Attached files

file filename
EX-32 - EXHIBIT 32 - FBL FINANCIAL GROUP INCex32q12017.htm
EX-31.2 - EXHIBIT 31.2 - FBL FINANCIAL GROUP INCex312q12017.htm
EX-31.1 - EXHIBIT 31.1 - FBL FINANCIAL GROUP INCex311q12017.htm
EX-10.4 - EXHIBIT 10.4 - FBL FINANCIAL GROUP INCexh104q12017.htm
EX-10.3 - EXHIBIT 10.3 - FBL FINANCIAL GROUP INCexh103q12017.htm
EX-10.2 - EXHIBIT 10.2 - FBL FINANCIAL GROUP INCexh102q12017.htm
EX-10.1 - EXHIBIT 10.1 - FBL FINANCIAL GROUP INCexh101q12017.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, 2017
 
 
 
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
ffglogo.jpg
(Exact name of registrant as specified in its charter)
 
 
 
Iowa
 
42-1411715
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5400 University Avenue, West Des Moines, Iowa
 
50266-5997
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(515) 225-5400
(Registrant's telephone number, including area code)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
 
Indicate by check mark whether the registrant has submitted electronically 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 Title of each class
 
Outstanding at May 1, 2017
Class A Common Stock, without par value
 
24,907,076
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, 2017
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,
2017
 
December 31,
2016
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2017 - $6,689,779; 2016 - $6,661,711)
$
7,071,998

 
$
7,008,790

Equity securities - available for sale, at fair value (cost: 2017 - $130,931; 2016 - $130,479)
137,316

 
132,968

Mortgage loans
855,497

 
816,471

Real estate
1,955

 
1,955

Policy loans
187,981

 
188,254

Short-term investments
14,264

 
16,348

Other investments
11,495

 
9,874

Total investments
8,280,506

 
8,174,660

 
 
 
 
Cash and cash equivalents
16,773

 
33,583

Securities and indebtedness of related parties
133,018

 
137,422

Accrued investment income
85,736

 
78,437

Amounts receivable from affiliates
3,361

 
3,790

Reinsurance recoverable
106,131

 
105,290

Deferred acquisition costs
322,138

 
330,324

Value of insurance in force acquired
8,552

 
9,226

Current income taxes recoverable

 
4,309

Other assets
90,831

 
92,021

Assets held in separate accounts
615,892

 
597,072

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,662,938

 
$
9,566,134


 


2




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

 
March 31,
2017
 
December 31,
2016
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
5,150,113

 
$
5,100,625

Traditional life insurance and accident and health products
1,710,763

 
1,698,792

Other policy claims and benefits
44,539

 
43,395

Supplementary contracts without life contingencies
330,869

 
330,232

Advance premiums and other deposits
267,032

 
265,221

Amounts payable to affiliates
1,481

 
862

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

 
97,000

Current income taxes payable
1,913

 

Deferred income taxes
172,675

 
163,495

Other liabilities
87,965

 
81,182

Liabilities related to separate accounts
615,892

 
597,072

Total liabilities
8,480,242

 
8,377,876

 
 
 
 
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 24,906,547 shares in 2017 and 24,882,542 shares in 2016
153,242

 
152,903

Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 11,413 shares in 2017 and 2016
72

 
72

Accumulated other comprehensive income
165,598

 
149,555

Retained earnings
860,726

 
882,672

Total FBL Financial Group, Inc. stockholders' equity
1,182,638

 
1,188,202

Noncontrolling interest
58

 
56

Total stockholders' equity
1,182,696

 
1,188,258

Total liabilities and stockholders' equity
$
9,662,938

 
$
9,566,134


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,
 
2017
 
2016
Revenues:
 
 
 
Interest sensitive product charges
$
29,201

 
$
28,111

Traditional life insurance premiums
48,434

 
50,138

Net investment income
100,994

 
98,385

Net realized capital gains (losses) on sales of investments
(403
)
 
1,590

 
 
 
 
Total other-than-temporary impairment losses
(66
)
 
(3,719
)
Non-credit portion in other comprehensive income

 
1,522

Net impairment losses recognized in earnings
(66
)
 
(2,197
)
Other income
3,760

 
3,639

Total revenues
181,920

 
179,666

 
 
 
 
Benefits and expenses:
 
 
 
Interest sensitive product benefits
62,760

 
54,419

Traditional life insurance benefits
42,954

 
44,569

Policyholder dividends
2,553

 
3,040

Underwriting, acquisition and insurance expenses
34,353

 
37,714

Interest expense
1,212

 
1,212

Other expenses
4,151

 
4,358

Total benefits and expenses
147,983

 
145,312

 
33,937

 
34,354

Income taxes
(10,733
)
 
(11,069
)
Equity income, net of related income taxes
3,231

 
2,652

Net income
26,435

 
25,937

Net (income) loss attributable to noncontrolling interest
(2
)
 
9

Net income attributable to FBL Financial Group, Inc.
$
26,433

 
$
25,946

 
 
 
 
Earnings per common share
$
1.05

 
$
1.04

Earnings per common share - assuming dilution
$
1.05

 
$
1.04

 
 
 
 
Cash dividend per common share
$
0.44

 
$
0.42

Special cash dividend per common share
$
1.50

 
$
2.00


See accompanying notes.


4




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
Three months ended March 31,
 
2017
 
2016
Net income
$
26,435

 
$
25,937

Other comprehensive income (1)
 
 
 
Change in net unrealized investment gains/losses
15,861

 
72,203

Non-credit impairment losses

 
(952
)
Change in underfunded status of postretirement benefit plans
182

 
135

Total other comprehensive income, net of tax
16,043

 
71,386

Total comprehensive income, net of tax
42,478

 
97,323

Comprehensive (income) loss attributable to noncontrolling interest
(2
)
 
9

Total comprehensive income applicable to FBL Financial Group, Inc.
$
42,476

 
$
97,332


(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, 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

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
3,000

 
$
152,975

 
$
149,555

 
$
882,672

 
$
56

 
$
1,188,258

Net income - three months ended March 31, 2017

 

 

 
26,433

 
2

 
26,435

Other comprehensive income

 

 
16,043

 

 

 
16,043

Issuance of common stock under compensation plans

 
339

 

 

 

 
339

Dividends on preferred stock

 

 

 
(38
)
 

 
(38
)
Dividends on common stock

 

 

 
(48,341
)
 

 
(48,341
)
Balance at March 31, 2017
$
3,000

 
$
153,314

 
$
165,598

 
$
860,726

 
$
58

 
$
1,182,696


See accompanying notes.


5




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

 
Three months ended March 31,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
26,435

 
$
25,937

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
40,256

 
37,317

Charges for mortality, surrenders and administration
(28,887
)
 
(27,603
)
Net realized losses on investments
469

 
607

Change in fair value of derivatives
(2,753
)
 
1,582

Increase in liabilities for life insurance and other future policy benefits
17,993

 
20,715

Deferral of acquisition costs
(10,604
)
 
(9,941
)
Amortization of deferred acquisition costs and value of insurance in force
7,598

 
10,224

Change in reinsurance recoverable
(841
)
 
(1,049
)
Provision for deferred income taxes
542

 
1,213

Other
4,590

 
(11,603
)
Net cash provided by operating activities
54,798

 
47,399

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
106,257

 
102,822

Equity securities - available for sale
744

 
600

Mortgage loans
11,024

 
9,007

Derivative instruments
3,052

 
65

Policy loans
10,266

 
9,185

Securities and indebtedness of related parties
2,391

 
5,866

Other long-term investments
7

 

Acquisitions:
 
 
 
Fixed maturities - available for sale
(118,948
)
 
(103,354
)
Equity securities - available for sale
(1,102
)
 
(1,326
)
Mortgage loans
(50,000
)
 
(34,057
)
Derivative instruments
(1,988
)
 
(1,715
)
Policy loans
(9,993
)
 
(10,360
)
Securities and indebtedness of related parties
(3,712
)
 
(2,219
)
Short-term investments, net change
2,084

 
14,928

Purchases and disposals of property and equipment, net
(2,270
)
 
(1,427
)
Net cash used in investing activities
(52,188
)
 
(11,985
)




6




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

 
Three months ended March 31,
 
2017
 
2016
Financing activities
 
 
 
Contract holder account deposits
$
116,760

 
$
127,190

Contract holder account withdrawals
(87,929
)
 
(94,709
)
Repayments of debt

 
(15,000
)
Receipts related to noncontrolling interests, net

 
3

Excess tax deductions on stock-based compensation

 
244

Issuance or repurchase of common stock, net
128

 
958

Dividends paid
(48,379
)
 
(60,143
)
Net cash used in financing activities
(19,420
)
 
(41,457
)
Decrease in cash and cash equivalents
(16,810
)
 
(6,043
)
Cash and cash equivalents at beginning of period
33,583

 
29,490

Cash and cash equivalents at end of period
$
16,773

 
$
23,447

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash (paid) received during the period for:
 
 
 
Interest
$
(1,213
)
 
$
(1,216
)
Income taxes
2

 
(1
)

See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2017

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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. We encourage you to refer to the notes to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2016 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.

Adoption of New Accounting Pronouncements

In March 2016, the FASB issued guidance that impacts the accounting for share-based compensation, 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 new guidance, which we adopted prospectively on January 1, 2017, resulted in a $0.4 million ($0.02 per basic and diluted common share) federal income tax benefit during the first quarter of 2017. Prior periods were not restated. Other impacts of this guidance were immaterial.

Recent Accounting Pronouncements

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. We currently anticipate that the primary impact will be in the recognition of gains or losses from changes in the fair value of our equity security investments through the statement of operations, rather than as unrealized gains or losses reflected in other comprehensive income. Note 2 provides further information as to our current level of unrealized gains or losses on these securities.

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 an 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 currently expect the impact of this new guidance to be related to non-insurance contract revenues, primarily net commissions on products we broker, which are insignificant to the consolidated financial statements.

In February 2016, the FASB issued a new lease accounting standard, which, for most lessees, will result in a gross-up of the balance sheet. Under the new standard, lessees will recognize the leased assets on the balance sheet and will recognize a corresponding liability for the present value of lease payments over the lease term. The new standard requires the application of judgment and estimates. Also, there are accounting policy elections that may be taken both at transition and for the accounting


8


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.

In June 2016, the FASB issued guidance amending the accounting for the credit impairment of financial instruments. Under the new guidance, impairment losses will be estimated using an expected loss model under which a valuation allowance is established and adjusted over time. The valuation allowance will be based on the probability of loss over the life of the instrument, considering historical, current and forecasted information. The new guidance differs significantly from the incurred loss model used today, and will result in the earlier recognition of impairment losses. The new guidance may also increase the volatility of earnings to the extent actual results differ from the assumptions used in the establishment of the valuation allowance. The financial instruments for which we will be required to use the new model include but are not limited to, mortgage loans and reinsurance recoverables. Our available-for-sale fixed maturities will continue to apply the incurred loss model. However, rather than impairment losses resulting in a permanent reduction of carrying value as they do today, such losses will be in the form of a valuation allowance, which can be increased in the case of future credit losses or decreased should conditions improve. The guidance becomes effective for fiscal years beginning after December 15, 2019, with early adoption permitted on January 1, 2019. We are currently evaluating the impact of this new guidance on our consolidated financial statements, but expect that it will be material.


2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,525,273

 
$
243,375

 
$
(37,057
)
 
$
3,731,591

 
$
(845
)
Residential mortgage-backed
402,572

 
30,983

 
(2,135
)
 
431,420

 
86

Commercial mortgage-backed
575,533

 
31,364

 
(3,788
)
 
603,109

 

Other asset-backed
758,251

 
11,169

 
(7,384
)
 
762,036

 
2,253

United States Government and agencies
29,914

 
1,535

 
(87
)
 
31,362

 

State and political subdivisions
1,398,236

 
119,743

 
(5,499
)
 
1,512,480

 

Total fixed maturities
$
6,689,779

 
$
438,169

 
$
(55,950
)
 
$
7,071,998

 
$
1,494

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
100,042

 
$
7,074

 
$
(867
)
 
$
106,249

 
 
Common stocks
30,889

 
178

 

 
31,067

 
 
Total equity securities
$
130,931

 
$
7,252

 
$
(867
)
 
$
137,316

 
 


9


Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
December 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)
$
3,529,997

 
$
228,601

 
$
(49,943
)
 
$
3,708,655

 
$
(1,082
)
Residential mortgage-backed
396,110

 
29,121

 
(2,931
)
 
422,300

 
(983
)
Commercial mortgage-backed
546,446

 
33,645

 
(4,137
)
 
575,954

 

Other asset-backed
771,570

 
8,846

 
(9,766
)
 
770,650

 
2,544

United States Government and agencies
30,575

 
1,629

 
(132
)
 
32,072

 

State and political subdivisions
1,387,013

 
119,298

 
(7,152
)
 
1,499,159

 

Total fixed maturities
$
6,661,711

 
$
421,140

 
$
(74,061
)
 
$
7,008,790

 
$
479

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
100,042

 
$
4,050

 
$
(1,675
)
 
$
102,417

 
 
Common stocks
30,437

 
114

 

 
30,551

 
 
Total equity securities
$
130,479

 
$
4,164

 
$
(1,675
)
 
$
132,968

 
 

(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for residential mortgage-backed and other asset-backed securities were in an unrealized gain position at March 31, 2017 and other asset-backed securities at December 31, 2016 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 fair value of $23.5 million at March 31, 2017 and $23.3 million at December 31, 2016. Corporate securities also include redeemable preferred stock with a fair value of $25.4 million at March 31, 2017 and $24.5 million at December 31, 2016.

Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
 
 
 
 
March 31, 2017
 
Amortized
Cost
 

Fair Value
 
(Dollars in thousands)
Due in one year or less
$
119,546

 
$
121,968

Due after one year through five years
767,921

 
824,933

Due after five years through ten years
735,058

 
770,322

Due after ten years
3,330,898

 
3,558,210

 
4,953,423

 
5,275,433

Mortgage-backed and other asset-backed
1,736,356

 
1,796,565

Total fixed maturities
$
6,689,779

 
$
7,071,998


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,
2017
 
December 31,
2016
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
382,219

 
$
347,079

Equity securities - available for sale
6,385

 
2,489

 
388,604

 
349,568

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(108,091
)
 
(95,647
)
Value of insurance in force acquired
(12,511
)
 
(12,382
)
Unearned revenue reserve
7,132

 
4,215

Adjustments for assumed changes in policyholder liabilities
(8,772
)
 
(3,795
)
Provision for deferred income taxes
(93,226
)
 
(84,684
)
Net unrealized investment gains
$
173,136

 
$
157,275


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, 2017
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 

Fair Value
 
Unrealized Losses
 

Fair Value
 
Unrealized Losses
 
 Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
552,242

 
$
(15,632
)
 
$
191,346

 
$
(21,425
)
 
$
743,588

 
$
(37,057
)
 
66.2
%
Residential mortgage-backed
 
64,007

 
(991
)
 
19,958

 
(1,144
)
 
83,965

 
(2,135
)
 
3.8

Commercial mortgage-backed
 
106,739

 
(3,165
)
 
6,512

 
(623
)
 
113,251

 
(3,788
)
 
6.8

Other asset-backed
 
287,708

 
(3,930
)
 
75,498

 
(3,454
)
 
363,206

 
(7,384
)
 
13.2

United States Government and agencies
 
7,377

 
(87
)
 

 

 
7,377

 
(87
)
 
0.2

State and political subdivisions
 
112,750

 
(5,499
)
 

 

 
112,750

 
(5,499
)
 
9.8

Total fixed maturities
 
$
1,130,823

 
$
(29,304
)
 
$
293,314

 
$
(26,646
)
 
$
1,424,137

 
$
(55,950
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
7,869

 
$
(111
)
 
$
9,244

 
$
(756
)
 
$
17,113

 
$
(867
)
 
 
Total equity securities
 
$
7,869

 
$
(111
)
 
$
9,244

 
$
(756
)
 
$
17,113

 
$
(867
)
 
 



11


Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 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
 
$
742,626

 
$
(23,142
)
 
$
220,939

 
$
(26,801
)
 
$
963,565

 
$
(49,943
)
 
67.3
%
Residential mortgage-backed
 
51,873

 
(1,014
)
 
22,744

 
(1,917
)
 
74,617

 
(2,931
)
 
4.0

Commercial mortgage-backed
 
95,690

 
(3,590
)
 
6,610

 
(547
)
 
102,300

 
(4,137
)
 
5.6

Other asset-backed
 
371,829

 
(5,810
)
 
95,740

 
(3,956
)
 
467,569

 
(9,766
)
 
13.2

United States Government and agencies
 
6,438

 
(132
)
 

 

 
6,438

 
(132
)
 
0.2

State and political subdivisions
 
150,052

 
(7,152
)
 

 

 
150,052

 
(7,152
)
 
9.7

Total fixed maturities
 
$
1,418,508

 
$
(40,840
)
 
$
346,033

 
$
(33,221
)
 
$
1,764,541

 
$
(74,061
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
12,774

 
$
(150
)
 
$
13,438

 
$
(1,525
)
 
$
26,212

 
$
(1,675
)
 
 
Total equity securities
 
$
12,774

 
$
(150
)
 
$
13,438

 
$
(1,525
)
 
$
26,212

 
$
(1,675
)
 
 

Fixed maturities in the above tables include 428 securities from 332 issuers at March 31, 2017 and 516 securities from 404 issuers at December 31, 2016.

Unrealized losses decreased during the three months ended March 31, 2017 primarily due to a decrease in treasury rates as well as a decrease in credit spreads. We do not consider securities to be OTTI when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality when recovery of all amounts due under the contractual terms of the security is anticipated. Based on our intent not to sell or our belief that we will not be required to sell these securities before recovery of their amortized cost basis, we do not consider these investments to be OTTI at March 31, 2017. We will continue to monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified.

Excluding mortgage- and asset-backed securities, our largest unrealized loss was from an oil field service provider and totaled $2.0 million at March 31, 2017. 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, 2017 was $0.7 million, consisting of a non-investment grade security that is backed by trust preferred securities.

As described more fully in Note 1 to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2016, we perform a regular evaluation of all investment classes for impairment, including fixed maturity securities and equity securities, in order to evaluate whether such investments are OTTI.

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
 
 
 
 
Three months ended March 31,
 
2017

2016
 
(Dollars in thousands)
Balance at beginning of period
$
(14,500
)
 
$
(11,498
)
Increases to previously impaired investments

 
(2,172
)
Reductions due to investments sold
349

 
310

Reduction for credit loss that no longer has a portion of the OTTI loss recognized in other comprehensive income
587

 

Balance at end of period
$
(13,564
)
 
$
(13,360
)

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 and corresponding changes in such


12


amounts. Credit loss impairments with no portion of the loss recognized in other comprehensive income, such as securities for which OTTI was measured at fair value, are excluded from the table.
Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
Fixed maturities:
 
 
 
Gross gains
$
124

 
$
1,590

Gross losses
(527
)
 

 
(403
)
 
1,590

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

 
(2,172
)
Other credit-related (2)
(66
)
 
(25
)
Net realized losses on investments recorded in income
$
(469
)
 
$
(607
)

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

Proceeds from sales of fixed maturities totaled $9.4 million during the three months ended March 31, 2017 and $8.9 million during the three months ended March 31, 2016.

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, 2017 and December 31, 2016, 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 commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely. At March 31, 2017, we had committed to provide additional funding for mortgage loans totaling $30.5 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.



13


Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
373,360

 
43.6
%
 
$
361,088

 
44.2
%
Retail
 
271,440

 
31.7

 
240,602

 
29.5

Industrial
 
151,983

 
17.8

 
154,005

 
18.9

Other
 
58,714

 
6.9

 
60,776

 
7.4

Total
 
$
855,497

 
100.0
%
 
$
816,471

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
270,544

 
31.6
%
 
$
266,019

 
32.6
%
West North Central
 
129,020

 
15.1

 
105,753

 
12.9

Pacific
 
111,255

 
13.0

 
104,337

 
12.8

East North Central
 
88,264

 
10.3

 
91,550

 
11.2

West South Central
 
83,628

 
9.8

 
74,258

 
9.1

Mountain
 
78,577

 
9.2

 
79,707

 
9.8

Other
 
94,209

 
11.0

 
94,847

 
11.6

Total
 
$
855,497

 
100.0
%
 
$
816,471

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
Loan-to-Value Ratio
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
309,244

 
36.1
%
 
$
274,953

 
33.7
%
51% - 60%
 
204,068

 
23.9

 
210,555

 
25.8

61% - 70%
 
239,884

 
28.0

 
233,216

 
28.5

71% - 80%
 
72,247

 
8.5

 
67,607

 
8.3

81% - 90%
 
30,054

 
3.5

 
30,140

 
3.7

Total
 
$
855,497

 
100.0
%
 
$
816,471

 
100.0
%

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



14


Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2017
 
$
49,914

 
5.8
%
 
$

 
%
2016
 
157,862

 
18.5

 
158,817

 
19.4

2015
 
148,316

 
17.3

 
149,302

 
18.3

2014
 
80,057

 
9.4

 
80,771

 
9.9

2013
 
69,212

 
8.1

 
69,887

 
8.6

2012 and prior
 
350,136

 
40.9

 
357,694

 
43.8

Total
 
$
855,497

 
100.0
%
 
$
816,471

 
100.0
%

 Impaired Mortgage Loans
 
 
 
March 31, 2017
 
December 31, 2016
 
(Dollars in thousands)
Unpaid principal balance
$
19,271

 
$
21,459

Less:
 
 
 
Related allowance
(663
)
 
(713
)
Carrying value of impaired mortgage loans
$
18,608

 
$
20,746

 Allowance on Mortgage Loans
 
Three months ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Balance at beginning of period
$
713

 
$
851

Charge offs
(50
)
 

Balance at end of period
$
663

 
$
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 three months ended March 31, 2017 or 2016.

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 $90.2 million at March 31, 2017 and $91.3 million at December 31, 2016. There were no impairment losses recorded on these investments during the first quarter of 2017 or 2016. We use the equity method of accounting for these investments and recorded the following in our consolidated statement of operations.


15


LIHTC Equity Income (Loss), Net of Related Income Taxes
 
 
 
 
 
 
Three months ended March 31,
 
 
2017
 
2016
 
 
(Dollars in thousands)
Equity losses from LIHTC
 
$
(1,805
)
 
$
(1,539
)
Income tax benefits:
 
 
 
 
Tax benefits from equity losses
 
632

 
539

Investment tax credits
 
3,529

 
3,450

Equity income from LIHTC, net of related income tax benefits
 
$
2,356

 
$
2,450


At March 31, 2017, 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 $35.9 million, including $3.1 million for LIHTC commitments, which are summarized by year in the following table.

LIHTC Commitments by Year
 
 
March 31, 2017
 
(Dollars in thousands)
2017
$
2,164

2018
590

2019-2024
315

Total
$
3,069


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 VIE status 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 includes a review of the purpose and design of the VIE as well as the role that we played in the formation of the entity and how that role could impact our ability to control the VIE. We also review the activities and decisions considered significant to the economic performance of the VIE and assess what power we have in directing those activities and decisions. Finally, we review the agreements in place to determine if there are any guarantees that would affect our maximum exposure to loss.

We have reviewed the circumstances surrounding our investments in VIEs, which are classified as securities and indebtedness of related parties and consist of 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 carrying value and any unfunded commitments that exist for each particular VIE. We also have not provided additional support or other guarantees that was not previously contractually required (financial or otherwise) to any of the VIEs as of March 31, 2017 or December 31, 2016. Based on this analysis, none of our VIEs were required to be consolidated for any reporting periods presented in this Form 10-Q.




16


VIE Investments by Category
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value
 
Maximum Exposure to Loss
 
(Dollars in thousands)
LIHTC
$
90,171

 
$
93,240

 
$
91,255

 
$
95,058

Investment companies
19,576

 
47,474

 
23,379

 
45,569

Real estate limited partnerships
10,908

 
14,214

 
10,790

 
14,558

Other
584

 
2,189

 
429

 
2,034

Total
$
121,239

 
$
157,117

 
$
125,853

 
$
157,219


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

Derivative Instruments

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

Derivatives Instruments by Type
 
 
March 31, 2017
 
December 31, 2016
 
(Dollars in thousands)
Assets
 
 
 
Freestanding derivatives:
 
 
 
Call options (reported in other investments)
$
10,660

 
$
9,360

Embedded derivatives:
 
 
 
Modified coinsurance (reported in reinsurance recoverable)
2,088

 
3,411

Interest-only security (reported in fixed maturities)
3,058

 
3,374

Total assets
$
15,806

 
$
16,145

 
 
 
 
Liabilities
 
 
 
Embedded derivatives:
 
 
 
Indexed annuity and universal life products (reported in liability for future policy benefits)
$
18,587

 
$
15,778

Modified coinsurance agreements (reported in other liabilities)
201

 
114

Total liabilities
$
18,788

 
$
15,892






17


Derivative Income (Loss)
 
 
 
 
Three months ended March 31,
 
2017
 
2016
 
(Dollars in thousands)
Change in fair value of free standing derivatives:
 
 
 
Call options
$
973

 
$
660

Change in fair value of embedded derivatives:
 
 
 
Modified coinsurance agreements
(1,410
)
 
161

Interest-only security
(21
)
 
245

Indexed annuity and universal life products
409

 
(1,168
)
Call option amortization
(1,660
)
 
(1,139
)
Call option proceeds
3,052


65

Total income (loss) from derivatives
$
1,343

 
$
(1,176
)

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

We are exposed to credit losses in the event of nonperformance of the derivative counterparties. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings (currently rated A- or better by nationally recognized statistical rating organizations). We have also entered into credit support agreements with the counterparties requiring them to post collateral when net exposures exceed pre-determined thresholds that vary by counterparty. The net amount of such exposure is essentially the market value less collateral held for such agreements with each counterparty. The call options are supported by securities collateral received of $6.8 million at March 31, 2017, which is held in a separate custodial account. Subject to certain constraints, we are permitted to sell or re-pledge this collateral, but do not have legal rights to the collateral; accordingly, it has not been recorded on our balance sheet. At March 31, 2017, none of the collateral had been sold or re-pledged. As of March 31, 2017, our net derivative exposure was $3.9 million.


3. Fair Values

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

Fair Values and Carrying Values
 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities - available for sale
$
7,071,998

 
$
7,071,998

 
$
7,008,790

 
$
7,008,790

Equity securities - available for sale
137,316

 
137,316

 
132,968

 
132,968

Mortgage loans
855,497

 
877,631

 
816,471

 
840,337

Policy loans
187,981

 
230,685

 
188,254

 
230,656

Other investments
11,438

 
12,622

 
9,809

 
11,272

Cash, cash equivalents and short-term investments
31,037

 
31,037

 
49,931

 
49,931

Reinsurance recoverable
2,088

 
2,088

 
3,411

 
3,411

Assets held in separate accounts
615,892

 
615,892

 
597,072

 
597,072




18


Fair Values and Carrying Values (continued)
 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
4,084,977

 
$
3,975,825

 
$
4,044,148

 
$
3,903,177

Supplementary contracts without life contingencies
330,869

 
334,089

 
330,232

 
330,633

Advance premiums and other deposits
258,220

 
258,220

 
257,171

 
257,171

Long-term debt
97,000

 
69,840

 
97,000

 
67,599

Other liabilities
201

 
201

 
114

 
114

Liabilities related to separate accounts
615,892

 
612,854

 
597,072

 
593,760


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

Also included in Level 2 are private placement corporate bonds for which 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


19


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 political subdivisions 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 fluctuations 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.

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


20


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 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


21


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.

Indexed 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.

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.



22


Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
 
 
March 31, 2017
 
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
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Corporate securities