitive products
60

 
187

 
252

 
615

Income tax
394

 
(727
)
 
884

 
(1,221
)
Net impact of adjustments to net income
$
(862
)
 
$
1,351

 
$
(2,706
)
 
$
2,270

Net impact per common share - basic
$
(0.04
)
 
$
0.05

 
$
(0.10
)
 
$
0.09

Net impact per common share - assuming dilution
$
(0.04
)
 
$
0.05

 
$
(0.10
)
 
$
0.09


(1)
Amount represents a change in the provisional estimate of the impact of the Tax Act on our deferred tax assets and liabilities as of December 31, 2017. See Note 5 to our consolidated financial statements for additional information.
(2)
The items excluded from non-GAAP operating income impact the amortization of deferred acquisition costs, value of business acquired and unearned revenue reserve. Certain interest sensitive reserves as well as income taxes are also impacted.



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Table of Contents

Realized Gains (Losses) on Investments
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Realized gains (losses) on investments:
 
 
 
 
 
 
 
Realized gains on sales
$
25

 
$
221

 
$
1,821

 
$
1,770

Realized losses on sales
(2
)
 
(140
)
 
(21
)
 
(1,171
)
Change in unrealized gains/losses on equity securities
(732
)
 

 
(3,415
)
 

Total other-than-temporary impairment charges
(50
)
 
(67
)
 
(1,090
)
 
(133
)
Net realized investment gains (losses)
$
(759
)
 
$
14

 
$
(2,705
)
 
$
466


The level of realized gains (losses) is subject to fluctuation from period to period due to movements in credit spreads and prevailing interest rates, changes in the economic environment, the timing of the sales of the investments generating the realized gains and losses, as well as the timing of other than temporary impairment charges and unrealized gains and losses on equity securities. See “Financial Condition - Investments” and Note 2 to our consolidated financial statements for details regarding our unrealized gains and losses on available-for-sale securities at September 30, 2018 and December 31, 2017.

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

Nine months ended September 30,
 
2018

2017

2018

2017
 
(Dollars in thousands)
Corporate securities:
 
 
 
 
 
 
 
Financial
$

 
$

 
$
26

 
$

Energy

 

 
1,014

 

Residential mortgage-backed

 
17

 

 
83

Securities and indebtedness of related parties
50

 
50

 
50

 
50

Total other-than-temporary impairment losses reported in net income
$
50

 
$
67

 
$
1,090

 
$
133


Other-than-temporary credit impairment losses for the nine months ended September 30, 2018 included a previously impaired energy sector bond due to the commencement of bankruptcy proceedings.


Financial Condition

Investments

Our investment portfolio decreased 1.5% to $8,490.0 million at September 30, 2018 compared to $8,620.2 million at December 31, 2017. The portfolio decrease is due to a decline of $361.3 million of net unrealized appreciation of fixed maturities, partially offset by positive cash flows from operating activities during 2018. Additional details regarding securities in an unrealized gain or loss position at September 30, 2018 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 maturity securities and commercial mortgage loans.



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Table of Contents

Fixed Maturity Acquisitions Selected Information
 
 
 
 
 
 
Nine months ended September 30,
 
 
2018
 
2017
 
 
(Dollars in thousands)
Cost of acquisitions:
 
 
 
 
Corporate
 
$
102,235

 
$
116,985

Mortgage- and asset-backed
 
424,531

 
319,545

United States Government and agencies
 

 
748

Tax-exempt municipals
 
91,741

 
17,566

Taxable municipals
 

 
17,144

Total
 
$
618,507

 
$
471,988

Effective annual yield
 
4.06
%
 
3.97
%
Credit quality
 
 
 
 
NAIC 1 designation
 
84.7
%
 
70.8
%
NAIC 2 designation
 
15.3
%
 
29.2
%
Weighted-average life in years
 
14.0

 
13.0
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 life is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average life is equal to the stated maturity date.

A portion of the securities acquired during the nine months ended September 30, 2018 and September 30, 2017 were obtained with the proceeds from advances on our funding agreements with the FHLB. The securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products, due to the shorter maturity and relatively low interest rate paid on those advances. In addition, certain municipal securities acquired are exempt from federal income taxes, and accordingly have a higher actual return than reflected in the yields stated above. The average yield of the securities acquired, excluding the securities supporting the funding agreements and using a tax-adjusted yield for the municipal securities, was 4.16% during the nine months ended September 30, 2018 and was 3.99% during the nine months ended September 30, 2017.

Investment Portfolio Summary 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
(Dollars in thousands)
Fixed maturities - available for sale:
 
 
 
 
 
 
 
Public
$
5,382,863

 
63.4
%
 
$
5,510,658

 
63.9
%
144A private placement
1,521,719

 
17.9

 
1,547,097

 
18.0

Private placement
194,443

 
2.3

 
234,212

 
2.7

Total fixed maturities - available for sale
7,099,025

 
83.6

 
7,291,967

 
84.6

Equity securities
103,896

 
1.2

 
104,145

 
1.2

Mortgage loans
1,015,618

 
12.0

 
971,812

 
11.3

Real estate
1,543

 

 
1,543

 

Policy loans
195,723

 
2.3

 
191,398

 
2.2

Short-term investments
25,569

 
0.3

 
17,007

 
0.5

Other investments
48,636

 
0.6

 
42,371

 
0.2

Total investments
$
8,490,010

 
100.0
%
 
$
8,620,243

 
100.0
%

As of September 30, 2018, 97.2% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities


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Table of Contents

(NAIC designations 3 through 6). As of September 30, 2018, no single non-investment grade holding exceeded 0.2% of total investments.

Credit Quality by NAIC Designation and Equivalent Rating
 
 
 
 
September 30, 2018
 
December 31, 2017
NAIC Designation
 
Equivalent Rating (1)
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
4,826,709

 
68.0
%
 
$
4,771,407

 
65.4
%
2
 
BBB
 
2,072,159

 
29.2

 
2,267,892

 
31.1

 
 
Total investment grade
 
6,898,868

 
97.2

 
7,039,299

 
96.5

3
 
BB
 
131,637

 
1.8

 
174,660

 
2.4

4
 
B
 
58,151

 
0.8

 
57,970

 
0.8

5
 
CCC
 
6,376

 
0.1

 
13,111

 
0.2

6
 
In or near default
 
3,993

 
0.1

 
6,927

 
0.1

 
 
Total below investment grade
 
200,157

 
2.8

 
252,668

 
3.5

 
 
Total fixed maturities - available for sale
 
$
7,099,025

 
100.0
%
 
$
7,291,967

 
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 that 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 maturity securities by contractual maturity date.
Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
 
September 30, 2018
 
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
$
324,920

 
$
217,342

 
$
12,140

 
$
107,578

 
$
(5,171
)
Capital goods
250,172

 
124,235

 
7,118

 
125,937

 
(5,070
)
Communications
129,948

 
77,290

 
5,697

 
52,658

 
(3,783
)
Consumer cyclical
107,384

 
75,084

 
3,622

 
32,300

 
(1,397
)
Consumer non-cyclical
495,749

 
218,532

 
13,062

 
277,217

 
(18,869
)
Energy
400,194

 
255,985

 
15,422

 
144,209

 
(9,005
)
Finance
620,325

 
415,337

 
22,339

 
204,988

 
(8,251
)
Transportation
94,210

 
64,340

 
3,006

 
29,870

 
(1,166
)
Utilities
730,065

 
557,937

 
60,308

 
172,128

 
(6,525
)
Other
160,566

 
119,681

 
5,289

 
40,885

 
(1,272
)
Total corporate securities
3,313,533

 
2,125,763

 
148,003

 
1,187,770

 
(60,509
)
Mortgage- and asset-backed securities
2,232,268

 
881,597

 
59,234

 
1,350,671

 
(50,780
)
United States Government and agencies
20,233

 
13,921

 
816

 
6,312

 
(295
)
States and political subdivisions
1,532,991

 
1,297,911

 
87,208

 
235,080

 
(10,268
)
Total
$
7,099,025

 
$
4,319,192

 
$
295,261

 
$
2,779,833

 
$
(121,852
)



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Table of Contents

Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
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
$
353,351

 
$
336,293

 
$
29,849

 
$
17,058

 
$
(479
)
Capital goods
279,281

 
271,346

 
21,624

 
7,935

 
(139
)
Communications
151,763

 
133,263

 
12,364

 
18,500

 
(862
)
Consumer cyclical
128,618

 
117,370

 
9,118

 
11,248

 
(516
)
Consumer non-cyclical
521,128

 
461,205

 
41,221

 
59,923

 
(4,684
)
Energy
462,437

 
409,768

 
34,028

 
52,669

 
(5,950
)
Finance
695,604

 
633,513

 
50,908

 
62,091

 
(1,143
)
Transportation
103,049

 
93,921

 
7,978

 
9,128

 
(141
)
Utilities
814,238

 
796,782

 
108,914

 
17,456

 
(1,909
)
Other
178,802

 
165,971

 
13,295

 
12,831

 
(132
)
Total corporate securities
3,688,271

 
3,419,432

 
329,299

 
268,839

 
(15,955
)
Mortgage- and asset-backed securities
2,055,090

 
1,549,187

 
88,999

 
505,903

 
(9,727
)
United States Government and agencies
24,905

 
17,343

 
1,606

 
7,562

 
(79
)
States and political subdivisions
1,523,701

 
1,497,292

 
141,813

 
26,409

 
(1,239
)
Total
$
7,291,967

 
$
6,483,254

 
$
561,717

 
$
808,713

 
$
(27,000
)

At September 30, 2018, our largest unrealized loss is in the consumer non-cyclical sector. Within this sector two companies represent 14.3% of the unrealized loss. One company is a grocery store chain representing $1.5 million of the unrealized loss while the other company is a consumer products company representing $1.2 million of the unrealized loss.

Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
 
 
 
 
September 30, 2018
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
 
$
1,803,514

 
64.9
%
 
$
(69,701
)
 
57.2
%
2
 
BBB
 
851,956

 
30.6

 
(39,690
)
 
32.6

 
 
Total investment grade
 
2,655,470

 
95.5

 
(109,391
)
 
89.8

3
 
BB
 
91,215

 
3.3

 
(6,023
)
 
4.9

4
 
B
 
31,201

 
1.1

 
(6,410
)
 
5.3

5
 
CCC
 
1,938

 
0.1

 
(28
)
 

6
 
In or near default
 
9

 

 

 

 
 
Total below investment grade
 
124,363

 
4.5

 
(12,461
)
 
10.2

 
 
Total
 
$
2,779,833

 
100.0
%
 
$
(121,852
)
 
100.0
%



48

Table of Contents

Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
 
 
 
 
December 31, 2017
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
 
$
518,748

 
64.1
%
 
$
(8,638
)
 
32.0
%
2
 
BBB
 
199,529

 
24.7

 
(6,927
)
 
25.6

 
 
Total investment grade
 
718,277

 
88.8

 
(15,565
)
 
57.6

3
 
BB
 
41,488

 
5.1

 
(819
)
 
3.0

4
 
B
 
37,944

 
4.7

 
(8,125
)
 
30.1

5
 
CCC
 
4,109

 
0.5

 
(1,314
)
 
4.9

6
 
In or near default
 
6,895

 
0.9

 
(1,177
)
 
4.4

 
 
Total below investment grade
 
90,436

 
11.2

 
(11,435
)
 
42.4

 
 
Total
 
$
808,713

 
100.0
%
 
$
(27,000
)
 
100.0
%

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
September 30, 2018
 
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
$

 
$
721,821

 
$

 
$
(10,047
)
Greater than three months to six months

 
609,165

 

 
(18,103
)
Greater than six months to nine months

 
878,428

 

 
(46,131
)
Greater than nine months to twelve months

 
222,092

 

 
(11,207
)
Greater than twelve months
9,878

 
460,301

 
(2,532
)
 
(33,832
)
Total
$
9,878

 
$
2,891,807

 
$
(2,532
)
 
$
(119,320
)

 
December 31, 2017
 
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
$

 
$
292,187

 
$

 
$
(3,974
)
Greater than three months to six months

 
164,170

 

 
(2,331
)
Greater than six months to nine months

 
24,821

 

 
(579
)
Greater than nine months to twelve months

 
9,350

 

 
(361
)
Greater than twelve months
16,747

 
328,438

 
(4,798
)
 
(14,957
)
Total
$
16,747

 
$
818,966

 
$
(4,798
)
 
$
(22,202
)



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Table of Contents

Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date
 
September 30, 2018
 
December 31, 2017
 
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
$

 
$

 
$
872

 
$
(2
)
Due after one year through five years
74,697

 
(2,046
)
 
25,857

 
(1,052
)
Due after five years through ten years
297,037

 
(11,856
)
 
107,198

 
(3,657
)
Due after ten years
1,057,428

 
(57,170
)
 
168,883

 
(12,562
)
 
1,429,162

 
(71,072
)
 
302,810

 
(17,273
)
Mortgage- and asset-backed
1,350,671

 
(50,780
)
 
505,903

 
(9,727
)
Total
$
2,779,833

 
$
(121,852
)
 
$
808,713

 
$
(27,000
)

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. 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 Form 10-K for the year ended December 31, 2017 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 one fund at September 30, 2018 and December 31, 2017, that owns securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The fund is reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of $2.3 million at September 30, 2018 and $3.0 million at December 31, 2017. We do not own any direct investments in subprime lenders.

Mortgage- and Asset-Backed Securities by Collateral Type
 
September 30, 2018
 
December 31, 2017
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
(Dollars in thousands)
Government agency
$
230,347

 
$
228,713

 
3.2
%
 
$
220,385

 
$
230,792

 
3.2
%
Prime
282,386

 
286,824

 
4.0

 
181,397

 
194,081

 
2.7

Alt-A
85,406

 
101,201

 
1.4

 
98,100

 
111,993

 
1.5

Subprime
143,705

 
154,802

 
2.2

 
139,826

 
149,469

 
2.0

Commercial mortgage
883,023

 
864,674

 
12.2

 
674,076

 
705,307

 
9.7

Non-mortgage
598,947

 
596,054

 
8.4

 
662,034

 
663,448

 
9.1

Total
$
2,223,814

 
$
2,232,268

 
31.4
%
 
$
1,975,818

 
$
2,055,090

 
28.2
%



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Table of Contents

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” with varying stated maturities that provide sequential retirement of the bonds. While each tranche receives monthly interest payments, a subsequent tranche is not entitled to receive payment of principal until the entire principal of the preceding tranche is paid off. We primarily invest in sequential tranches, which allow us to manage cash flow stability and prepayment risk by the level of tranche in which we invest. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. PAC bonds provide more predictable cash flows within a range of prepayment speeds and provide some protection against prepayment risk. TAC bonds provide protection from a rise in the prepayment rate due to falling interest rates. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to excessive prepayment risk.

Residential Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
September 30, 2018
 
 
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
 
$
76,151

 
$
78,215

 
$
74,172

 
$
94,817

 
$
432,847

 
$
422,471

 
$
583,170

 
$
595,503

3
 

 

 
613

 
609

 

 

 
613

 
609

4
 
393

 
402

 
8,191

 
10,946

 

 

 
8,584

 
11,348

6
 
9

 
9

 

 

 

 

 
9

 
9

Total
 
$
76,553

 
$
78,626

 
$
82,976

 
$
106,372

 
$
432,847

 
$
422,471

 
$
592,376

 
$
607,469


 
 
December 31, 2017
 
 
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
 
$
88,773

 
$
91,424

 
$
79,358

 
$
101,123

 
$
303,659

 
$
311,883

 
$
471,790

 
$
504,430

2
 

 

 
876

 
877

 

 

 
876

 
877

3
 

 

 
1,697

 
1,634

 

 

 
1,697

 
1,634

4
 
584

 
592

 
8,713

 
8,738

 

 

 
9,297

 
9,330

6
 
11

 
10

 

 

 

 

 
11

 
10

Total
 
$
89,368

 
$
92,026

 
$
90,644

 
$
112,372

 
$
303,659

 
$
311,883

 
$
483,671

 
$
516,281


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.

Commercial Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
September 30, 2018
 
 
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
 
$
8,541

 
$
8,997

 
$
114,256

 
$
123,391

 
$
724,296

 
$
696,549

 
$
847,093

 
$
828,937

2
 

 

 
35,930

 
35,737

 

 

 
35,930

 
35,737

Total (1)
 
$
8,541

 
$
8,997

 
$
150,186

 
$
159,128

 
$
724,296

 
$
696,549

 
$
883,023

 
$
864,674




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Commercial Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
December 31, 2017
 
 
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
 
$
8,878

 
$
9,661

 
$
114,230

 
$
128,907

 
$
515,654

 
$
529,192

 
$
638,762

 
$
667,760

2
 

 

 
35,314

 
37,547

 

 

 
35,314

 
37,547

Total (1)
 
$
8,878

 
$
9,661

 
$
149,544

 
$
166,454

 
$
515,654

 
$
529,192

 
$
674,076

 
$
705,307


(1)
The commercial mortgage-backed securities (CMBS) portfolio included government agency-backed securities with a carrying value of $681.5 million at September 30, 2018 and $515.7 million at December 31, 2017. Also included in the CMBS are military housing bonds totaling $154.7 million at September 30, 2018 and $161.1 million at December 31, 2017. 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. The majority of these securities are high quality, short-duration assets with limited cash flow variability.
Other Asset-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
September 30, 2018
 
 
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
 
$
9,612

 
$
9,349

 
$
142,530

 
$
157,112

 
$
462,332

 
$
459,976

 
$
614,474

 
$
626,437

2
 
1,618

 
1,708

 
1,975

 
2,017

 
104,068

 
104,055

 
107,661

 
107,780

3
 

 

 
344

 
336

 
21,975

 
21,620

 
22,319

 
21,956

4
 
182

 
173

 

 

 

 

 
182

 
173

5
 

 

 

 

 
3,779

 
3,779

 
3,779

 
3,779

Total
 
$
11,412

 
$
11,230

 
$
144,849

 
$
159,465

 
$
592,154

 
$
589,430

 
$
748,415

 
$
760,125

 
 
December 31, 2017
 
 
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
 
$
10,606

 
$
10,367

 
$
151,775

 
$
166,223

 
$
512,548

 
$
513,792

 
$
674,929

 
$
690,382

2
 
1,745

 
1,846

 
2,612

 
2,557

 
97,549

 
98,811

 
101,906

 
103,214

3
 

 

 

 

 
26,586

 
26,444

 
26,586

 
26,444

4
 
189

 
178

 

 

 

 

 
189

 
178

5
 

 

 

 

 
6,400

 
6,400

 
6,400

 
6,400

6
 

 

 
8,061

 
6,884

 

 

 
8,061

 
6,884

Total
 
$
12,540

 
$
12,391

 
$
162,448

 
$
175,664

 
$
643,083

 
$
645,447

 
$
818,071

 
$
833,502


State and Political Subdivision Securities

State and political subdivision securities totaled $1,533.0 million, or 21.6% of total fixed maturities, at September 30, 2018, and $1,523.7 million, or 20.9% of total fixed maturities at December 31, 2017 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


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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. Exposure to the state of Illinois and municipalities within the state accounted for 1.5% of our total fixed maturities at September 30, 2018. As of September 30, 2018, our Illinois-related portfolio holdings were rated investment grade, and were trading at 107.0% of amortized cost. Our municipal bond exposure had an average rating of Aa2/AA and our holdings were trading at 105.3% of amortized cost at September 30, 2018.

Equity Securities

Equity securities totaled $103.9 million at September 30, 2018 and $104.1 million at December 31, 2017. At December 31, 2017, gross unrealized gains totaled $7.7 million and gross unrealized losses totaled $0.3 million on these securities. The unrealized losses were attributable to non-redeemable perpetual preferred securities from issuers in the financial sector.
 
Mortgage Loans

Mortgage loans totaled $1,015.6 million at September 30, 2018 and $971.8 million at December 31, 2017. 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 202 at September 30, 2018 and 190 at December 31, 2017. In the first nine months of 2018, new loans ranged from $1.4 million to $10.5 million in size, with an average loan size of $5.0 million, an average loan term of 16 years and an average net yield of 4.73%. 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 1.3% that are interest-only loans as of September 30, 2018. At September 30, 2018, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 53.4% and the weighted average debt service coverage ratio was 1.7 based on the results of our 2017 annual study. See Note 2 to our consolidated financial statements for further discussion regarding our mortgage loans.

Other Assets and Liabilities

Deferred acquisition costs increased 36.2% to $412.0 million at September 30, 2018, compared to December 31, 2017, primarily due to a $100.3 million decrease in the impact of the change in net unrealized appreciation on fixed maturity securities during the period. Securities and indebtedness of related parties increased 24.5% to $60.0 million due to acquisitions. Cash and cash equivalents decreased 72.6% to $14.4 million primarily due to normal fluctuations in timing of payments made and received.

Future policy benefits increased 2.7% to $7,241.2 million at September 30, 2018, compared to December 31, 2017, primarily due to an increase in the volume of annuity and life business in force. Deferred income taxes decreased 40.2% to $78.0 million primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments.

Stockholders’ Equity

As discussed in Note 7 to our consolidated financial statements, stockholders’ equity was impacted by capital deployment actions during the first quarter of 2018, which included a special cash dividend of $1.50 per share on Class A and Class B common stock and an increase in our regular quarterly dividend by 4.5% to $0.46 per share.

Our stockholders’ equity decreased 13.3% to $1,193.7 million at September 30, 2018, compared to $1,377.1 million at December 31, 2017, primarily due to the change in unrealized appreciation of fixed maturity securities during the period and dividends paid, partially offset by net income.

At September 30, 2018, our common stockholders’ equity was $1,190.7 million, or $47.98 per share, compared to $1,374.1 million, or $55.12 per share, at December 31, 2017. Included in stockholders’ equity per common share is $3.59 at September 30, 2018 and $11.44 at December 31, 2017 attributable to accumulated other comprehensive income.



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Liquidity and Capital Resources

Cash Flows

During the first nine months of 2018, our operating activities generated cash flows totaling $176.8 million, consisting of net income of $87.4 million adjusted for non-cash operating revenues and expenses netting to $89.4 million. We used cash of $235.9 million in our investing activities during the 2018 period. The primary uses were $777.2 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $558.3 million in sales, maturities and repayments of investments. Our financing activities provided cash of $20.8 million during the 2018 period. The primary financing source was $525.2 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $423.7 million for return of policyholder account balances on interest sensitive products and $71.7 million for dividends paid to stockholders.

Sources and Uses of Capital Resources

Parent company cash inflows from operations consist primarily of fees that it charges various subsidiaries and affiliates for management of their operations, expense reimbursements and tax settlements from subsidiaries and affiliates, proceeds from the exercise of employee stock options, investment income and dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during the nine months ended September 30, 2018 included management fees from subsidiaries and affiliates totaling $6.2 million and dividends of $79.5 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.

We paid regular cash dividends on our common and preferred stock during the nine-month period ended September 30 totaling $34.4 million in 2018 and $33.0 million in 2017. In addition, we paid a special $1.50 per common share cash dividend in March 2018 totaling $37.3 million and a $1.50 per common share cash dividend in March 2017 totaling $37.4 million. It is anticipated that quarterly cash dividend requirements for 2018 will be $0.0075 per Series B preferred share and $0.46 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 $11.5 million for the remainder of 2018. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2018. The parent company had available cash and investments totaling $50.3 million at September 30, 2018. The parent company 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. In addition, our parent company and Farm Bureau Life have entered into a reciprocal line of credit arrangement, which provides additional liquidity for either entity up to $20.0 million. We had no material commitments for capital expenditures as of September 30, 2018.

As discussed in Note 7 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 of Directors. At September 30, 2018, $48.0 million remains available for repurchase under the Class A common stock repurchase program. Under these programs, we repurchased 129,011 shares for $8.8 million during the nine months ended September 30, 2018. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.

Interest payments on our debt totaled $3.6 million for the nine months ended September 30, 2018 and September 30, 2017. Interest payments on our debt outstanding at September 30, 2018 are estimated to be $1.2 million for the remainder of 2018.

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 that 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 $283.4 million for the nine months ended September 30, 2018 and $191.8 million for the prior year period.


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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, 2017, Farm Bureau Life’s statutory unassigned surplus was $482.5 million. There are certain additional limits on the amount of dividends that may be paid within a year without approval of the Insurance Division, Department of Commerce of the State of Iowa as discussed in Note 7 to our consolidated financial statements included in Item 8 of our 2017 Form 10-K. During the remainder of 2018, the maximum amount legally available for distribution to the parent company without further regulatory approval is $31.1 million.

We manage the amount of capital held by our insurance subsidiaries to ensure they 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 and have included the impact of the NAIC’s recently approved change to the RBC formula factors due to the Tax Act. These estimates may differ from actual results. As of September 30, 2018, Farm Bureau Life’s statutory total adjusted capital is estimated at $699.2 million, resulting in a RBC ratio of 554%, based on company action level capital of $126.2 million.

On a consolidated basis, we anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally-generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. Farm Bureau Life is a member of the FHLB, which provides a source for additional liquidity, if needed. This membership allows us to utilize fixed or floating rate advances offered by the FHLB and secured by qualifying collateral. Our total capacity to utilize such advances is impacted by multiple factors including the market value of eligible collateral, our level of statutory admitted assets and excess reserves and our willingness or capacity to hold activity-based FHLB common stock.

Contractual Obligations

In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments 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, 2017.


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, 2017.


ITEM 4. CONTROLS AND PROCEDURES

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities and Exchange Act of 1934 (the Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and


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Table of Contents

communicated to the issuer’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our internal control over financial reporting changes from time-to-time as we modify and enhance our systems and processes to meet our dynamic needs. Changes are also made as we strive to be more efficient in how we conduct our business. While changes have taken place in our internal controls during the quarter ended September 30, 2018, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

The performance of our company is subject to a variety of risks 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, 2017.


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

(c) Issuer Repurchases of Equity Securities

We had no issuer repurchases of equity securities for the quarter ended September 30, 2018. We have $48.0 million available under the repurchase program announced on March 1, 2018, which will expire March 31, 2022. The program authorizes us to make repurchases of Class A common stock in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Completion of the program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.



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Table of Contents

ITEM 6. EXHIBITS

(a) Exhibits:
18.1+
31.1+
31.2+
32+
101+#
Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language) from FBL Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 as follows: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (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: November 1, 2018                


 
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 Officer)
 
 
 
 
By
/s/ Anthony J. Aldridge
 
 
Anthony J. Aldridge
 
 
Chief Accounting Officer (Principal Accounting Officer)



58