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EX-10.1 - EXHIBIT 10.1 - FBL FINANCIAL GROUP INCex101rsuq12016.htm
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EX-10.2 - EXHIBIT 10.2 - FBL FINANCIAL GROUP INCex102rsuq12016.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, 2016
 
 
 
or
 
 
 
[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from____________________ to____________________
 
 
 
Commission File Number: 1-11917
(Exact name of registrant as specified in its charter)
 
 
 
Iowa
 
42-1411715
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5400 University Avenue, West Des Moines, Iowa
 
50266-5997
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(515) 225-5400
(Registrant's telephone number, including area code)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 Title of each class
 
Outstanding at May 5, 2016
Class A Common Stock, without par value
 
24,850,871
Class B Common Stock, without par value
 
11,413


















(This page has been intentionally left blank.)




FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
TABLE OF CONTENTS


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



1


ITEM 1. FINANCIAL STATEMENTS

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

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

 
$
6,637,776

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

 
121,667

Mortgage loans
769,387

 
744,303

Real estate
1,955

 
1,955

Policy loans
186,959

 
185,784

Short-term investments
13,323

 
28,251

Other investments
4,079

 
3,017

Total investments
7,895,115

 
7,722,753

 
 
 
 
Cash and cash equivalents
23,447

 
29,490

Securities and indebtedness of related parties
129,300

 
134,570

Accrued investment income
84,990

 
78,274

Amounts receivable from affiliates
3,722

 
2,834

Reinsurance recoverable
104,947

 
103,898

Deferred acquisition costs
286,789

 
335,783

Value of insurance in force acquired
20,148

 
20,913

Current income taxes recoverable

 
2,421

Other assets
79,675

 
75,811

Assets held in separate accounts
607,739

 
625,257

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,235,872

 
$
9,132,004


 


2




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

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

 
$
4,764,159

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

 
1,637,322

Other policy claims and benefits
36,395

 
44,157

Supplementary contracts without life contingencies
340,322

 
339,929

Advance premiums and other deposits
262,224

 
254,276

Amounts payable to affiliates
633

 
575

Short-term debt payable to non-affiliates

 
15,000

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

 
97,000

Current income taxes
3,021

 

Deferred income taxes
174,701

 
135,063

Other liabilities
73,116

 
84,792

Liabilities related to separate accounts
607,739

 
625,257

Total liabilities
8,062,720

 
7,997,530

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

 
3,000

Class A common stock, without par value - authorized 88,500,000 shares, issued and outstanding 24,840,893 shares in 2016 and 24,796,763 shares in 2015
150,779

 
149,248

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

 
72

Accumulated other comprehensive income
185,918

 
114,532

Retained earnings
833,341

 
867,574

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

 
1,134,426

Noncontrolling interest
42

 
48

Total stockholders' equity
1,173,152

 
1,134,474

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

 
$
9,132,004


See accompanying notes.


3




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

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

 
$
28,121

Traditional life insurance premiums
50,138

 
47,148

Net investment income
98,385

 
98,773

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

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

Non-credit portion in other comprehensive income
1,522

 

Net impairment losses recognized in earnings
(2,197
)
 

Other income
3,639

 
4,270

Total revenues
179,666

 
177,946

 
 
 
 
Benefits and expenses:
 
 
 
Interest sensitive product benefits
54,419

 
55,808

Traditional life insurance benefits
44,569

 
45,709

Policyholder dividends
3,040

 
2,961

Underwriting, acquisition and insurance expenses
37,714

 
35,541

Interest expense
1,212

 
1,212

Other expenses
4,358

 
4,530

Total benefits and expenses
145,312

 
145,761

 
34,354

 
32,185

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

 
1,769

Net income
25,937

 
23,570

Net loss attributable to noncontrolling interest
9

 
21

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

 
$
23,591

 
 
 
 
Earnings per common share
$
1.04

 
$
0.95

Earnings per common share - assuming dilution
$
1.04

 
$
0.94

 
 
 
 
Cash dividend per common share
$
0.42

 
$
0.40

Special cash dividend per common share
$
2.00

 
$
2.00


See accompanying notes.


4




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

 
$
23,570

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

 
29,187

Non-credit impairment losses
(952
)
 

Change in underfunded status of postretirement benefit plans
135

 
231

Total other comprehensive income, net of tax
71,386

 
29,418

Total comprehensive income net of tax
97,323

 
52,988

Comprehensive loss attributable to noncontrolling interest
9

 
21

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

 
$
53,009


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


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

 
$
144,697

 
$
258,410

 
$
846,737

 
$
38

 
$
1,252,882

Net income - three months ended March 31, 2015

 

 

 
23,591

 
(21
)
 
23,570

Other comprehensive income

 

 
29,418

 

 

 
29,418

Issuance of common stock under compensation plans

 
2,682

 

 

 

 
2,682

Dividends on preferred stock

 

 

 
(38
)
 

 
(38
)
Dividends on common stock

 

 

 
(59,440
)
 

 
(59,440
)
Receipts related to noncontrolling interest

 

 

 

 
14

 
14

Balance at March 31, 2015
$
3,000

 
$
147,379

 
$
287,828

 
$
810,850

 
$
31

 
$
1,249,088

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
3,000

 
$
149,320

 
$
114,532

 
$
867,574

 
$
48

 
$
1,134,474

Net income - three months ended March 31, 2016

 

 

 
25,946

 
(9
)
 
25,937

Other comprehensive income

 

 
71,386

 

 

 
71,386

Issuance of common stock under compensation plans

 
1,535

 

 

 

 
1,535

Purchase of common stock

 
(4
)
 

 
(36
)
 

 
(40
)
Dividends on preferred stock

 

 

 
(38
)
 

 
(38
)
Dividends on common stock

 

 

 
(60,105
)
 

 
(60,105
)
Receipts related to noncontrolling interest

 

 

 

 
3

 
3

Balance at March 31, 2016
$
3,000

 
$
150,851

 
$
185,918

 
$
833,341

 
$
42

 
$
1,173,152


See accompanying notes.


5




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

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

 
$
23,570

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

 
37,964

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

 
366

Change in fair value of derivatives
1,582

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

 
16,184

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

 
9,054

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

 
2,036

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

 
45,796

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

 
123,134

Equity securities - available for sale
600

 
420

Mortgage loans
9,007

 
14,257

Derivative instruments
65

 
1,078

Policy loans
9,185

 
9,222

Securities and indebtedness of related parties
5,866

 
4,892

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

 
25,323

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




6




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

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

 
$
196,491

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

Receipts related to noncontrolling interests, net
3

 
14

Excess tax deductions on stock-based compensation
244

 
620

Issuance or repurchase of common stock, net
958

 
1,717

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

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

 
76,632

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

 
$
44,276

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

 
$
1,213

Income taxes
1

 
2,001


See accompanying notes.


7


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

1. Significant Accounting Policies

Basis of Presentation

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

Operating results for the quarter ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2015 included in our Annual Report on Form 10-K for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgments and estimates and other information necessary to understand our financial position and results of operations.

Recent Accounting Pronouncements

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

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

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

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



8


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


2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
March 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,452,908

 
$
258,227

 
$
(97,954
)
 
$
3,613,181

 
$
154

Residential mortgage-backed
418,814

 
38,147

 
(2,768
)
 
454,193

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

 
58,253

 
(1,476
)
 
580,135

 

Other asset-backed
592,785

 
11,518

 
(10,066
)
 
594,237

 
2,850

United States Government and agencies
40,637

 
3,715

 
(1
)
 
44,351

 

State, municipal and other governments
1,342,587

 
160,169

 
(196
)
 
1,502,560

 

Total fixed maturities
$
6,371,089

 
$
530,029

 
$
(112,461
)
 
$
6,788,657

 
$
1,422

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

 
$
6,873

 
$
(1,626
)
 
$
100,288

 
 
Common stocks
30,096

 
400

 
(29
)
 
30,467

 
 
Total equity securities
$
125,137

 
$
7,273

 
$
(1,655
)
 
$
130,755

 
 


9


Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,464,402

 
$
192,149

 
$
(137,844
)
 
$
3,518,707

 
$
351

Residential mortgage-backed
436,969

 
33,880

 
(5,343
)
 
465,506

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

 
42,284

 
(2,487
)
 
553,992

 

Other asset-backed
578,692

 
11,554

 
(7,124
)
 
583,122

 
3,058

United States Government and agencies
41,050

 
3,129

 
(81
)
 
44,098

 

State, municipal and other governments
1,344,611

 
129,923

 
(2,183
)
 
1,472,351

 

Total fixed maturities
$
6,379,919

 
$
412,919

 
$
(155,062
)
 
$
6,637,776

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

 
$
6,095

 
$
(1,173
)
 
$
91,951

 
 
Common stocks
29,307

 
450

 
(41
)
 
29,716

 
 
Total equity securities
$
116,336

 
$
6,545

 
$
(1,214
)
 
$
121,667

 
 

(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for corporate and other asset-backed securities were in an unrealized gain position at March 31, 2016 and December 31, 2015 due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2)
Corporate securities include hybrid preferred securities with a carrying value of $31.1 million at March 31, 2016 and $43.5 million at December 31, 2015. Corporate securities also include redeemable preferred stock with a carrying value of $25.3 million at March 31, 2016 and $24.8 million at December 31, 2015.

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

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

 
$
70,600

Due after one year through five years
758,676

 
812,294

Due after five years through ten years
760,987

 
795,877

Due after ten years
3,246,938

 
3,481,321

 
4,836,132

 
5,160,092

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

 
1,628,565

Total fixed maturities
$
6,371,089

 
$
6,788,657


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



10


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

 
$
257,857

Equity securities - available for sale
5,618

 
5,331

 
423,186

 
263,188

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

 
3,352

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

 
$
120,673


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

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

Fair Value
 
Unrealized Losses
 

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

 
$
(48,204
)
 
$
180,810

 
$
(49,750
)
 
$
813,042

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

 
(225
)
 
25,376

 
(2,543
)
 
45,321

 
(2,768
)
 
2.5

Commercial mortgage-backed
 
26,171

 
(1,280
)
 
2,350

 
(196
)
 
28,521

 
(1,476
)
 
1.3

Other asset-backed
 
252,009

 
(4,984
)
 
71,884

 
(5,082
)
 
323,893

 
(10,066
)
 
8.9

United States Government and agencies
 
750

 
(1
)
 

 

 
750

 
(1
)
 

State, municipal and other governments
 
18,404

 
(196
)
 

 

 
18,404

 
(196
)
 
0.2

Total fixed maturities
 
$
949,511

 
$
(54,890
)
 
$
280,420

 
$
(57,571
)
 
$
1,229,931

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

 
$
(1,126
)
 
$
4,500

 
$
(500
)
 
$
20,337

 
$
(1,626
)
 
 
Common stocks
 
2,546

 
(29
)
 

 

 
2,546

 
(29
)
 
 
Total equity securities
 
$
18,383

 
$
(1,155
)
 
$
4,500

 
$
(500
)
 
$
22,883

 
$
(1,655
)
 
 



11


Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
1,115,324

 
$
(96,062
)
 
$
115,730

 
$
(41,782
)
 
$
1,231,054

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

 
(725
)
 
26,537

 
(4,618
)
 
48,183

 
(5,343
)
 
3.4

Commercial mortgage-backed
 
48,424

 
(1,947
)
 
7,657

 
(540
)
 
56,081

 
(2,487
)
 
1.6

Other asset-backed
 
285,395

 
(3,323
)
 
65,298

 
(3,801
)
 
350,693

 
(7,124
)
 
4.6

United States Government and agencies
 
4,807

 
(81
)
 

 

 
4,807

 
(81
)
 
0.1

State, municipal and other governments
 
77,980

 
(2,183
)
 

 

 
77,980

 
(2,183
)
 
1.4

Total fixed maturities
 
$
1,553,576

 
$
(104,321
)
 
$
215,222

 
$
(50,741
)
 
$
1,768,798

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

 
$
(573
)
 
$
4,400

 
$
(600
)
 
$
25,680

 
$
(1,173
)
 
 
Common stocks
 
1,428

 
(41
)
 

 

 
1,428

 
(41
)
 
 
Total equity securities
 
$
22,708

 
$
(614
)
 
$
4,400

 
$
(600
)
 
$
27,108

 
$
(1,214
)
 
 

Fixed maturities in the above tables include 370 securities from 304 issuers at March 31, 2016 and 542 securities from 435 issuers at December 31, 2015. We do not intend to sell or believe we will be required to sell any of our temporarily-impaired fixed maturities before recovery of their amortized cost basis. The following summarizes the more significant unrealized losses of fixed maturities and equity securities by investment category as of March 31, 2016.

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

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

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

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


12



State, municipal and other governments: The unrealized losses on state, municipal and other governments were primarily due to general spread widening relative to spreads at which we acquired the bonds.

Equity securities: Our gross unrealized losses on equity securities were on investment grade non-redeemable perpetual preferred securities within the finance sector. These securities provide periodic cash flows, contain call features and are similarly rated and priced like other long-term callable bonds and are evaluated for OTTIs similar to fixed maturities. The decline in fair value is primarily due to market concerns regarding the finance sector. We have evaluated the near-term prospects of our equity securities in relation to the severity and duration of their impairment as well as our intent and ability to hold these investments until recovery of fair value, and have concluded they are not other-than-temporarily impaired.

Excluding mortgage- and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $4.6 million at March 31, 2016, with the largest unrealized loss from an energy service provider. With respect to mortgage- and asset-backed securities not backed by the United States Government, our largest aggregate unrealized loss from the same issuer at March 31, 2016 was $1.5 million, consisting of two different securities that are backed by different pools of Alt-A residential mortgage loans. Both securities are rated non-investment grade and the largest unrealized loss totaled $0.8 million.

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

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

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

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

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



13


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

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

Reductions due to investments sold
310

 
159

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

The table above sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which a portion of the OTTI was recognized in other comprehensive income (loss) and corresponding changes in such amounts.
Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2016
 
2015
 
 
(Dollars in thousands)
 
Realized gains (losses) on sales of investments
 
 
 
 
Fixed maturities:
 
 
 
 
Gross gains
$
1,590

 
$
220

 
Gross losses

 
(586
)
 
 
1,590

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

 
Other credit-related
(25
)
 

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

(1)
Amount represents the credit-related losses recognized for fixed maturities that were impaired to the present value of estimated future cash flows through income but not written down to fair value. As discussed above, the non-credit portion of the losses have been recognized in other comprehensive income (loss).

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

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

Mortgage Loans

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

Any loan delinquent on contractual payments is considered non-performing. At March 31, 2016 and December 31, 2015, there were no non-performing loans over 90 days past due on contractual payments. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would


14


commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely.

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

 
45.6
%
 
$
333,400

 
44.8
%
Retail
 
226,639

 
29.5

 
227,039

 
30.5

Industrial
 
141,344

 
18.4

 
133,085

 
17.9

Other
 
50,382

 
6.5

 
50,779

 
6.8

Total
 
$
769,387

 
100.0
%
 
$
744,303

 
100.0
%

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

 
30.4
%
 
$
233,522

 
31.4
%
Pacific
 
106,219

 
13.8

 
100,188

 
13.4

West North Central
 
101,433

 
13.2

 
102,555

 
13.8

East North Central
 
84,554

 
11.0

 
86,019

 
11.5

Mountain
 
77,650

 
10.1

 
78,750

 
10.6

West South Central
 
68,363

 
8.9

 
66,677

 
9.0

Other
 
97,182

 
12.6

 
76,592

 
10.3

Total
 
$
769,387

 
100.0
%
 
$
744,303

 
100.0
%

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

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

 
33.9
%
 
$
264,605

 
35.6
%
51% - 60%
 
196,653

 
25.6

 
169,045

 
22.7

61% - 70%
 
250,207

 
32.4

 
234,544

 
31.5

71% - 80%
 
52,882

 
6.9

 
67,072

 
9.0

81% - 90%
 
9,003

 
1.2

 
9,037

 
1.2

Total
 
$
769,387

 
100.0
%
 
$
744,303

 
100.0
%

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



15


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

 
4.3
%
 
$

 
%
2015
 
153,675

 
20.0

 
154,582

 
20.9

2014
 
82,864

 
10.8

 
83,546

 
11.2

2013
 
79,155

 
10.3

 
79,879

 
10.7

2012
 
65,154

 
8.5

 
65,817

 
8.8

2011 and prior
 
354,490

 
46.1

 
360,479

 
48.4

Total
 
$
769,387

 
100.0
%
 
$
744,303

 
100.0
%

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

 
$
21,766

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

 
$
20,828

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

 
$
857

Charge offs

 
(6
)
Balance at end of period
$
851

 
$
851


Mortgage Loan Modifications

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

There were no loan modifications during the first quarter of 2016 or of 2015.

Low Income Housing Tax Credit Investments (LIHTC)

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


16


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

 
646

 
Investment tax credits
 
3,450

 
3,187

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

 
$
1,988

 

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

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

2017
899

2018-2024
468

Total
$
6,772


Variable Interest Entities

We evaluate our variable interest entity (VIE) investees to determine whether the level of our direct ownership interest, our rights to manage operations, or our obligation to provide ongoing financial support are such that we are the primary beneficiary of the entity, and would therefore be required to consolidate it for financial reporting purposes. After determining that a VIE exists, we review our involvement in the VIE to determine whether we have both the power to direct activities that most significantly impact the economic performance of the VIE, and the obligation to absorb losses or the rights to receive benefits that could be potentially significant to the VIE. This analysis included a review of the purpose and design of the VIE as well as the role that we played in the formation of the entity and how that role could impact our ability to control the VIE. We also review the activities and decisions considered significant to the economic performance of the VIE and assess what power we have in directing those activities and decisions. Finally, we review the agreements in place to determine if there are any guarantees that would affect our maximum exposure to loss.

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

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



17


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

 
$
101,082

 
$
94,170

 
$
102,626

Investment companies
14,969

 
29,825

 
20,004

 
35,604

Real estate limited partnerships
9,044

 
15,088

 
9,554

 
15,610

Other
635

 
2,445

 
637

 
2,448

Total
$
118,958

 
$
148,440

 
$
124,365

 
$
156,288

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

Derivative Instruments

We are not significantly involved in hedging activities and have limited exposure to derivatives. We do not apply hedge accounting to any of our derivative positions. Derivative assets, which are primarily reported in reinsurance recoverable and other investments, totaled $11.0 million at March 31, 2016 and $9.9 million at December 31, 2015. At March 31, 2016, we had master netting agreements with counterparties covering cash collateral payable totaling $0.4 million. This amount was invested and included in the consolidated balance sheets with corresponding amounts netted against the derivative instruments. We also received collateral of $2.3 million at March 31, 2016, which is held in a separate custodial account and not recorded on the balance sheet. Our derivative assets consist of an interest-only bond, derivatives embedded within our modified coinsurance agreements and call options that provide an economic hedge for our index contracts. Derivative liabilities totaled $10.7 million at March 31, 2016 and $9.4 million at December 31, 2015 and include derivatives embedded within our index contracts and derivatives embedded within our modified coinsurance agreements. The net gain or loss recognized on these derivatives is included in net investment income and interest sensitive benefits.

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


3. Fair Values

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

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

 
$
6,788,657

 
$
6,637,776

 
$
6,637,776

Equity securities - available for sale
130,755

 
130,755

 
121,667

 
121,667

Mortgage loans
769,387

 
819,166

 
744,303

 
780,624

Policy loans
186,959

 
240,315

 
185,784

 
230,153

Other investments
3,992

 
5,255

 
2,331

 
2,331

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

 
36,770

 
57,741

 
57,741

Reinsurance recoverable
2,741

 
2,741

 
2,636

 
2,636

Assets held in separate accounts
607,739

 
607,739

 
625,257

 
625,257



18


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

 
$
3,696,482

 
$
3,750,186

 
$
3,618,145

Supplementary contracts without life contingencies
340,322

 
345,016

 
339,929

 
339,717

Advance premiums and other deposits
252,367

 
252,367

 
245,269

 
245,269

Short-term debt

 

 
15,000

 
15,000

Long-term debt
97,000

 
64,864

 
97,000

 
68,133

Other liabilities

 

 
56

 
56

Liabilities related to separate accounts
607,739

 
603,549

 
625,257

 
620,676


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

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

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

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

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

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

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

Fixed maturities:

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

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

Also included in Level 2 are private placement corporate bonds where quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach,


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

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

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

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

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

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

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

We compare prices between different pricing sources for unusual disparity.

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

Equity securities:

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

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



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

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

Mortgage loans:

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

Policy loans:

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

Other investments:

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

Cash, cash equivalents and short-term investments:

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

Reinsurance recoverable:

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

Assets held in separate accounts:

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

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

Level 3 policy-related financial instruments of investment-type contracts are those not involving significant mortality or morbidity risks. No active market exists for these contracts and they are not measured at fair value on a recurring basis. Fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed. Fair values for our investment-type contracts with expected maturities, including deferred annuities, funding agreements and supplementary contracts, are determined using discounted cash flow valuation techniques based on current interest rates adjusted to reflect our credit risk and an additional provision for adverse deviation. For certain deposit liabilities with no defined maturities and no


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surrender charges, including pension-related deposit administration funds, advance premiums and other deposits, fair value is the account value or amount payable on demand. Significant judgment is required in selecting the assumptions used to estimate the fair values of these financial instruments. For contracts with known maturities, increases in current rates will result in a decrease in discounted cash flows and a decrease in the estimated fair value of the policy obligation.

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

Short-term debt:

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

Long-term debt:

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

Other liabilities:

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

Liabilities related to separate accounts:

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



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Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
 
 
March 31, 2016
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Corporate securities
$

 
$
3,563,649

 
$
49,532

 
$