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EX-10 - EXHIBIT 10 - FBL FINANCIAL GROUP INCex10rsuagree2015.htm

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

(Mark one)
 
 
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended March 31, 2015
 
 
 
or
 
 
 
[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from____________________ to____________________
 
 
 
Commission File Number: 1-11917
(Exact name of registrant as specified in its charter)
 
 
 
Iowa
 
42-1411715
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5400 University Avenue, West Des Moines, Iowa
 
50266-5997
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(515) 225-5400
(Registrant's telephone number, including area code)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 Title of each class
 
Outstanding at May 5, 2015
Class A Common Stock, without par value
 
24,787,694
Class B Common Stock, without par value
 
11,413


















(This page has been intentionally left blank.)




FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
TABLE OF CONTENTS


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



1


ITEM 1. FINANCIAL STATEMENTS

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

 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2015 - $6,180,490; 2014 - $6,111,433)
$
6,833,252

 
$
6,700,698

Equity securities - available for sale, at fair value (cost: 2015 - $115,127; 2014 - $107,410)
122,355

 
112,623

Mortgage loans
673,311

 
629,296

Real estate
3,613

 
3,622

Policy loans
182,432

 
182,502

Short-term investments
23,262

 
48,585

Other investments
3,400

 
3,644

Total investments
7,841,625

 
7,680,970

 
 
 
 
Cash and cash equivalents
44,276

 
76,632

Securities and indebtedness of related parties
130,375

 
129,872

Accrued investment income
83,187

 
76,445

Amounts receivable from affiliates
3,542

 
2,666

Reinsurance recoverable
106,916

 
101,247

Deferred acquisition costs
204,699

 
220,760

Value of insurance in force acquired
22,015

 
22,497

Other assets
75,950

 
70,286

Assets held in separate accounts
688,194

 
683,033

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,200,779

 
$
9,064,408


 


2




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

 
March 31,
2015
 
December 31,
2014
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
4,621,780

 
$
4,543,980

Traditional life insurance and accident and health products
1,597,322

 
1,581,138

Other policy claims and benefits
41,069

 
34,895

Supplementary contracts without life contingencies
337,733

 
341,955

Advance premiums and other deposits
258,963

 
248,679

Amounts payable to affiliates
274

 
188

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

 
97,000

Current income taxes
4,309

 
2,764

Deferred income taxes
223,573

 
205,698

Other liabilities
81,474

 
72,196

Liabilities related to separate accounts
688,194

 
683,033

Total liabilities
7,951,691

 
7,811,526

 
 
 
 
Stockholders' equity:
 
 
 
FBL Financial Group, Inc. stockholders' equity:
 
 
 
Preferred stock, without par value, at liquidation value - authorized 10,000,000 shares, issued and outstanding 5,000,000 Series B shares
3,000

 
3,000

Class A common stock, without par value - authorized 88,500,000 shares, issued and outstanding 24,785,471 shares in 2015 and 24,703,903 shares in 2014
147,307

 
144,625

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

 
72

Accumulated other comprehensive income
287,828

 
258,410

Retained earnings
810,850

 
846,737

Total FBL Financial Group, Inc. stockholders' equity
1,249,057

 
1,252,844

Noncontrolling interest
31

 
38

Total stockholders' equity
1,249,088

 
1,252,882

Total liabilities and stockholders' equity
$
9,200,779

 
$
9,064,408
















See accompanying notes.


3




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

 
Three months ended March 31,
 
2015
 
2014
Revenues:
 
 
 
Interest sensitive product charges
$
28,121

 
$
27,091

Traditional life insurance premiums
47,148

 
45,492

Net investment income
98,773

 
92,631

Net realized capital losses on sales of investments
(366
)
 
(540
)
Other income
4,270

 
3,861

Total revenues
177,946

 
168,535

 
 
 
 
Benefits and expenses:
 
 
 
Interest sensitive product benefits
55,808

 
53,380

Traditional life insurance benefits
45,709

 
41,497

Policyholder dividends
2,961

 
3,345

Underwriting, acquisition and insurance expenses
35,541

 
33,444

Interest expense
1,212

 
1,212

Other expenses
4,530

 
4,128

Total benefits and expenses
145,761

 
137,006

 
32,185

 
31,529

Income taxes
(10,384
)
 
(10,228
)
Equity income, net of related income taxes
1,769

 
1,648

Net income
23,570

 
22,949

Net loss attributable to noncontrolling interest
21

 
43

Net income attributable to FBL Financial Group, Inc.
$
23,591

 
$
22,992

 
 
 
 
Earnings per common share
$
0.95

 
$
0.92

Earnings per common share - assuming dilution
$
0.94

 
$
0.91

 
 
 
 
Cash dividends per common share
$
0.40

 
$
0.35

Special cash dividend per common share
$
2.00

 
$


















See accompanying notes.


4




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
Three months ended March 31,
 
2015
 
2014
Net income
$
23,570

 
$
22,949

Other comprehensive income (1)
 
 
 
Change in net unrealized investment gains/losses
29,187

 
69,308

Change in underfunded status of postretirement benefit plans
231

 
172

Total other comprehensive income, net of tax
29,418

 
69,480

Total comprehensive income, net of tax
52,988

 
92,429

Comprehensive loss attributable to noncontrolling interest
21

 
43

Total comprehensive income applicable to FBL Financial Group, Inc.
$
53,009

 
$
92,472


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


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
 
FBL Financial Group, Inc. Stockholders' Equity
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Non-
controlling Interest
 
Total Stockholders' Equity
Balance at January 1, 2014
$
3,000

 
$
135,065

 
$
119,067

 
$
787,609

 
$
50

 
$
1,044,791

Net income - three months ended March 31, 2014

 

 

 
22,992

 
(43
)
 
22,949

Other comprehensive income

 

 
69,480

 

 

 
69,480

Issuance of common stock under compensation plans

 
6,411

 

 

 

 
6,411

Purchase of common stock

 
(1,435
)
 

 
(9,727
)
 

 
(11,162
)
Dividends on preferred stock

 

 

 
(38
)
 

 
(38
)
Dividends on common stock

 

 

 
(8,664
)
 

 
(8,664
)
Receipts related to noncontrolling interest

 

 

 

 
29

 
29

Balance at March 31, 2014
$
3,000

 
$
140,041

 
$
188,547

 
$
792,172

 
$
36

 
$
1,123,796

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
3,000

 
$
144,697

 
$
258,410

 
$
846,737

 
$
38

 
$
1,252,882

Net income - three months ended March 31, 2015

 

 

 
23,591

 
(21
)
 
23,570

Other comprehensive income

 

 
29,418

 

 

 
29,418

Issuance of common stock under compensation plans

 
2,682

 

 

 

 
2,682

Dividends on preferred stock

 

 

 
(38
)
 

 
(38
)
Dividends on common stock

 

 

 
(59,440
)
 

 
(59,440
)
Receipts related to noncontrolling interest

 

 

 

 
14

 
14

Balance at March 31, 2015
$
3,000

 
$
147,379

 
$
287,828

 
$
810,850

 
$
31

 
$
1,249,088









See accompanying notes.


5




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

 
Three months ended March 31,
 
2015
 
2014
Operating activities
 
 
 
Net income
$
23,570

 
$
22,949

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
37,964

 
37,014

Charges for mortality, surrenders and administration
(26,977
)
 
(26,081
)
Net realized losses on investments
366

 
540

Change in fair value of derivatives
(97
)
 
(326
)
Increase in traditional life and accident and health benefit liabilities
16,184

 
13,923

Deferral of acquisition costs
(10,354
)
 
(10,044
)
Amortization of deferred acquisition costs and value of insurance in force
9,054

 
8,493

Change in reinsurance recoverable
(5,669
)
 
(625
)
Provision for deferred income taxes
2,036

 
3,125

Other
(281
)
 
(18,421
)
Net cash provided by operating activities
45,796

 
30,547

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
123,134

 
81,293

Equity securities - available for sale
420

 
200

Mortgage loans
14,257

 
8,272

Derivative instruments
1,078

 
253

Policy loans
9,222

 
9,019

Securities and indebtedness of related parties
4,892

 
1,207

Acquisitions:
 
 
 
Fixed maturities - available for sale
(179,351
)
 
(161,976
)
Equity securities - available for sale
(8,130
)
 
(6,189
)
Mortgage loans
(58,235
)
 
(18,100
)
Derivative instruments
(896
)
 
(617
)
Policy loans
(9,152
)
 
(10,718
)
Securities and indebtedness of related parties
(7,956
)
 
(3,725
)
Short-term investments, net change
25,323

 
41,084

Purchases and disposals of property and equipment, net
(3,443
)
 
(1,240
)
Net cash used in investing activities
(88,837
)
 
(61,237
)




6




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

 
Three months ended March 31,
 
2015
 
2014
Financing activities
 
 
 
Contract holder account deposits
$
196,491

 
$
180,472

Contract holder account withdrawals
(128,679
)
 
(111,788
)
Receipts related to noncontrolling interests, net
14

 
29

Excess tax deductions on stock-based compensation
620

 
507

Issuance or repurchase of common stock, net
1,717

 
(3,977
)
Dividends paid
(59,478
)
 
(8,702
)
Net cash provided by financing activities
10,685

 
56,541

Increase (decrease) in cash and cash equivalents
(32,356
)
 
25,851

Cash and cash equivalents at beginning of period
76,632

 
6,370

Cash and cash equivalents at end of period
$
44,276

 
$
32,221

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,213

 
$
1,213

Income taxes
2,001

 
2,005































See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2015

1. Significant Accounting Policies

Basis of Presentation

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

Operating results for the three-month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2014 included in our Annual Report on Form 10-K for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgments and estimates and other information necessary to understand our financial position and results of operations.

Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (FASB) issued guidance related to accounting for investments in low income housing tax credit limited partnerships. Our low income housing tax credit investments totaled $88.1 million at March 31, 2015 and $84.8 million at December 31, 2014. Presently, we account for these investments under the equity method and include related tax benefits as a component of equity income. The new guidance allows us the option to account for these partnerships using the proportional amortization method, which amortizes the acquisition cost of the partnership in proportion to the recognition of the tax benefits associated with these projects. The tax credits, net of the amortization of the partnership interest, would be recognized as a component of income taxes. This guidance, which became effective during the first quarter of 2015, did not impact us as we elected not to adopt the optional accounting for our low income housing tax credit limited partnerships.

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

In February 2015, the FASB issued guidance that amends existing consolidation guidance. The new guidance modifies the consolidation framework for certain investment entities and all limited partnerships. It also eliminates certain criteria used to determine whether fees paid to a decision maker are a variable interest. The amendment allows for either a full retrospective or modified approach at adoption, and is effective during the first quarter of 2016. We are currently evaluating the impact of this new guidance on our consolidated financial statements.



8


2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
March 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,369,116

 
$
392,286

 
$
(20,377
)
 
$
3,741,025

 
$
467

Residential mortgage-backed
446,682

 
44,863

 
(4,125
)
 
487,420

 
(3,254
)
Commercial mortgage-backed
487,521

 
56,906

 
(339
)
 
544,088

 

Other asset-backed
540,624

 
18,660

 
(3,928
)
 
555,356

 
5,180

United States Government and agencies
37,439

 
4,674

 

 
42,113

 

State, municipal and other governments
1,299,108

 
164,244

 
(102
)
 
1,463,250

 

Total fixed maturities
$
6,180,490

 
$
681,633

 
$
(28,871
)
 
$
6,833,252

 
$
2,393

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
85,566

 
$
7,034

 
$
(550
)
 
$
92,050

 
 
Common stocks
29,561

 
744

 

 
30,305

 
 
Total equity securities
$
115,127

 
$
7,778

 
$
(550
)
 
$
122,355

 
 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,335,535

 
$
348,937

 
$
(17,566
)
 
$
3,666,906

 
$
211

Residential mortgage-backed
453,607

 
42,510

 
(4,583
)
 
491,534

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

 
45,573

 
(812
)
 
530,695

 

Other asset-backed
508,090

 
17,188

 
(4,017
)
 
521,261

 
5,223

United States Government and agencies
38,227

 
4,581

 
(4
)
 
42,804

 

State, municipal and other governments
1,290,040

 
157,571

 
(113
)
 
1,447,498

 

Total fixed maturities
$
6,111,433

 
$
616,360

 
$
(27,095
)
 
$
6,700,698

 
$
1,740

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

 
$
5,135

 
$
(660
)
 
$
85,041

 
 
Common stocks
26,844

 
738

 

 
27,582

 
 
Total equity securities
$
107,410

 
$
5,873

 
$
(660
)
 
$
112,623

 
 

(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for corporate and other asset-backed securities were in an unrealized gain position at March 31, 2015 and December 31, 2014 due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2)
Corporate securities include hybrid preferred securities with a carrying value of $62.5 million at March 31, 2015 and $80.9 million at December 31, 2014. Corporate securities also include redeemable preferred stock with a carrying value of $30.6 million at March 31, 2015 and $29.9 million at December 31, 2014.


9


Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
 
 
 
 
March 31, 2015
 
Amortized
Cost
 
Estimated
Fair Value
 
(Dollars in thousands)
Due in one year or less
$
106,819

 
$
108,578

Due after one year through five years
760,042

 
843,244

Due after five years through ten years
884,759

 
966,225

Due after ten years
2,954,043

 
3,328,341

 
4,705,663

 
5,246,388

Mortgage-backed and other asset-backed
1,474,827

 
1,586,864

Total fixed maturities
$
6,180,490

 
$
6,833,252


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

Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income
 
 
 
 
 
March 31,
2015
 
December 31,
2014
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
652,762

 
$
589,265

Equity securities - available for sale
7,228

 
5,213

 
659,990

 
594,478

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(197,928
)
 
(179,544
)
Value of insurance in force acquired
(3,839
)
 
(3,939
)
Unearned revenue reserve
10,765

 
11,461

Adjustments for assumed changes in policyholder liabilities
(12,811
)
 
(11,182
)
Provision for deferred income taxes
(159,648
)
 
(143,932
)
Net unrealized investment gains
$
296,529

 
$
267,342


Net unrealized investment gains and losses are recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities. Subsequent changes in the fair value of securities for which a previous non-credit OTTI loss was recognized in accumulated other comprehensive income, are reported along with changes in fair value for which no OTTI losses were previously recognized.



10


Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
March 31, 2015
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
189,123

 
$
(13,547
)
 
$
86,753

 
$
(6,830
)
 
$
275,876

 
$
(20,377
)
 
70.5
%
Residential mortgage-backed
 
19,352

 
(155
)
 
28,414

 
(3,970
)
 
47,766

 
(4,125
)
 
14.3

Commercial mortgage-backed
 
8,507

 
(65
)
 
8,025

 
(274
)
 
16,532

 
(339
)
 
1.2

Other asset-backed
 
100,580

 
(2,131
)
 
46,118

 
(1,797
)
 
146,698

 
(3,928
)
 
13.6

State, municipal and other governments
 
23,066

 
(102
)
 

 

 
23,066

 
(102
)
 
0.4

Total fixed maturities
 
$
340,628

 
$
(16,000
)
 
$
169,310

 
$
(12,871
)
 
$
509,938

 
$
(28,871
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$

 
$

 
$
4,450

 
$
(550
)
 
$
4,450

 
$
(550
)
 
 
Total equity securities
 
$

 
$

 
$
4,450

 
$
(550
)
 
$
4,450

 
$
(550
)
 
 

 
 
December 31, 2014
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
203,764

 
$
(9,756
)
 
$
142,600

 
$
(7,810
)
 
$
346,364

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

 
(315
)
 
19,084

 
(4,268
)
 
46,973

 
(4,583
)
 
16.9

Commercial mortgage-backed
 

 

 
20,900

 
(812
)
 
20,900

 
(812
)
 
3.0

Other asset-backed
 
128,516

 
(2,349
)
 
55,526

 
(1,668
)
 
184,042

 
(4,017
)
 
14.8

United States Government and agencies
 
500

 

 
470

 
(4
)
 
970

 
(4
)
 

State, municipal and other governments
 

 

 
12,472

 
(113
)
 
12,472

 
(113
)
 
0.5

Total fixed maturities
 
$
360,669

 
$
(12,420
)
 
$
251,052

 
$
(14,675
)
 
$
611,721

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

 
$
(110
)
 
$
4,450

 
$
(550
)
 
$
19,288

 
$
(660
)
 
 
Total equity securities
 
$
14,838

 
$
(110
)
 
$
4,450

 
$
(550
)
 
$
19,288

 
$
(660
)
 
 

Fixed maturities in the above tables include 160 securities from 127 issuers at March 31, 2015 and 185 securities from 160 issuers at December 31, 2014. We do not intend to sell or believe we will be required to sell any of our impaired fixed maturities before recovery of their amortized cost basis. The following summarizes the more significant unrealized losses of fixed maturities and equity securities by investment category as of March 31, 2015.

Corporate securities: The largest unrealized losses were in the energy sector ($96.4 million carrying value and $11.2 million unrealized loss). The largest unrealized losses in the energy sector were in the oil field service ($37.2 million carrying value and $5.7 million unrealized loss) and the energy independent ($43.7 million carrying value and $4.5 million unrealized loss) sub-sectors. The majority of losses were primarily attributable to general credit spread widening across the energy sector.

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





11


Other asset-backed securities: The unrealized losses on other asset-backed securities were primarily due to market concerns regarding defaults on subprime mortgages and home equity loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.

Excluding mortgage- and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $2.8 million at March 31, 2015, with the largest unrealized loss from an energy service provider. With respect to mortgage- and asset-backed securities not backed by the United States Government, our largest aggregate unrealized loss from the same issuer at March 31, 2015 was $3.2 million, consisting of two different securities that are backed by different pools of Alt-A residential mortgage loans. Both securities are rated non-investment grade and the largest unrealized loss totaled $1.9 million.

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

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

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

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

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

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
 
 
 
 
Three months ended March 31,
 
2015

2014
 
(Dollars in thousands)
Balance at beginning of period
$
(16,772
)
 
$
(21,592
)
Reductions due to investments sold
159

 
68

Balance at end of period
$
(16,613
)
 
$
(21,524
)


12



The table above sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which a portion of the OTTI was recognized in other comprehensive income (loss) and corresponding changes in such amounts. We had no OTTIs for the three-month periods ended March 31, 2015 or 2014.

Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
Fixed maturities:
 
 
 
Gross gains
$
220

 
$
97

Gross losses
(586
)
 
(637
)
Net realized gains (losses) on investments recorded in income
$
(366
)
 
$
(540
)

Proceeds from sales of fixed maturities totaled $17.3 million during the three months ended March 31, 2015 and $12.8 million during the three months ended March 31, 2014.

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

Mortgage Loans

Our mortgage loan portfolio consists principally of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to-value ratio that provides sufficient excess collateral to absorb losses should we be required to foreclose and take possession of the collateral. In order to identify impairment losses, management maintains and regularly reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and establish an estimated loss, if needed, for each impaired loan identified. An estimated loss is needed for loans for which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements.

Any loan delinquent on contractual payments is considered non-performing. At March 31, 2015 and December 31, 2014, there were no non-performing loans over 90 days past due on contractual payments. Interest income is accrued on impaired loans to the extent it is deemed collectible (delinquent less than 90 days) and the loan continues to perform under its original or restructured contractual terms. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past-due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely.

Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
307,998

 
45.7
%
 
$
269,308

 
42.8
%
Retail
 
211,082

 
31.4

 
214,710

 
34.1

Industrial
 
128,478

 
19.1

 
125,425

 
19.9

Other
 
25,753

 
3.8

 
19,853

 
3.2

Total
 
$
673,311

 
100.0
%
 
$
629,296

 
100.0
%



13


Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
216,884

 
32.2
%
 
$
191,835

 
30.5
%
Pacific
 
93,405

 
13.9

 
94,770

 
15.1

West North Central
 
94,943

 
14.1

 
85,664

 
13.6

East North Central
 
79,601

 
11.8

 
80,999

 
12.9

Mountain
 
65,720

 
9.8

 
62,473

 
9.9

West South Central
 
59,819

 
8.9

 
50,010

 
7.9

Other
 
62,939

 
9.3

 
63,545

 
10.1

Total
 
$
673,311

 
100.0
%
 
$
629,296

 
100.0
%

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

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
206,255

 
30.6
%
 
$
180,884

 
28.7
%
51% - 60%
 
180,263

 
26.8

 
189,210

 
30.1

61% - 70%
 
219,676

 
32.6

 
198,336

 
31.5

71% - 80%
 
62,609

 
9.3

 
53,480

 
8.5

81% - 90%
 
4,508

 
0.7

 
7,386

 
1.2

Total
 
$
673,311

 
100.0
%
 
$
629,296

 
100.0
%

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

Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2015
 
$
58,204

 
8.7
%
 
$

 
%
2014
 
85,546

 
12.7

 
86,174

 
13.7

2013
 
81,116

 
12.0

 
81,802

 
13.0

2012
 
69,626

 
10.4

 
70,274

 
11.2

2011
 
46,456

 
6.9

 
46,813

 
7.4

2010 and prior
 
332,363

 
49.3

 
344,233

 
54.7

Total
 
$
673,311

 
100.0
%
 
$
629,296

 
100.0
%

 Impaired Mortgage Loans
 
 
 
March 31, 2015
 
December 31, 2014
 
(Dollars in thousands)
Unpaid principal balance
$
22,026

 
$
22,103

Less:
 
 
 
Related allowance
851

 
857

Discount
223

 
267

Carrying value of impaired mortgage loans
$
20,952

 
$
20,979



14


 Allowance on Mortgage Loans
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Balance at beginning of period
$
857

 
$
888

Charge offs
(6
)
 
(5
)
Balance at end of period
$
851

 
$
883


Mortgage Loan Modifications

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

There were no loan modifications during the first quarter of 2015 or 2014.

Variable Interest Entities

We evaluate our variable interest entity (VIE) investees to determine whether the level of our direct ownership interest, our rights to manage operations or our obligation to provide ongoing financial support are such that we are the primary beneficiary of the entity, and would therefore be required to consolidate it for financial reporting purposes. None of our VIE investees were required to be consolidated for any reporting periods presented in this Form 10-Q. Our VIE investments are as follows:

 
March 31, 2015
 
December 31, 2014
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value
 
Maximum Exposure to Loss
 
(Dollars in thousands)
Real estate limited partnerships
$
17,288

 
$
17,288

 
$
17,046

 
$
17,046


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

Other

At March 31, 2015, we had committed to provide $45.4 million of additional funds for limited partnerships and limited liability companies in which we invest.

Derivative Instruments

We are not significantly involved in hedging activities and have limited exposure to derivatives. We do not apply hedge accounting to any of our derivative positions. Derivative assets, which are primarily reported in reinsurance recoverable and other investments, totaled $7.1 million at March 31, 2015 and at December 31, 2014. Securities collateral received of $2.1 million is held in a separate custodial account and not recorded on the balance sheet. Our derivative assets consist of derivatives embedded within our modified coinsurance agreements and call options which provide an economic hedge for our index annuity contracts. Derivative liabilities totaled $9.8 million at March 31, 2015 and $8.7 million at December 31, 2014 and include derivatives embedded within our index annuity contracts and derivatives embedded within our modified coinsurance agreements. The net gain recognized on these derivatives is included in net investment income and interest sensitive benefits and, for the three-month period ended March 31, totaled $0.3 million for 2015 and $0.5 million for 2014.



15


3. Fair Values

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

Fair Values and Carrying Values
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities - available for sale
$
6,833,252

 
$
6,833,252

 
$
6,700,698

 
$
6,700,698

Equity securities - available for sale
122,355

 
122,355

 
112,623

 
112,623

Mortgage loans
673,311

 
722,016

 
629,296

 
667,913

Policy loans
182,432

 
233,804

 
182,502

 
230,070

Other investments
3,313

 
3,313

 
3,558

 
3,558

Cash, cash equivalents and short-term investments
67,538

 
67,538

 
125,217

 
125,217

Reinsurance recoverable
3,820

 
3,820

 
3,562

 
3,562

Assets held in separate accounts
688,194

 
688,194

 
683,033

 
683,033

Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
3,629,682

 
$
3,783,109

 
$
3,563,558

 
$
3,666,960

Supplemental contracts without life contingencies
337,733

 
329,566

 
341,955

 
329,651

Advance premiums and other deposits
249,319

 
249,319

 
239,700

 
239,700

Long-term debt
97,000

 
73,720

 
97,000

 
69,772

Other liabilities
221

 
221

 
173

 
173

Liabilities related to separate accounts
688,194

 
682,492

 
683,033

 
677,040


Fair value is based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As not all financial instruments are actively traded, various valuation methods may be used to estimate fair value. These methods rely on observable market data and where observable market data is not available, the best information available. Significant judgment may be required to interpret the data and select the assumptions used in the valuation estimates, particularly when observable market data is not available.

In the discussion that follows, we have ranked our financial instruments by the level of judgment used in the determination of the fair values presented above. The levels are defined as follows:

Level 1 - Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Fair values are based on inputs, other than quoted prices from active markets, that are observable for the asset or liability, either directly or indirectly.

Level 3 - Fair values are based on significant unobservable inputs for the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. From time to time there may be movements between levels as inputs become more or less observable, which may depend on several factors including the activity of the market for the specific security, the activity of the market for similar securities, the level of risk spreads and the source from which we obtain the information. Transfers into or out of any level are measured as of the beginning of the period.



16


The following methods and assumptions were used in estimating the fair value of our financial instruments:

Fixed maturities:

Level 1 fixed maturities consist of U.S. Treasury issues that are actively traded, allowing us to use current market prices as an estimate of their fair value.

Level 2 fixed maturities consist of corporate, mortgage- and asset-backed, United States Government agencies and private placement securities with observable market data, and in some circumstances recent trade activity. When quoted prices of identical assets in active markets are not available, our first priority is to obtain prices from third party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2.

Also included in Level 2 are corporate bonds where quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread.

Level 3 fixed maturities include private placements as well as corporate, mortgage- and asset-backed and state and municipal securities for which there is little or no current market data available. We use external pricing sources, or if prices are not available we will estimate fair value internally. Fair values of private investments in Level 3 are determined by reference to the public market, private transactions or valuations for comparable companies or assets in the relevant asset class when such amounts are available. For other securities where an exit price based on relevant observable inputs is not obtained, the fair value is determined using a matrix calculation. Fair values estimated through the use of matrix pricing methods rely on an estimate of credit spreads to a risk-free U.S. Treasury yield. Selecting the credit spread requires judgment based on an understanding of the security and may include a market liquidity premium. Our selection of comparable companies as well as the level of spread requires significant judgment. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.

We obtain fixed maturity fair values from a variety of external independent pricing services, including brokers, with access to observable data including recent trade information, if available. In certain circumstances in which an external price is not available for a Level 3 security, we will internally estimate its fair value. Our process for evaluation and selection of the fair values includes:

We follow a “pricing waterfall” policy, which establishes the pricing source preference for a particular security or security type. The order of preference is based on our evaluation of the valuation methods used, the source's knowledge of the instrument and the reliability of the prices we have received from the source in the past. Our valuation policy dictates that fair values are initially sought from third party pricing services. If our review of the prices received from our preferred source indicates an inaccurate price, we will use an alternative source within the waterfall and document the decision. In the event that fair values are not available from one of our external pricing services or upon review of the fair values provided it is determined that they may not be reflective of market conditions, those securities are submitted to brokers familiar with the security to obtain non-binding price quotes. Broker quotes tend to be used in limited circumstances such as for newly issued, private placement and other instruments that are not widely traded. For those securities for which an externally provided fair value is not available, we use cash flow modeling techniques to estimate fair value.

We evaluate third party pricing source estimation methodologies to assess whether they will provide a fair value which approximates a market exit price.

We perform an overall analysis of portfolio fair value movement against general movements in interest rates and spreads.



17


We compare month-to-month price trends to detect unexpected price fluctuation based on our knowledge of the market and the particular instrument. As fluctuations are noted, we will perform further research which may include discussions with the original pricing source or other external sources to ensure we are in agreement with the valuation.

We compare prices between different pricing sources for unusual disparity.

We meet at least quarterly with our Investment Committee, the group that oversees our valuation process, to discuss valuation practices and observations during the pricing process.

Equity securities:

Level 1 equity securities consist of listed common stocks and mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value.

Level 2 equity securities consist of common stock issued by the Federal Home Loan Bank of Des Moines (FHLB), with estimated fair value based on the current redemption value of the shares and non-redeemable preferred stock. Estimated fair value is obtained from external pricing sources using a matrix pricing approach.

Level 3 equity securities consist of non-redeemable preferred stock for which no active market exists, and fair value estimates for these securities is based on the values of comparable securities which are actively traded. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.

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

Mortgage loans:

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

Policy loans:

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

Other investments:

Level 2 other investments include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty.

Cash, cash equivalents and short-term investments:

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



18


Reinsurance recoverable:

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

Assets held in separate accounts:

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

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

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

Certain annuity contracts include embedded derivatives and are measured at fair value on a recurring basis. These embedded derivatives are a Level 3 measurement. The fair value of the embedded derivatives is based on the discounted excess of projected account values (including a risk margin) over projected guaranteed account values. The key unobservable inputs required in the projection of future values which require management judgment include the risk margin as well as the credit risk of our company. Should the risk margin increase or the credit risk decrease, the discounted cash flows and the estimated fair value of the obligation will increase.

Long-term debt:

Long-term debt is not measured at fair value on a recurring basis. Long-term debt is a Level 3 measurement. The fair value of our outstanding debt is estimated using a discounted cash flow method based on the market's assessment or our current incremental borrowing rate for similar types of borrowing arrangements adjusted, as needed, to reflect our credit risk. Our selection of the credit spread requires significant judgment. A decrease in the spread will increase the estimated fair value of the outstanding debt.

Other liabilities:

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

Liabilities related to separate accounts:

Separate account liabilities are not measured at fair value on a recurring basis. Level 3 separate account liabilities' fair value is based on the cash surrender value of the underlying contract, which is the cost we would incur to extinguish the liability.



19


Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
 
 
March 31, 2015
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Corporate securities
$

 
$
3,667,326

 
$
73,699

 
$
3,741,025

Residential mortgage-backed securities

 
482,374

 
5,046

 
487,420

Commercial mortgage-backed securities

 
465,586

 
78,502

 
544,088

Other asset-backed securities

 
462,468

 
92,888

 
555,356

United States Government and agencies
16,083

 
16,874

 
9,156

 
42,113

State, municipal and other governments

 
1,463,250

 

 
1,463,250

Non-redeemable preferred stocks

 
83,698

 
8,352

 
92,050

Common stocks
4,537

 
25,768

 

 
30,305

Other investments

 
3,313

 

 
3,313

Cash, cash equivalents and short-term investments
67,538

 

 

 
67,538

Reinsurance recoverable

 
3,820

 

 
3,820

Assets held in separate accounts
688,194

 

 

 
688,194

Total assets
$
776,352

 
$
6,674,477

 
$
267,643

 
$
7,718,472

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$

 
$

 
$
9,591

 
$
9,591

Other liabilities

 
221

 

 
221

Total liabilities
$

 
$
221

 
$
9,591

 
$
9,812


 
December 31, 2014
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Corporate securities
$

 
$
3,602,667

 
$
64,239

 
$
3,666,906

Residential mortgage-backed securities

 
491,534

 

 
491,534

Commercial mortgage-backed securities

 
452,804

 
77,891

 
530,695

Other asset-backed securities

 
405,120

 
116,141

 
521,261

United States Government and agencies
15,170

 
18,569

 
9,065

 
42,804

State, municipal and other governments

 
1,447,498

 

 
1,447,498

Non-redeemable preferred stocks

 
76,987

 
8,054

 
85,041

Common stocks
3,501

 
24,081

 

 
27,582

Other investments

 
3,558

 

 
3,558

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

 

 

 
125,217

Reinsurance recoverable

 
3,562

 

 
3,562

Assets held in separate accounts
683,033

 

 

 
683,033

Total assets
$
826,921

 
$
6,526,380

 
$
275,390

 
$
7,628,691

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$

 
$

 
$
8,681

 
$
8,681

Other liabilities

 
173

 

 
173

Total liabilities
$

 
$
173

 
$
8,681

 
$
8,854



20


Level 3 Fixed Maturities by Valuation Source - Recurring Basis
 
 
 
March 31, 2015
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
39,799

 
$
33,900

 
$
73,699

Residential mortgage-backed securities
4,056

 
990

 
5,046

Commercial mortgage-backed securities
78,502

 

 
78,502

Other asset-backed securities
72,043

 
20,845

 
92,888

United States Government and agencies

 
9,156

 
9,156

Total
$
194,400

 
$
64,891

 
$
259,291

Percent of total
75.0
%
 
25.0
%
 
100.0
%

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

 
$
24,144

 
$
64,239

Commercial mortgage-backed securities
77,891

 

 
77,891

Other asset-backed securities
95,271

 
20,870

 
116,141

United States Government and agencies

 
9,065

 
9,065

Total
$
213,257

 
$
54,079

 
$
267,336

Percent of total
79.8
%
 
20.2
%
 
100.0
%

Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
March 31, 2015
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
50,482

 
Discounted cash flow
 
Credit spread
 
0.85% - 12.00% (6.97%)
Commercial mortgage-backed
78,502

 
Discounted cash flow
 
Credit spread
 
1.75% - 4.00% (2.94%)
Other asset-backed securities
19,184

 
Discounted cash flow
 
Credit spread
 
0.94% - 6.21% (4.30%)
United States Government and agencies
9,156

 
Discounted cash flow
 
Credit spread
 
1.85% (1.85%)
Non-redeemable preferred stocks
8,352

 
Discounted cash flow
 
Credit spread
 
3.00% (3.00%)
Total Assets
$
165,676

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
9,591

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.70% - 1.85% (1.15%)
0.15% - 0.40% (0.25%)



21


Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
December 31, 2014
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
41,491

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

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

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

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

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

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

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.70% - 1.70% (1.10%)
0.15% - 0.40% (0.25%)

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

Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
Purchases
 
Disposals
 
Included in net income
 
Included in other compre-hensive income
 
Net
transfers into
Level 3 (1)
 
Net transfers
out of
Level 3 (1)
 
Amort-ization included in net income
 
Balance,
March 31, 2015
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
64,239

 
$
2,993

 
$
(3,613
)
 
$

 
$
(4,190
)
 
$
14,165

 
$

 
$
105

 
$
73,699

Residential mortgage-backed securities

 
5,052

 

 

 
(6
)
 

 

 

 
5,046

Commercial mortgage-backed securities
77,891

 

 
(193
)
 

 
780

 

 

 
24

 
78,502

Other asset-backed securities
116,141

 
19,742

 
(3,876
)
 

 
(77
)
 

 
(39,095
)
 
53

 
92,888

United States Government and agencies
9,065

 

 

 

 
89

 

 

 
2

 
9,156

Non-redeemable preferred stocks
8,054

 

 

 

 
298

 

 

 

 
8,352

Total Assets
$
275,390

 
$
27,787

 
$
(7,682
)
 
$

 
$
(3,106
)
 
$
14,165

 
$
(39,095
)
 
$
184

 
$
267,643

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

 
$
1,067

 
$
(183
)
 
$
26

 
$

 
$

 
$

 
$

 
$
9,591

Total Liabilities
$
8,681

 
$
1,067

 
$
(183
)
 
$
26

 
$

 
$

 
$

 
$

 
$
9,591




22


Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
 
Purchases
 
Disposals
 
Included in net income
 
Included in other compre-hensive income
 
Net transfers into
Level 3 (1)
 
Net transfers
out of
Level 3 (1)
 
Amort-ization included in net income
 
Balance,
March 31, 2014
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
81,994

 
$
206

 
$
(2,835
)
 
$

 
$
(106
)
 
$
13,623

 
$

 
$
(10
)
 
$
92,872

Commercial mortgage-backed securities
71,712

 

 
(167
)
 

 
1,448

 

 

 
21

 
73,014

Other asset-backed securities
85,835

 
5,450

 
(3,129
)
 

 
(133
)
 

 
(7,194
)
 
243

 
81,072

United States Government and agencies
8,044

 

 

 

 
149

 

 

 
1

 
8,194

Non-redeemable preferred stocks
7,795

 

 

 

 
234

 

 

 

 
8,029

Total Assets
$
255,380

 
$
5,656

 
$
(6,131
)
 
$

 
$
1,592

 
$
13,623

 
$
(7,194
)
 
$
255

 
$
263,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
286

 
$

 
$
5

 
$
8

 
$

 
$

 
$

 
$

 
$
299

Total Liabilities
$
286

 
$

 
$
5

 
$
8

 
$

 
$

 
$

 
$

 
$
299


(1)
Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using non-binding broker quotes. Transfers out of Level 3 include those assets that we are now able to obtain pricing from a third party pricing vendor that uses observable inputs. There were no transfers between Level 1 and Level 2 during the periods presented above.

Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels
 
 
 
March 31, 2015
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Mortgage loans
$

 
$

 
$
722,016

 
$
722,016

Policy loans

 

 
233,804

 
233,804

Total assets
$

 
$

 
$
955,820

 
$
955,820

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
3,773,518

 
$
3,773,518

Supplemental contracts without life contingencies

 

 
329,566

 
329,566

Advance premiums and other deposits

 

 
249,319

 
249,319

Long-term debt

 

 
73,720

 
73,720

Liabilities related to separate accounts

 

 
682,492

 
682,492

Total liabilities
$

 
$

 
$
5,108,615

 
$
5,108,615




23


Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels
 
 
 
December 31, 2014
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Mortgage loans
$

 
$

 
$
667,913

 
$
667,913

Policy loans

 

 
230,070

 
230,070

Total assets
$

 
$

 
$
897,983

 
$
897,983

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
3,658,279

 
$
3,658,279

Supplemental contracts without life contingencies

 

 
329,651

 
329,651

Advance premiums and other deposits

 

 
239,700

 
239,700

Long-term debt

 

 
69,772

 
69,772

Liabilities related to separate accounts

 

 
677,040

 
677,040

Total liabilities
$

 
$

 
$
4,974,442

 
$
4,974,442


Level 3 Financial Instruments Measured at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate which have been deemed to be impaired during the reporting period. There were no mortgage loans or real estate impaired to fair value during the three months ended March 31, 2015 or March 31, 2014.


4. Defined Benefit Plan

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

Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Multiemployer Plan
 
 
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Service cost
$
1,488

 
$
1,320

Interest cost
3,300

 
3,505

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

 
36

Amortization of actuarial loss
2,598

 
1,361

Net periodic pension cost
$
2,959

 
$
1,837

 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
$
959

 
$
589



24


Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Other Plans
 
 
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Service cost
$
109

 
$
67

Interest cost
250

 
269

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

 
283

Net periodic pension cost
$
738

 
$
616

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

 
$
343

 

5. Commitments and Contingencies

Legal Proceedings

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


6. Stockholders' Equity

Share Repurchases

During 2012 and 2014, our Board of Directors approved plans to repurchase our Class A common stock. These repurchase plans authorize us to make repurchases in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Under these programs, we made no repurchases during the three months ended March 31, 2015. We repurchased 262,945 shares for $11.2 million during the three months ended March 31, 2014. At March 31, 2015, $42.7 million remains available for repurchase under the 2014 plan. Completion of the program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.

Special Dividend

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



25


Reconciliation of Outstanding Common Stock
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
(Dollars in thousands)
Outstanding at January 1, 2014
24,742,942

 
$
134,993

 
11,413

 
$
72

 
24,754,355

 
$
135,065

Issuance of common stock under compensation plans
210,442

 
6,411

 

 

 
210,442

 
6,411

Purchase of common stock
(262,945
)
 
(1,435
)
 

 

 
(262,945
)
 
(1,435
)
Outstanding at March 31, 2014
24,690,439

 
$
139,969

 
11,413

 
$
72

 
24,701,852

 
$
140,041

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2015
24,703,903

 
$
144,625

 
11,413

 
$
72

 
24,715,316

 
$
144,697

Issuance of common stock under compensation plans
81,568

 
2,682

 

 

 
81,568

 
2,682

Purchase of common stock

 

 

 

 

 

Outstanding at March 31, 2015
24,785,471

 
$
147,307

 
11,413

 
$
72

 
24,796,884

 
$
147,379


Accumulated Other Comprehensive Income, Net of Tax and Other Offsets
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses
 
Underfunded Status of Postretirement Benefit Plans
 
Total
 
(Dollars in thousands)
Balance at January 1, 2014
$
126,587

 
$
(1,366
)
 
$
(6,154
)
 
$
119,067

Other comprehensive income before reclassifications
66,801

 
2,179

 

 
68,980

Reclassification adjustments
328

 

 
172

 
500

Balance at March 31, 2014
$
193,716

 
$
813

 
$
(5,982
)
 
$
188,547

 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
266,211

 
$
1,131

 
$
(8,932
)
 
$
258,410

Other comprehensive income before reclassifications
28,515

 
425

 

 
28,940

Reclassification adjustments
247

 
$

 
231

 
478

Balance at March 31, 2015
$
294,973

 
$
1,556

 
$
(8,701
)
 
$
287,828


(1)
Includes the impact of taxes, deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves and policyholder liabilities. See Note 2 for further information.



26


Accumulated Other Comprehensive Income Reclassification Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses (1)
 
Underfunded Status of Postretirement Benefit
Plans
 
Total
 
(Dollars in thousands)
Realized capital losses on sales of investments
$
366

 
$

 
$

 
$
366

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

 

 

 
14

Other expenses: Change in unrecognized postretirement items:
 
 
 
 
 
 


Prior service costs

 

 
(3
)
 
(3
)
Net actuarial loss

 

 
358

 
358

Reclassifications before income taxes
380

 

 
355

 
735

Income taxes
(133
)
 

 
(124
)
 
(257
)
Reclassification adjustments
$
247

 
$

 
$
231

 
$
478

 
Three months ended March 31, 2014
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses (1)
 
Unfunded Status of Postretirement Benefit
Plans
 
Total
 
(Dollars in thousands)
Realized capital losses on sales of investments
$
540

 
$

 
$

 
$
540

Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
(36
)
 

 

 
(36
)
Other expenses: Change in unrecognized postretirement items:
 
 
 
 
 
 


Prior service costs

 

 
(3
)
 
(3
)
Net actuarial loss

 

 
268

 
268

Reclassifications before income taxes
504

 

 
265

 
769

Income taxes
(176
)
 

 
(93
)
 
(269
)
Reclassification adjustments
$
328

 
$

 
$
172

 
$
500


(1)
See Note 2 for further information.



27


7. Earnings Per Share

Computation of Earnings Per Common Share
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands, except per share data)
Numerator:
 
 
 
Net income attributable to FBL Financial Group, Inc.
$
23,591

 
$
22,992

Less: Dividends on Series B preferred stock
38

 
38

Income available to common stockholders
$
23,553

 
$
22,954

 
 
 
 
Denominator:
 
 
 
Weighted average shares - basic
24,899,278

 
24,937,307

Effect of dilutive securities - stock-based compensation
109,300

 
179,531

Weighted average shares - diluted
25,008,578

 
25,116,838

 
 
 
 
Earnings per common share
$
0.95

 
$
0.92

Earnings per common share - assuming dilution:
$
0.94

 
$
0.91

 
No antidilutive stock options were excluded from diluted earnings per share in either period presented.


8. Segment Information

We analyze operations by reviewing financial information regarding our primary products that are aggregated into the Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company.

We analyze our segment results based on pre-tax operating income. Accordingly, income taxes are not allocated to the segments. In addition, operating results are reported net of transactions between the segments. Operating income represents net income excluding the impact of realized gains and losses on investments and changes in net unrealized gains and losses on derivatives.

We use operating income, in addition to net income, to measure our performance since realized gains and losses on investments and the change in net unrealized gains and losses on derivatives can fluctuate greatly from quarter to quarter. A view of our operating performance without the impact of these items enhances the analysis of our results. We use operating income for goal setting, determining short-term incentive compensation and evaluating performance on a basis comparable to that used by many in the investment community.



28


Financial Information Concerning our Operating Segments
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Operating revenues:
 
 
 
Annuity
$
52,759

 
$
49,579

Life Insurance
102,010

 
95,817

Corporate and Other
23,705

 
23,369

 
178,474

 
168,765

Net realized losses on investments (1)
(366
)
 
(540
)
Change in net unrealized gains/losses on derivatives (1)
(162
)
 
310

Consolidated revenues
$
177,946

 
$
168,535

 
 
 
 
Pre-tax operating income:
 
 
 
Annuity
$
17,088

 
$
15,447

Life Insurance
9,785

 
10,092

Corporate and Other
3,496

 
4,593

 
30,369

 
30,132

Income taxes on operating income
(6,554
)
 
(7,048
)
Net realized gains/losses on investments (1)
(247
)
 
(328
)
Change in net unrealized gains/losses on derivatives (1)
23

 
236

Consolidated net income attributable to FBL Financial Group, Inc.
$
23,591

 
$
22,992


(1)
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired and income taxes attributable to these items.

Our investment in equity method investees, the related equity income and interest expense are attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significant during the periods presented above. Goodwill at March 31, 2015 and December 31, 2014 was allocated among the segments as follows: Annuity ($3.9 million) and Life Insurance ($6.1 million).

Premiums collected, which is not a measure used in financial statements prepared according to GAAP, includes premiums received on life insurance policies and deposits on annuities and universal life-type products. Net premiums collected totaled $166.2 million for the quarter ended March 31, 2015 and $178.7 million for the 2014 period.

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

Reconciliation of Traditional Life Insurance Premiums, Net of Reinsurance
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Traditional and universal life insurance premiums collected
$
71,215

 
$
72,838

Premiums collected on interest sensitive products
(23,691
)
 
(26,388
)
Traditional life insurance premiums collected
47,524

 
46,450

Change in due premiums and other
(376
)
 
(958
)
Traditional life insurance premiums
$
47,148

 
$
45,492




29


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 March 31,
 
2015
 
2014
 
(Dollars in thousands)
Annuity
 
 
 
Surrender charges and other
$
613

 
$
554

 
 
 
 
Life Insurance
 
 
 
Administration charges
$
3,697

 
$
3,495

Cost of insurance charges
11,492

 
11,017

Surrender charges
217

 
216

Amortization of policy initiation fees
499

 
32

Total
$
15,905

 
$
14,760

 
 
 
 
Corporate and Other
 
 
 
Administration charges
$
1,517

 
$
1,599

Cost of insurance charges
7,424

 
7,415

Surrender charges
108

 
138

Separate account charges
2,239

 
2,280

Amortization of policy initiation fees
315

 
345

Total
$
11,603

 
$
11,777

 
 
 
 
Consolidated interest sensitive product charges
$
28,121

 
$
27,091




30


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

This section includes a summary of FBL Financial Group, Inc.'s consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its life insurance subsidiary, Farm Bureau Life Insurance Company (Farm Bureau Life). Please read this discussion in conjunction with the accompanying consolidated financial statements and related notes. In addition, we encourage you to refer to our Form 10-K for the fiscal year ended December 31, 2014 for a complete description of our significant accounting policies and estimates. Familiarity with this information is important in understanding our financial position and results of operations.

This Form 10-Q includes statements relating to anticipated financial performance, business prospects, new products, and similar matters. These statements and others, which include words such as "expect," "anticipate," "believe," "intend" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. A variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. See Part 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for additional information on the risks and uncertainties that may affect the operations, performance, development and results of our business.

Overview

We operate predominantly in the life insurance industry through our principal subsidiary, Farm Bureau Life. Farm Bureau Life markets individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in the Midwestern and Western sections of the United States through an exclusive agency force. Several subsidiaries support various functional areas of Farm Bureau Life and other affiliates by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau-affiliated property-casualty companies.

We analyze operations by reviewing financial information regarding our primary products that are aggregated in Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company. We analyze our segment results based on pre-tax operating income, which excludes the impact of certain items that are included in net income. See Note 8 to our consolidated financial statements for further information regarding how we define our segments and operating income.

We also include within our analysis “premiums collected,” which is not a measure used in financial statements prepared in accordance with GAAP, but is a common industry measure of agent productivity. See Note 8 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.

Impact of Recent Business Environment
 
Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economy characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies during such times. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations, cash flows or financial condition.

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

Gross Domestic Product increased approximately 0.2% during the first quarter of 2015 based on early estimates.
U.S. unemployment was estimated to be 5.5% during March 2015.
U.S. net farm income is forecast to decrease 31.8% and farm real estate value is forecast to decrease 0.8% during 2015.
The U.S. 10-year Treasury yield declined during the first quarter to 1.94% at March 31, 2015.
Continued uncertainty as to actions the United States Congress will take to address the national debt, including potential actions to change the tax advantages of life insurance.



31


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


Results of Operations for the Periods Ended March 31, 2015 and 2014

 
Three months ended March 31,
 
2015
 
2014
 
Change
 
(Dollars in thousands, except per share data)
Pre-tax operating income:
 
 
 
 
 
Annuity segment
$
17,088

 
$
15,447

 
11
 %
Life Insurance segment
9,785

 
10,092

 
(3
)%
Corporate and Other segment
3,496

 
4,593

 
(24
)%
Total pre-tax operating income
30,369

 
30,132

 
1
 %
Income taxes on operating income
(6,554
)
 
(7,048
)
 
(7
)%
Operating income
23,815

 
23,084

 
3
 %
 
 
 
 
 
 
Realized gains/losses on investments (1)
(247
)
 
(328
)
 
(25
)%
Change in net unrealized gains/losses on derivatives (1)
23

 
236

 
(90
)%
Net income attributable to FBL Financial Group, Inc.
$
23,591

 
$
22,992

 
3
 %
 
 
 
 
 

Operating income per common share - assuming dilution
$
0.95

 
$
0.92

 
3
 %
Earnings per common share - assuming dilution
0.94

 
0.91

 
3
 %
Effective tax rate on operating income
22
%
 
23
%
 

Average invested assets, at amortized cost
$
7,153,345

 
$
6,810,577

 
5
 %
Annualized yield on average invested assets
5.66
%
 
5.57
%
 


(1)
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired and income taxes attributable to these items.

Our operating and net income increased in the first quarter of 2015, compared to the prior year period, primarily due to increases in the volume of business in force and investment fee income, partially offset by an increase in death benefits. See the discussion that follows for details regarding operating income by segment.

Earnings per share and operating income per common share benefited from repurchases of Class A common shares in 2014. Details regarding the share repurchases are included in Note 6 to the consolidated financial statements.



32


Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
Interest sensitive product charges and other income
$
613

 
$
554

 
11
%
Net investment income
52,146

 
49,025

 
6
%
Total operating revenues
52,759

 
49,579

 
6
%
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
Interest sensitive product benefits
27,453

 
26,755

 
3
%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
Commissions net of deferrals
546

 
454

 
20
%
Amortization of deferred acquisition costs
2,729

 
2,461

 
11
%
Amortization of value of insurance in force
202

 
143

 
41
%
Other underwriting expenses
4,741

 
4,319

 
10
%
Total underwriting, acquisition and insurance expenses
8,218

 
7,377

 
11
%
Total benefits and expenses
35,671

 
34,132

 
5
%
Pre-tax operating income
$
17,088

 
$
15,447

 
11
%

Other data
 
 
 
 
 
Annuity premiums collected, direct
$
76,335

 
$
86,252

 
(11
)%
Policy liabilities and accruals, end of period
3,806,556

 
3,607,425

 
6
 %
Average invested assets, at amortized cost
3,883,858

 
3,666,791

 
6
 %
Investment fee income included in net investment income (1)
2,398

 
880

 
173
 %
Average individual annuity account value
2,624,384

 
2,484,000

 
6
 %
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
Weighted average yield on cash and invested assets
5.57
%
 
5.62
%
 
 
Weighted average interest crediting rate
2.81
%
 
2.93
%
 
 
Spread
2.76
%
 
2.69
%
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
4.4
%
 
5.2
%
 
 

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

Pre-tax operating income for the Annuity segment increased in the first quarter of 2015, compared to the prior year period, due to higher spread income earned from an increase in the volume of business in force and higher investment fee income.

The average aggregate account value for individual annuity contracts in force increased in 2015, compared to prior year period, due to continued sales and the crediting of interest. Premiums collected were lower in the 2015 period due to decreases in sales of fixed rate deferred annuities. The amount of premiums collected is highly dependent upon the relationship between the current crediting rate of our products compared to those of competing products.

The Annuity segment also includes advances on our funding agreements with the Federal Home Loan Bank of Des Moines (FHLB). Outstanding funding agreements totaled $400.9 million at March 31, 2015 and $334.4 million at March 31, 2014.

The weighted average yield on cash and invested assets for individual annuities decreased for the three months ended March 31, 2015, compared to the prior year period, primarily due to lower yields on new investment acquisitions from premium


33


receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by higher investment fee income. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our individual annuity products decreased due to crediting rate actions taken in 2014 in response to the declining portfolio yield and a change in the underlying product mix.

Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
Interest sensitive product charges and other income
$
15,818

 
$
14,675

 
8
 %
Traditional life insurance premiums
47,148

 
45,492

 
4
 %
Net investment income
39,044

 
35,650

 
10
 %
Total operating revenues
102,010

 
95,817

 
6
 %
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 

Interest sensitive product benefits:
 
 
 
 

Interest credited
8,185

 
8,002

 
2
 %
Death benefits and other
12,515

 
11,410

 
10
 %
Total interest sensitive product benefits
20,700

 
19,412

 
7
 %
Traditional life insurance benefits:
 
 
 
 

Death benefits
24,375

 
19,754

 
23
 %
Surrender and other benefits
7,282

 
9,009

 
(19
)%
Increase in traditional life future policy benefits
14,052

 
12,734

 
10
 %
Total traditional life insurance benefits
45,709

 
41,497

 
10
 %
Distributions to participating policyholders
2,961

 
3,345

 
(11
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 

Commission expense, net of deferrals
4,627

 
4,152

 
11
 %
Amortization of deferred acquisition costs
3,966

 
3,831

 
4
 %
Amortization of value of insurance in force
379

 
306

 
24
 %
Other underwriting expenses
13,883

 
13,182

 
5
 %
Total underwriting, acquisition and insurance expenses
22,855

 
21,471

 
6
 %
Total benefits and expenses
92,225

 
85,725

 
8
 %
Pre-tax operating income
$
9,785

 
$
10,092

 
(3
)%



34


Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Other data
 
 
 
 
 
Life premiums collected, net of reinsurance
$
71,215

 
$
72,838

 
(2
)%
Policy liabilities and accruals, end of period
2,613,024

 
2,482,578

 
5
 %
Life insurance in force, end of period
52,533,816

 
49,594,860

 
6
 %
Average invested assets, at amortized cost
2,637,202

 
2,497,940

 
6
 %
Investment fee income included in net investment income (1)
2,454

 
96

 
2,456
 %
Average interest sensitive life account value
783,116

 
746,624

 
5
 %
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
Weighted average yield on cash and invested assets
6.58
%
 
5.80
%
 
 
Weighted average interest crediting rate
3.89
%
 
4.03
%
 
 
Spread
2.69
%
 
1.77
%
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
5.4
%
 
5.5
%
 
 
Death benefits, net of reinsurance and reserves released
$
24,491

 
$
20,613

 
19
 %

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

Pre-tax operating income for the Life Insurance segment decreased in the first quarter of 2015, compared to the prior year period, primarily due to an increase in death benefits, partially offset by increases in the volume of business in force and investment fee income.

Premiums collected were lower in the first quarter of 2015, compared to the prior year period, primarily due to changes in universal life sales. Universal life collected premiums were $24.2 million in the first quarter of 2015 and $26.8 million in the first quarter of 2014. Continued growth in our business in force contributes to the increase in revenues and expenses.

Death benefits, net of reinsurance and reserves released, increased in the first quarter of 2015, compared to the prior year period, primarily due to an increase in the number claims.

The weighted average yield on cash and invested assets for interest sensitive life insurance products increased in the first quarter of 2015, compared to the prior year period, due to an increase in investment fee income from prepayment fees, partially offset by lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our interest sensitive life insurance products were impacted by crediting rate decreases taken in 2014 in response to the declining portfolio yield, partially offset by sales of products with higher crediting rates.




35


Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
Interest sensitive product charges
$
11,603

 
$
11,777

 
(1
)%
Net investment income
7,745

 
7,646

 
1
 %
Other income
4,357

 
3,946

 
10
 %
Total operating revenues
23,705

 
23,369

 
1
 %
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
Interest sensitive product benefits
7,672

 
7,334

 
5
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
Commission expense, net of deferrals
964

 
1,047

 
(8
)%
Amortization of deferred acquisition costs
1,763

 
1,655

 
7
 %
Other underwriting expenses
1,908

 
1,863

 
2
 %
Total underwriting, acquisition and insurance expenses
4,635

 
4,565

 
2
 %
Interest expense
1,212

 
1,212

 
 %
Other expenses
4,530

 
4,128

 
10
 %
Total benefits and expenses
18,049

 
17,239

 
5
 %
 
5,656

 
6,130

 
(8
)%
Net loss attributable to noncontrolling interest
21

 
43

 
(51
)%
Equity loss, before tax
(2,181
)
 
(1,580
)
 
38
 %
Pre-tax operating income
$
3,496

 
$
4,593

 
(24
)%
Other data
 
 
 
 
 
Average invested assets, at amortized cost
$
632,284

 
$
645,847

 
(2
)%
Investment fee income included in net investment income (1)
200

 
(14
)
 
(1,529
)%
Average interest sensitive life account value
337,161

 
330,153

 
2
 %
Death benefits, net of reinsurance and reserves released
4,649

 
4,350

 
7
 %
Estimated impact on pre-tax income from separate account performance on amortization of deferred acquisition costs
(48
)
 
(145
)
 
(67
)%

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

Pre-tax operating income decreased for the Corporate and Other segment in the first quarter of 2015, compared to the prior year period, primarily due to an increase in pre-tax equity loss.

Other income and other expenses includes fees and expenses from sales of brokered products and operating results of our non-insurance subsidiaries, which include management, advisory, marketing and distribution services and leasing activities.

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


36


losses, but after-tax gains, as the related tax credits are realized. The timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and the approval of tax credits. Equity income, net of related income taxes, was as follows:

Equity Income, Net of Related Income Taxes
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Equity income (loss):
 
 
 
Low income housing tax credit partnerships
$
(1,845
)
 
$
(1,761
)
Other equity method investments
(336
)
 
181

 
(2,181
)
 
(1,580
)
Income taxes:
 
 
 
Taxes on equity income (loss)
763

 
566

Investment tax credits
3,187

 
2,662

Equity income, net of related income taxes
$
1,769

 
$
1,648


Income Taxes on Operating Income

The effective tax rate on operating income was 21.6% for the first quarter of 2015, compared with 23.4% for the first quarter of 2014. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of low-income housing tax credits from equity method investees and tax-exempt interest and dividend income. The 2015 effective tax rate decreased, compared to the prior year period, primarily due to an increase in tax credits from low income housing tax credit partnerships.

Impact of Operating Income Adjustments on FBL Net Income
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Realized losses on investments
$
(366
)
 
$
(540
)
Change in net unrealized gains/losses on derivatives
(145
)
 
431

Change in amortization of:
 
 
 
Deferred acquisition costs
168

 
(34
)
Value of insurance in force acquired
(1
)
 
3

Income tax offset
120

 
48

Net impact of operating income adjustments
$
(224
)
 
$
(92
)

Summary of adjustments noted above after offsets and income taxes:
 
 
 
Realized gains/losses on investments
$
(247
)
 
$
(328
)
Change in net unrealized gains/losses on derivatives
23

 
236

Net impact of operating income adjustments
$
(224
)
 
$
(92
)
Net impact per common share - basic
$
(0.01
)
 
$

Net impact per common share - assuming dilution
$
(0.01
)
 
$
(0.01
)

Income taxes on operating income adjustments on continuing operations are recorded at 35% as there are no permanent differences between book and taxable income relating to these adjustments.



37


Realized Gains (Losses) on Investments
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
 
(Dollars in thousands)
Realized gains (losses) on investments:
 
 
 
Realized gains on sales
$
220

 
$
97

Realized losses on sales
(586
)
 
(637
)
Total reported in statements of operations
$
(366
)
 
$
(540
)

The level of realized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate, economic environment and timing of the sale of investments. See "Financial Condition - Investments" and Note 2 to our consolidated financial statements for details regarding our unrealized gains and losses on available-for-sale securities at March 31, 2015 and December 31, 2014.
 
 
 
 
Financial Condition

Investments

Our investment portfolio increased 2.1% to $7,841.6 million at March 31, 2015 compared to $7,681.0 million at December 31, 2014. The portfolio increased due to an increase of $63.5 million of net unrealized appreciation of fixed maturities during 2015 and positive cash flows from operating and financing activities. Additional details regarding securities in an unrealized loss position at March 31, 2015 are included in the discussion that follows and in Note 2 to our consolidated financial statements. Details regarding investment impairments are discussed above in the "Realized Gains (Losses) on Investments" section under "Results of Operations."
 
We manage the investment portfolio to optimize risk-adjusted yield within the context of prudent asset-liability management. We evaluate multiple cash flow testing scenarios as part of this process. The Company's investment policy calls for investing primarily in high quality fixed maturities and commercial mortgage loans.

Fixed Maturity Acquisitions Selected Information
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2015
 
2014
 
 
(Dollars in thousands)
Cost of acquisitions:
 
 
 
 
Corporate
 
$
77,511

 
$
78,514

Mortgage- and asset-backed
 
79,230

 
87,685

United States Government and agencies
 
1,500

 
499

Tax-exempt municipals
 
3,975

 

Taxable municipals
 
28,174

 
15,078

Total
 
$
190,390

 
$
181,776

Effective annual yield
 
4.08
%
 
4.69
%
Credit quality
 
 
 
 
NAIC 1 designation
 
55.2
%
 
65.2
%
NAIC 2 designation
 
44.3
%
 
34.8
%
Non-investment grade
 
0.5
%
 
%
Weighted-average life in years
 
14.0

 
16.0
The table above summarizes selected information for fixed maturity purchases. The effective annual yield shown is the yield calculated to the "worst-call date." For noncallable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call or maturity date that produces the lowest yield. The weighted-average maturity is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average maturity is equal to the stated maturity date.


38



A portion of the securities acquired during the three months ended March 31, 2015 and March 31, 2014, were acquired with the proceeds from advances on our funding agreements with the FHLB. The securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products, due to the shorter maturity and relatively low interest rate paid on those advances. In addition, certain municipal securities acquired are exempt from federal income taxes, and accordingly have a higher actual return than reflected in the yields stated above. The average yield of the securities acquired, excluding the securities supporting the funding agreements and using a tax-adjusted yield for the municipal securities, was 4.50% during the three-month period ended March 31, 2015 and 4.93% during the three-month period ended March 31, 2014.

Investment Portfolio Summary 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
(Dollars in thousands)
Fixed maturities - available for sale:
 
 
 
 
 
 
 
Public
$
5,215,845

 
66.5
%
 
$
5,151,922

 
67.1
%
144A private placement
1,315,052

 
16.8

 
1,245,474

 
16.2

Private placement
302,355

 
3.9

 
303,302

 
4.0

Total fixed maturities - available for sale
6,833,252

 
87.2

 
6,700,698

 
87.3

Equity securities
122,355

 
1.6

 
112,623

 
1.5

Mortgage loans
673,311

 
8.6

 
629,296

 
8.2

Real estate
3,613

 

 
3,622

 

Policy loans
182,432

 
2.3

 
182,502

 
2.4

Short-term investments
23,262

 
0.3

 
48,585

 
0.6

Other investments
3,400

 

 
3,644

 

Total investments
$
7,841,625

 
100.0
%
 
$
7,680,970

 
100.0
%

As of March 31, 2015, 96.1% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of March 31, 2015, no single non-investment grade holding exceeded 0.2% of total investments.

Credit Quality by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
NAIC Designation
 
Equivalent Rating (1)
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
4,321,672

 
63.2
%
 
$
4,252,851

 
63.5
%
2
 
BBB
 
2,247,626

 
32.9

 
2,204,791

 
32.9

 
 
Total investment grade
 
6,569,298

 
96.1

 
6,457,642

 
96.4

3
 
BB
 
181,171

 
2.7

 
166,757

 
2.5

4
 
B
 
41,663

 
0.6

 
37,887

 
0.5

5
 
CCC
 
19,959

 
0.3

 
18,771

 
0.3

6
 
In or near default
 
21,161

 
0.3

 
19,641

 
0.3

 
 
Total below investment grade
 
263,954

 
3.9

 
243,056

 
3.6

 
 
Total fixed maturities - available for sale
 
$
6,833,252

 
100.0
%
 
$
6,700,698

 
100.0
%

(1)
Equivalent ratings are based on those provided by nationally recognized rating agencies with some exceptions for certain residential mortgage, commercial mortgage- and asset-backed securities where they are based on the expected loss of the security rather than the probability of default.
 


39


See Note 2 to our consolidated financial statements for a summary of fixed maturities by contractual maturity date.

Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
 
 
 
March 31, 2015
 
Total Carrying Value
 
Carrying
Value of
Securities
with Gross
Unrealized
Gains
 
Gross Unrealized Gains
 
Carrying Value of Securities
with Gross Unrealized Losses
 
Gross Unrealized Losses
 
(Dollars in thousands)
Corporate securities:
 
 
 
 
 
 
 
 
 
Basic industrial
$
368,286

 
$
327,202

 
$
31,380

 
$
41,084

 
$
(2,930
)
Capital goods
231,366

 
223,574

 
26,283

 
7,792

 
(168
)
Communications
131,124

 
124,191

 
15,148

 
6,933

 
(17
)
Consumer cyclical
115,068

 
115,068

 
11,509

 

 

Consumer non-cyclical
411,629

 
395,841

 
37,396

 
15,788

 
(1,628
)
Energy
414,203

 
317,754

 
37,644

 
96,449

 
(11,244
)
Finance
794,954

 
766,287

 
66,940

 
28,667

 
(152
)
Transportation
95,642

 
91,751

 
9,299

 
3,891

 
(77
)
Utilities
1,029,809

 
967,211

 
146,473

 
62,598

 
(3,974
)
Other
148,944

 
136,270

 
10,214

 
12,674

 
(187
)
Total corporate securities
3,741,025

 
3,465,149

 
392,286

 
275,876

 
(20,377
)
Mortgage- and asset-backed securities
1,586,864

 
1,375,868

 
120,429

 
210,996

 
(8,392
)
United States Government and agencies
42,113

 
42,113

 
4,674

 

 

State, municipal and other governments
1,463,250

 
1,440,184

 
164,244

 
23,066

 
(102
)
Total
$
6,833,252

 
$
6,323,314

 
$
681,633

 
$
509,938

 
$
(28,871
)

 
December 31, 2014
 
Total Carrying Value
 
Carrying
Value of
Securities
with Gross
Unrealized
Gains
 
Gross Unrealized Gains
 
Carrying Value of Securities
with Gross Unrealized Losses
 
Gross Unrealized Losses
 
(Dollars in thousands)
Corporate securities:
 
 
 
 
 
 
 
 
 
Basic industrial
$
356,761

 
$
299,688

 
$
25,221

 
$
57,073

 
$
(3,505
)
Capital goods
229,901

 
221,692

 
22,954

 
8,209

 
(73
)
Communications
124,387

 
117,560

 
12,420

 
6,827

 
(123
)
Consumer cyclical
196,957

 
187,587

 
14,536

 
9,370

 
(22
)
Consumer non-cyclical
402,033

 
365,482

 
32,353

 
36,551

 
(1,653
)
Energy
409,642

 
319,393

 
35,579

 
90,249

 
(6,571
)
Finance
777,484

 
738,003

 
61,405

 
39,481

 
(491
)
Transportation
87,172

 
84,190

 
8,457

 
2,982

 
(295
)
Utilities
1,008,174

 
923,312

 
130,003

 
84,862

 
(4,807
)
Other
74,395

 
63,635

 
6,009

 
10,760

 
(26
)
Total corporate securities
3,666,906

 
3,320,542

 
348,937

 
346,364

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

 
1,291,575

 
105,271

 
251,915

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

 
41,834

 
4,581

 
970

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

 
1,435,026

 
157,571

 
12,472

 
(113
)
Total
$
6,700,698

 
$
6,088,977

 
$
616,360

 
$
611,721

 
$
(27,095
)



40


Non-Sovereign European Debt Exposure
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
Italy
$
19,708

 
$
22,410

 
$
19,707

 
$
22,547

Spain
15,430

 
20,674

 
15,430

 
20,281

Ireland
12,286

 
14,514

 
12,744

 
15,028

Subtotal
47,424

 
57,598

 
47,881

 
57,856

United Kingdom
180,867

 
197,448

 
182,879

 
196,476

Netherlands
55,424

 
61,926

 
54,576

 
60,225

France
28,203

 
32,568

 
37,218

 
41,086

Other countries
88,349

 
97,820

 
86,370

 
93,955

Subtotal
352,843

 
389,762

 
361,043

 
391,742

Total European exposure
$
400,267

 
$
447,360

 
$
408,924

 
$
449,598


The table above reflects our exposure to non-sovereign European debt. This represents 6.5% of total fixed maturities as of March 31, 2015 and 6.7% as of December 31, 2014. The exposures are primarily in the industrial, financial and utility sectors. We do not own any securities issued by European governments.

Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
NAIC Designation
 
Equivalent Rating
 
Carrying Value of Securities with Gross Unrealized Losses
 
Percent of Total
 
Gross Unrealized Losses
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
237,117

 
46.5
%
 
$
(5,981
)
 
20.7
%
2
 
BBB
 
181,007

 
35.5

 
(9,476
)
 
32.8

 
 
Total investment grade
 
418,124

 
82.0

 
(15,457
)
 
53.5

3
 
BB
 
63,099

 
12.4

 
(10,599
)
 
36.7

4
 
B
 
20,507

 
4.0

 
(2,548
)
 
8.8

5
 
CCC
 
8,208

 
1.6

 
(267
)
 
1.0

 
 
Total below investment grade
 
91,814

 
18.0

 
(13,414
)
 
46.5

 
 
Total
 
$
509,938

 
100.0
%
 
$
(28,871
)
 
100.0
%

 
 
 
 
December 31, 2014
NAIC Designation
 
Equivalent Rating
 
Carrying Value of Securities with Gross Unrealized Losses
 
Percent of Total
 
Gross Unrealized Losses
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
296,390

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

 
39.3

 
(10,795
)
 
39.8

 
 
Total investment grade
 
536,698

 
87.8

 
(18,205
)
 
67.2

3
 
BB
 
61,995

 
10.1

 
(7,667
)
 
28.3

4
 
B
 
6,134

 
1.0

 
(636
)
 
2.3

5
 
CCC
 
6,894

 
1.1

 
(587
)
 
2.2

 
 
Total below investment grade
 
75,023

 
12.2

 
(8,890
)
 
32.8

 
 
Total
 
$
611,721

 
100.0
%
 
$
(27,095
)
 
100.0
%



41


Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
March 31, 2015
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
Fair Value is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
(Dollars in thousands)
Three months or less
$

 
$
196,811

 
$

 
$
(4,903
)
Greater than three months to six months
8,814

 
72,854

 
(2,772
)
 
(2,852
)
Greater than six months to nine months

 
68,152

 

 
(4,789
)
Greater than nine months to twelve months

 
9,997

 

 
(684
)
Greater than twelve months
7,788

 
174,393

 
(2,068
)
 
(10,803
)
Total
$
16,602

 
$
522,207

 
$
(4,840
)
 
$
(24,031
)

 
December 31, 2014
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
is Less than 75% of Cost
 
Fair Value is 75% or Greater than Cost
 
Fair Value is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
(Dollars in thousands)
Three months or less
$

 
$
223,846

 
$

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

 
110,035

 

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

 
16,353

 

 
(625
)
Greater than nine months to twelve months

 
22,855

 

 
(487
)
Greater than twelve months
7,397

 
258,330

 
(2,341
)
 
(12,334
)
Total
$
7,397

 
$
631,419

 
$
(2,341
)
 
$
(24,754
)

Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
 
Carrying Value of Securities with Gross Unrealized Losses
 
Gross
Unrealized
Losses
 
Carrying Value of Securities with Gross Unrealized Losses
 
Gross
Unrealized
Losses
 
(Dollars in thousands)
Due in one year or less
$
6,371

 
$
(142
)
 
$
4,518

 
$
(496
)
Due after one year through five years
17,742

 
(2,533
)
 
17,499

 
(477
)
Due after five years through ten years
57,043

 
(3,632
)
 
61,928

 
(4,332
)
Due after ten years
217,786

 
(14,172
)
 
275,861

 
(12,378
)
 
298,942

 
(20,479
)
 
359,806

 
(17,683
)
Mortgage- and asset-backed
210,996

 
(8,392
)
 
251,915

 
(9,412
)
Total
$
509,938

 
$
(28,871
)
 
$
611,721

 
$
(27,095
)

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

Mortgage- and Asset-Backed Securities

Mortgage-backed and other asset-backed securities are purchased when we believe these types of investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity.



42


Mortgage- and Asset-Backed Securities by Type
 
 
 
 
 
 
 
 
 
March 31, 2015
 
Amortized Cost
 
Par Value
 
Carrying
Value
 
Percent of Fixed Maturities
 
(Dollars in thousands)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Sequential
$
287,543

 
$
341,046

 
$
313,371

 
4.6
%
Pass-through
19,394

 
19,371

 
21,743

 
0.3

Planned and targeted amortization class
133,480

 
131,928

 
144,536

 
2.1

Other
6,265

 
8,936

 
7,770

 
0.1

Total residential mortgage-backed securities
446,682

 
501,281

 
487,420

 
7.1

Commercial mortgage-backed securities
487,521

 
506,766

 
544,088

 
8.0

Other asset-backed securities
540,624

 
577,379

 
555,356

 
8.1

Total
$
1,474,827

 
$
1,585,426

 
$
1,586,864

 
23.2
%

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

 
$
346,546

 
$
316,556

 
4.7
%
Pass-through
20,223

 
20,193

 
22,407

 
0.3

Planned and targeted amortization class
135,534

 
133,976

 
144,670

 
2.2

Other
6,281

 
9,019

 
7,901

 
0.1

Total residential mortgage-backed securities
453,607

 
509,734

 
491,534

 
7.3

Commercial mortgage-backed securities
485,934

 
506,091

 
530,695

 
7.9

Other asset-backed securities
508,090

 
546,440

 
521,261

 
7.8

Total
$
1,447,631

 
$
1,562,265

 
$
1,543,490

 
23.0
%

The residential mortgage-backed portfolio includes government agency pass-through and collateralized mortgage obligation (CMO) securities. With a government agency pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds.

The commercial mortgage-backed securities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less subject to refinance risk than residential mortgage-backed securities principally due to prepayment restrictions on many of the underlying commercial mortgage loans.

The other asset-backed securities are backed by both residential and non-residential collateral. The collateral for residential asset-backed securities primarily consists of second lien fixed-rate home equity loans. The cash flows of these securities are less subject to prepayment risk than residential mortgage-backed securities as the borrowers are less likely to refinance than those with only a first lien mortgage. The collateral for non-residential asset-backed securities primarily includes securities backed by credit card receivables, auto dealer receivables, auto installment loans, aircraft leases, middle market and syndicated business loans, timeshare receivables and trade and account receivables. These securities are high quality, short-duration assets with limited cash flow variability.

Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans. We also have a partnership interest in two funds at March 31, 2015 and at December 31, 2014, that own securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The funds are reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of $10.4 million at March 31, 2015 and $14.2 million at December 31, 2014.



43


Mortgage- and Asset-Backed Securities by Collateral Type
 
 
 
March 31, 2015
 
December 31, 2014
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
(Dollars in thousands)
Government agency
$
203,609

 
$
224,238

 
3.3
%
 
$
206,397

 
$
223,478

 
3.3
%
Prime
126,485

 
138,282

 
2.0

 
127,434

 
139,954

 
2.1

Alt-A
155,630

 
169,558

 
2.5

 
160,111

 
174,230

 
2.6

Subprime
63,872

 
61,060

 
0.9

 
72,132

 
69,421

 
1.0

Commercial mortgage
487,521

 
544,088

 
8.0

 
485,934

 
530,695

 
7.9

Non-mortgage
437,710

 
449,638

 
6.5

 
395,623

 
405,712

 
6.1

Total
$
1,474,827

 
$
1,586,864

 
23.2
%
 
$
1,447,631

 
$
1,543,490

 
23.0
%

The mortgage- and asset-backed securities can be summarized into three broad categories: residential, commercial and other asset-backed securities.
 
Residential Mortgage-Backed Securities by Collateral Type and Origination Year
 
 
 
 
 
March 31, 2015
 
Government & Prime
 
Alt-A
 
Subprime
 
Total
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
2015-2008
$
172,968

 
$
188,340

 
$
208

 
$
208

 
$

 
$

 
$
173,176

 
$
188,548

2007
27,395

 
32,817

 
25,677

 
27,281

 

 

 
53,072

 
60,098

2006
17,440

 
20,679

 
24,955

 
29,606

 

 

 
42,395

 
50,285

2005
10,643

 
12,224

 
6,198

 
6,786

 
921

 
930

 
17,762

 
19,940

2004 and prior
83,154

 
89,410

 
77,123

 
79,139

 

 

 
160,277

 
168,549

Total
$
311,600

 
$
343,470

 
$
134,161

 
$
143,020

 
$
921

 
$
930

 
$
446,682

 
$
487,420


 
December 31, 2014
 
Government & Prime
 
Alt-A
 
Subprime
 
Total
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
2014-2008
$
169,261

 
$
181,427

 
$
260

 
$
261

 
$

 
$

 
$
169,521

 
$
181,688

2007
27,881

 
33,557

 
26,052

 
27,232

 

 

 
53,933

 
60,789

2006
18,004

 
21,248

 
25,318

 
30,301

 

 

 
43,322

 
51,549

2005
10,969

 
12,560

 
6,278

 
6,928

 
912

 
921

 
18,159

 
20,409

2004 and prior
88,941

 
95,158

 
79,731

 
81,941

 

 

 
168,672

 
177,099

Total
$
315,056

 
$
343,950

 
$
137,639

 
$
146,663

 
$
912

 
$
921

 
$
453,607

 
$
491,534




44


Residential Mortgage-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
NAIC
Designation
 
Equivalent Rating
 
Carrying Value
 
Percent of
Total
 
Carrying Value
 
Percent of
Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
451,935

 
92.7
%
 
$
455,505

 
92.7
%
2
 
BBB
 
10,445

 
2.2

 
10,944

 
2.2

3
 
BB
 
13,303

 
2.7

 
13,065

 
2.7

4
 
B
 
11,724

 
2.4

 
12,006

 
2.4

5
 
CCC
 
13

 

 
14

 

 
 
Total
 
$
487,420

 
100.0
%
 
$
491,534

 
100.0
%
Commercial Mortgage-Backed Securities by Origination Year
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
2014
$
131,523

 
145,616

 
$
131,365

 
140,872

2013
28,740

 
30,354

 
28,732

 
29,409

2011
95,871

 
107,514

 
95,935

 
103,485

2010 and prior
231,387

 
260,604

 
229,902

 
256,929

Total
$
487,521

 
$
544,088

 
$
485,934

 
$
530,695


Commercial Mortgage-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
NAIC
Designation
 
Equivalent Rating
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
GNMA
 
$
330,889

 
60.8
%
 
$
324,315

 
61.1
%
1
 
FNMA
 
14,340

 
2.6

 
14,110

 
2.7

1
 
AAA, AA, A
 
 
 
 
 
 
 
 
 
 
Generic
 
98,193

 
18.0

 
91,035

 
17.2

 
 
Super Senior
 
19,437

 
3.6

 
19,725

 
3.7

 
 
Mezzanine
 
17,402

 
3.2

 
17,528

 
3.3

 
 
Junior
 
19,961

 
3.7

 
20,097

 
3.8

 
 
Total AAA, AA, A
 
154,993

 
28.5

 
148,385

 
28.0

2
 
BBB
 
32,659

 
6.0

 
32,904

 
6.2

3
 
BB
 
8,717

 
1.6

 
8,493

 
1.6

4
 
B
 
2,490

 
0.5

 
2,488

 
0.4

 
 
Total
 
$
544,088

 
100.0
%
 
$
530,695

 
100.0
%

The Government National Mortgage Association (GNMA) guarantees principal and interest on mortgage-backed securities. The guarantee is backed by the full faith and credit of the United States Government. The Federal National Mortgage Association (FNMA) is a government-sponsored enterprise (GSE) that was chartered by Congress to reduce borrowing costs for certain homeowners. GSEs carry an implicit backing of the U.S. Government but do not have explicit guarantees like GNMA.

The AAA, AA and A-rated commercial mortgage-backed securities are broken down into categories based on subordination levels. Rating agencies disclose subordination levels, which measure the amount of credit support that the bonds (or tranches) have from subordinated bonds (or tranches). Generic is a term used for securities issued prior to 2005. The super senior securities have subordination levels greater than 27%, the mezzanine securities have subordination levels in the 17% to 27% range and the junior securities have subordination levels in the 9% to 16% range. Also included in the commercial mortgage-backed securities are military housing bonds totaling $128.0 million at March 31, 2015 and $120.5 million at December 31, 2014. These bonds are used to fund the construction of multi-family homes on United States military bases. The bonds are backed by a first mortgage lien on residential military housing projects.


45



Other Asset-Backed Securities by Collateral Type and Origination Year
 
 
 
March 31, 2015
 
Government & Prime
 
Alt-A
 
Subprime
 
Non-Mortgage
 
Total
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
2015
$

 
$

 
$

 
$

 
$

 
$

 
$
53,987

 
$
54,280

 
$
53,987

 
$
54,280

2014

 

 

 

 

 

 
112,039

 
112,622

 
112,039

 
112,622

2013

 

 

 

 

 

 
57,900

 
58,432

 
57,900

 
58,432

2012

 

 

 

 

 

 
103,814

 
105,840

 
103,814

 
105,840

2011

 

 

 

 

 

 
16,384

 
16,518

 
16,384

 
16,518

2010 and prior
18,494

 
19,050

 
21,469

 
26,538

 
62,951

 
60,130

 
93,586

 
101,946

 
196,500

 
207,664

Total
$
18,494

 
$
19,050

 
$
21,469

 
$
26,538

 
$
62,951

 
$
60,130

 
$
437,710

 
$
449,638

 
$
540,624

 
$
555,356


 
December 31, 2014
 
Government & Prime
 
Alt-A
 
Subprime
 
Non-Mortgage
 
Total
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
2014
$

 
$

 
$

 
$

 
$

 
$

 
102,612

 
102,405

 
$
102,612

 
$
102,405

2013

 

 

 

 

 

 
60,296

 
60,600

 
60,296

 
60,600

2012

 

 

 

 

 

 
115,851

 
117,975

 
115,851

 
117,975

2011

 

 

 

 

 

 
16,736

 
16,942

 
16,736

 
16,942

2010 and prior
18,775

 
19,482

 
22,472

 
27,567

 
71,220

 
68,500

 
100,128

 
107,790

 
212,595

 
223,339

Total
$
18,775

 
$
19,482

 
$
22,472

 
$
27,567

 
$
71,220

 
$
68,500

 
$
395,623

 
$
405,712

 
$
508,090

 
$
521,261


Other Asset-Backed Securities by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
NAIC
Designation
 
Equivalent Ratings
 
Carrying
Value
 
Percent of
Total
 
Carrying
Value
 
Percent of
Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
471,231

 
84.8
%
 
$
457,154

 
87.7
%
2
 
BBB
 
50,903

 
9.2

 
32,664

 
6.3

3
 
BB
 
11,014

 
2.0

 
11,400

 
2.2

4
 
B
 
1,539

 
0.3

 
1,561

 
0.3

5
 
CCC
 
7,364

 
1.3

 
6,400

 
1.2

6
 
In or near default
 
13,305

 
2.4

 
12,082

 
2.3

 
 
Total
 
$
555,356

 
100.0
%
 
$
521,261

 
100.0
%
 
State, Municipal and Other Government Securities

State, municipal and other government securities totaled $1,463.3 million, or 21.4% of total fixed maturities, at March 31, 2015, and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. We do not hold any Puerto Rico-related bonds, which has been in the news recently given its financial issues. Exposure to the state of Illinois and municipalities within the state accounted for 1.8% of our total fixed maturities at March 31, 2015. As of March 31, 2015, our Illinois-related portfolio holdings were rated investment grade, and were trading at 111.6% of amortized cost. Our municipal bond exposure had an average rating of AA and our holdings were trading at 112.6% of amortized cost at March 31, 2015.



46


Equity Securities

Equity securities totaled $122.4 million at March 31, 2015 and $112.6 million at December 31, 2014. Gross unrealized gains totaled $7.8 million and gross unrealized losses totaled $0.6 million at March 31, 2015. At December 31, 2014, gross unrealized gains totaled $5.9 million and gross unrealized losses totaled $0.7 million on these securities. The unrealized losses were primarily attributable to nonredeemable perpetual preferred securities from issuers in the financial sector. See Note 2 to our consolidated financial statements for further discussion regarding our analysis of unrealized losses related to these securities.
 
Mortgage Loans

Mortgage loans totaled $673.3 million at March 31, 2015 and $629.3 million at December 31, 2014. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of commercial mortgage loans outstanding was 153 at March 31, 2015 and 146 at December 31, 2014. In the first quarter of 2015, new loans ranged from $1.9 million to $10.2 million in size, with an average loan size of $6.5 million, an average loan term of 14 years and an average yield of 4.25%. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. The majority of our mortgage loans amortize principal, with 2.2% that are interest only loans at March 31, 2015. At March 31, 2015, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 56.4% and the weighted average debt service coverage ratio was 1.5 based on the results of our 2013 annual study. See Note 2 to our consolidated financial statements for further discussion regarding our mortgage loans.

Asset-Liability Management

Our asset-liability management program includes (i) designing and developing products that encourage persistency and help ensure targeted spreads are earned and, as a result, create a stable liability structure, and (ii) structuring the investment portfolio with duration and cash flow characteristics consistent with the duration and cash flow characteristics of our insurance liabilities. The weighted average life of the fixed maturity and mortgage loan portfolio based on fair values was approximately 10.7 years at March 31, 2015 and 10.6 years at December 31, 2014. The effective duration of the fixed maturity and mortgage loan portfolios backing our annuity products was 5.8 years at March 31, 2015 and 5.9 years at December 31, 2014. The effective duration of our annuity liabilities was approximately 6.5 years at March 31, 2015 and 6.4 years at December 31, 2014. While it can be difficult to maintain asset and liability durations that are closely matched in a dynamic environment, we have identified various strategies that can be implemented if duration mismatches exceed acceptable tolerances.

Other Assets

Deferred acquisition costs decreased 7.3% to $204.7 million at March 31, 2015, primarily due to an $18.4 million increase in the impact of the change in net unrealized appreciation on fixed maturity securities during the period. Cash and cash equivalents decreased 42.2% to $44.3 million primarily due to payment of a special $2.00 per share dividend on common stock and normal fluctuations in timing of payments made and received.

Liabilities

Future policy benefits increased 1.5% to $6,219.1 million at March 31, 2015, primarily due to an increase in the volume of annuity and life business in force. Deferred income taxes increased 8.7% to $223.6 million, primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments.

Stockholders' Equity

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

Our stockholders' equity decreased 0.3% to $1,249.1 million at March 31, 2015, compared to $1,252.8 million at December 31, 2014, primarily due to dividends paid, partially offset by the change in unrealized appreciation of fixed maturity securities during the period and net income.



47


At March 31, 2015, FBL's common stockholders' equity was $1,246.1 million, or $50.25 per share, compared to $1,249.8 million, or $50.57 per share, at December 31, 2014. Included in stockholders' equity per common share is $11.61 at March 31, 2015 and $10.46 at December 31, 2014 attributable to accumulated other comprehensive income.

Liquidity and Capital Resources

Cash Flows

During the first quarter of 2015, our operating activities generated cash flows totaling $45.8 million, consisting of net income of $23.6 million adjusted for non-cash operating revenues and expenses netting to $22.2 million. We used cash of $88.8 million in our investing activities during the 2015 period. The primary uses were $263.7 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $153.0 million in sales, maturities and repayments of investments. Our financing activities provided cash of $10.7 million during the 2015 period. The primary financing source was $196.5 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $128.7 million for return of policyholder account balances on interest sensitive products and $59.5 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, proceeds from borrowings, investment income and dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during the quarter ended March 31, 2015 included management fees from subsidiaries and affiliates totaling $2.2 million and dividends of $12.5 million. Cash outflows are principally for salaries, taxes and other expenses related to providing management services, dividends on outstanding stock, stock repurchases, interest on our parent company debt and capital contributions to subsidiaries.

As discussed in Note 6 to our consolidated financial statements, we have periodically taken advantage of opportunities to repurchase our outstanding Class A common stock through Class A common stock repurchase plans approved by our Board of Directors. There was $42.7 million remaining available for repurchases at March 31, 2015 under the current $50 million Class A common stock repurchase plan. 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. No repurchases of Class A common stock were made during the quarter ended March 31, 2015.

Interest payments on our debt totaled $1.2 million for the quarters ended March 31, 2015 and March 31, 2014. Interest payments on our debt outstanding at March 31, 2015 are estimated to be $3.6 million for the remainder of 2015.

Farm Bureau Life's cash inflows primarily consist of premiums; deposits to policyholder account balances; income from investments; sales, maturities and calls of investments; and repayments of investment principal. Farm Bureau Life's cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, current operating expenses and dividends. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. Continuing operations and financing activities from Farm Bureau Life relating to interest sensitive products provided funds totaling $120.0 million for the three months ended March 31, 2015 and $108.6 million for the prior year period.

Farm Bureau Life's ability to pay dividends to the parent company is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa. At December 31, 2014, Farm Bureau Life’s statutory unassigned surplus was $418.5 million. There are certain additional limits on the amount of dividends that may be paid within a year without approval of the Insurance Division, Department of Commerce of the State of Iowa (the Iowa Insurance Division) as discussed in Note 7 to our consolidated financial statements for year ended December 31, 2014 included in our Annual Report on Form 10-K. During the remainder of 2015, the maximum amount legally available for distribution to the parent company without further regulatory approval is $85.3 million. However, due to the timing of dividend payments during the prior 12 months, the maximum dividend available to be paid without further regulatory approval during the period from March 31, 2015 to December 19, 2015 is $40.3 million.


48



We paid regular cash dividends on our common and preferred stock during the three-month period ended March 31 totaling $9.9 million in 2015 and $8.7 million in 2014. In addition, we paid a special $2.00 per common share cash dividend on March 26, 2015 totaling $49.5 million. It is anticipated that quarterly cash dividend requirements for 2015 will be $0.0075 per Series B preferred share and $0.40 per common share. The level of common stock dividends are analyzed quarterly and are dependent upon our capital and liquidity positions. In addition, alternative uses of excess capital may impact future dividend levels. Assuming these quarterly dividend rates, the common and preferred dividends would total approximately $29.9 million for the remainder of 2015. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2015. The parent company had available cash and investments totaling $60.5 million at March 31, 2015. FBL Financial Group, Inc. expects to rely on available cash resources, dividends from Farm Bureau Life and management fee income to make dividend payments to its stockholders and interest payments on its debt. We had no material commitments for capital expenditures as of March 31, 2015.

We manage the amount of capital held by our insurance subsidiaries to ensure we meet regulatory requirements. State laws specify regulatory actions if an insurer's risk-based capital (RBC) ratio, a measure of solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against a statutory "authorized control level" RBC at which point regulators have the option to assume control of the insurance company. The company action level RBC is 200% of the authorized control level and is the first point at which any action would be triggered. Our adjusted capital and RBC is reported to our insurance regulators annually based on formulas which may be revised throughout the year. We estimate our adjusted capital and RBC quarterly; however, these estimates may differ from annual results should the regulatory formulas change. As of March 31, 2015, our statutory total adjusted capital is estimated at $622.9 million, resulting in a RBC ratio of 535%, based on company action level capital of $116.4 million.

On a consolidated basis, we anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally-generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. Our investment portfolio at March 31, 2015 included $23.3 million of short-term investments, $44.3 million of cash and cash equivalents and $611.6 million in carrying value of U.S. Government and U.S. Government agency-backed securities that could be readily converted to cash at or near carrying value. Farm Bureau Life is also a member of the FHLB, which provides a source for additional liquidity, if needed. This membership allows us to utilize fixed or floating rate advances offered by the FHLB and secured by qualifying collateral. Our total capacity to utilize such advances is impacted by multiple factors including the market value of eligible collateral, our level of statutory admitted assets and excess reserves and our willingness or capacity to hold activity-based FHLB common stock.

Contractual Obligations

In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments which are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. There have been no material changes to our total contractual obligations since December 31, 2014.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks of Financial Instruments
 
There have been no material changes in the market risks from the information provided in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Form 10-K for the fiscal year ended December 31, 2014.


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


49


disclosure controls and procedures were effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities and Exchange Act of 1934 (the Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our internal control over financial reporting changes from time-to-time as we modify and enhance our systems and processes to meet our dynamic needs. Changes are also made as we strive to be more efficient in how we conduct our business. While changes have taken place in our internal controls during the quarter ended March 31, 2015, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

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

(c) Issuer Purchases of Equity Securities

We had no issuer purchases of equity securities for the quarter ended March 31, 2015. We have $42.7 million available under a stock repurchase plan announced February 20, 2015, which will expire on March 31, 2016. The plan authorizes us to make repurchases of Class A common stock in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Completion of the program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.
 
 
 
 
 
 
 
 
 
ITEM 6. EXHIBITS

(a) Exhibits:
10.1+*
Restricted Stock Unit Agreement dated February 1, 2015 between James P. Brannen and the Company.
31.1+
Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+
Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32+
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101+#
Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language) from FBL Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 as follows: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Financial Statements
 
 
+
Filed or furnished herewith
*
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.


50




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: May 7, 2015                


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



51