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

(Mark one)
 
 
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended June 30, 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 August 1, 2016
Class A Common Stock, without par value
 
24,851,296
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 JUNE 30, 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 (Loss)
 
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)

 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2016 - $6,443,993; 2015 - $6,379,919)
$
7,066,458

 
$
6,637,776

Equity securities - available for sale, at fair value (cost: 2016 - $132,006; 2015 - $116,336)
139,473

 
121,667

Mortgage loans
763,427

 
744,303

Real estate
1,955

 
1,955

Policy loans
187,439

 
185,784

Short-term investments
22,557

 
28,251

Other investments
6,323

 
3,017

Total investments
8,187,632

 
7,722,753

 
 
 
 
Cash and cash equivalents
125,545

 
29,490

Securities and indebtedness of related parties
132,367

 
134,570

Accrued investment income
77,048

 
78,274

Amounts receivable from affiliates
5,452

 
2,834

Reinsurance recoverable
105,778

 
103,898

Deferred acquisition costs
219,626

 
335,783

Value of insurance in force acquired
19,724

 
20,913

Current income taxes recoverable
—

 
2,421

Other assets
83,579

 
75,811

Assets held in separate accounts
603,706

 
625,257

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,560,457

 
$
9,132,004


 


2



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

 
June 30,
2016
 
December 31,
2015
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
4,950,857

 
$
4,764,159

Traditional life insurance and accident and health products
1,669,990

 
1,637,322

Other policy claims and benefits
34,163

 
44,157

Supplementary contracts without life contingencies
335,898

 
339,929

Advance premiums and other deposits
254,931

 
254,276

Amounts payable to affiliates
678

 
575

Short-term debt payable to non-affiliates
—

 
15,000

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

 
97,000

Current income taxes
6,152

 
—

Deferred income taxes
224,074

 
135,063

Other liabilities
105,500

 
84,792

Liabilities related to separate accounts
603,706

 
625,257

Total liabilities
8,282,949

 
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 24,849,262 shares in 2016 and 24,796,763 shares in 2015
151,499

 
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
276,122

 
114,532

Retained earnings
846,752

 
867,574

Total FBL Financial Group, Inc. stockholders' equity
1,277,445

 
1,134,426

Noncontrolling interest
63

 
48

Total stockholders' equity
1,277,508

 
1,134,474

Total liabilities and stockholders' equity
$
9,560,457

 
$
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 June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Interest sensitive product charges
$
29,027

 
$
28,273

 
$
57,138

 
$
56,394

Traditional life insurance premiums
49,605

 
48,891

 
99,743

 
96,039

Net investment income
100,722

 
97,489

 
199,107

 
196,262

Net realized capital gains (losses) on sales of investments
(2,269
)
 
7,968

 
(679
)
 
7,602

 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
(25
)
 
(160
)
 
(3,744
)
 
(160
)
Non-credit portion in other comprehensive income
—

 
—

 
1,522

 
—

Net impairment losses recognized in earnings
(25
)
 
(160
)
 
(2,222
)
 
(160
)
Other income
4,225

 
4,284

 
7,864

 
8,554

Total revenues
181,285

 
186,745

 
360,951

 
364,691

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Interest sensitive product benefits
58,559

 
53,373

 
112,978

 
109,181

Traditional life insurance benefits
43,369

 
44,654

 
87,938

 
90,363

Policyholder dividends
2,515

 
2,956

 
5,555

 
5,917

Underwriting, acquisition and insurance expenses
38,938

 
35,818

 
76,652

 
71,359

Interest expense
1,213

 
1,212

 
2,425

 
2,424

Other expenses
4,435

 
4,618

 
8,793

 
9,148

Total benefits and expenses
149,029

 
142,631

 
294,341

 
288,392

 
32,256

 
44,114

 
66,610

 
76,299

Income taxes
(10,477
)
 
(14,153
)
 
(21,546
)
 
(24,537
)
Equity income, net of related income taxes
2,613

 
2,402

 
5,265

 
4,171

Net income
24,392

 
32,363

 
50,329

 
55,933

Net loss (income) attributable to noncontrolling interest
(12
)
 
9

 
(3
)
 
30

Net income attributable to FBL Financial Group, Inc.
$
24,380

 
$
32,372

 
$
50,326

 
$
55,963

 
 
 
 
 
 
 
 
Earnings per common share
$
0.97

 
$
1.30

 
$
2.01

 
$
2.24

Earnings per common share - assuming dilution
$
0.97

 
$
1.29

 
$
2.01

 
$
2.23

 
 
 
 
 
 
 
 
Cash dividend per common share
$
0.42

 
$
0.40

 
$
0.84

 
$
0.80

Special cash dividend per common share
$
—

 
$
—

 
$
2.00

 
$
2.00


See accompanying notes.


4



FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
24,392

 
$
32,363

 
$
50,329

 
$
55,933

Other comprehensive income (loss) (1)
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses
90,055

 
(115,873
)
 
162,258

 
(86,686
)
Non-credit impairment losses
—

 
—

 
(952
)
 
—

Change in underfunded status of postretirement benefit plans
149

 
246

 
284

 
477

Total other comprehensive income (loss), net of tax
90,204

 
(115,627
)
 
161,590

 
(86,209
)
Total comprehensive income net of tax
114,596

 
(83,264
)
 
211,919

 
(30,276
)
Comprehensive loss (income) attributable to noncontrolling interest
(12
)
 
9

 
(3
)
 
30

Total comprehensive income (loss) applicable to FBL Financial Group, Inc.
$
114,584

 
$
(83,255
)
 
$
211,916

 
$
(30,246
)

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


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

 
$
144,697

 
$
258,410

 
$
846,737

 
$
38

 
$
1,252,882

Net income - six months ended June 30, 2015
—

 
—

 
—

 
55,963

 
(30
)
 
55,933

Other comprehensive loss
—

 
—

 
(86,209
)
 
—

 
—

 
(86,209
)
Issuance of common stock under compensation plans
—

 
3,302

 
—

 
—

 
—

 
3,302

Dividends on preferred stock
—

 
—

 
—

 
(75
)
 
—

 
(75
)
Dividends on common stock
—

 
—

 
—

 
(69,364
)
 
—

 
(69,364
)
Receipts related to noncontrolling interest
—

 
—

 
—

 
—

 
33

 
33

Balance at June 30, 2015
$
3,000

 
$
147,999

 
$
172,201

 
$
833,261

 
$
41

 
$
1,156,502

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
3,000

 
$
149,320

 
$
114,532

 
$
867,574

 
$
48

 
$
1,134,474

Net income - six months ended June 30, 2016
—

 
—

 
—

 
50,326

 
3

 
50,329

Other comprehensive income
—

 
—

 
161,590

 
—

 
—

 
161,590

Issuance of common stock under compensation plans
—

 
2,314

 
—

 
—

 
—

 
2,314

Purchase of common stock
—

 
(63
)
 
—

 
(523
)
 
—

 
(586
)
Dividends on preferred stock
—

 
—

 
—

 
(75
)
 
—

 
(75
)
Dividends on common stock
—

 
—

 
—

 
(70,550
)
 
—

 
(70,550
)
Receipts related to noncontrolling interest
—

 
—

 
—

 
—

 
12

 
12

Balance at June 30, 2016
$
3,000

 
$
151,571

 
$
276,122

 
$
846,752

 
$
63

 
$
1,277,508


See accompanying notes.


5



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

 
Six months ended June 30,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
50,329

 
$
55,933

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
75,226

 
76,043

Charges for mortality, surrenders and administration
(55,579
)
 
(53,992
)
Net realized (gains) losses on investments
2,901

 
(7,442
)
Change in fair value of derivatives
2,800

 
(131
)
Increase in liabilities for life insurance and other future policy benefits
44,169

 
26,462

Deferral of acquisition costs
(20,977
)
 
(20,693
)
Amortization of deferred acquisition costs and value of insurance in force
22,379

 
18,683

Change in reinsurance recoverable
(1,880
)
 
(10,904
)
Provision for deferred income taxes
1,993

 
462

Other
(4,270
)
 
4,620

Net cash provided by operating activities
117,091

 
89,041

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
289,644

 
322,036

Equity securities - available for sale
3,571

 
12,320

Mortgage loans
34,641

 
24,254

Derivative instruments
75

 
1,953

Policy loans
18,532

 
17,833

Securities and indebtedness of related parties
7,293

 
12,662

Acquisitions:
 
 
 
Fixed maturities - available for sale
(328,264
)
 
(434,563
)
Equity securities - available for sale
(11,162
)
 
(22,582
)
Mortgage loans
(61,125
)
 
(83,935
)
Derivative instruments
(3,311
)
 
(1,727
)
Policy loans
(20,187
)
 
(18,987
)
Securities and indebtedness of related parties
(8,131
)
 
(14,429
)
Short-term investments, net change
5,694

 
19,309

Purchases and disposals of property and equipment, net
(5,831
)
 
(5,624
)
Net cash used in investing activities
(78,561
)
 
(171,480
)




6



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

 
Six months ended June 30,
 
2016
 
2015
Financing activities
 
 
 
Contract holder account deposits
$
319,337

 
$
363,387

Contract holder account withdrawals
(177,676
)
 
(239,091
)
Repayments of debt
(15,000
)
 
—

Receipts related to noncontrolling interests, net
12

 
33

Excess tax deductions on stock-based compensation
472

 
806

Issuance or repurchase of common stock, net
1,005

 
2,094

Dividends paid
(70,625
)
 
(69,439
)
Net cash provided by financing activities
57,525

 
57,790

Increase (decrease) in cash and cash equivalents
96,055

 
(24,649
)
Cash and cash equivalents at beginning of period
29,490

 
76,632

Cash and cash equivalents at end of period
$
125,545

 
$
51,983

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,429

 
$
2,425

Income taxes
2,001

 
8,501


See accompanying notes.


7

FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 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 June 30, 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 issued guidance that will impact the accounting for share-based compensation. The guidance will impact several areas including the accounting for excess tax benefits and deficiencies, classification of excess tax benefits within the consolidated statement of cash flows, and the accounting for forfeitures. The guidance becomes effective for fiscal years beginning after December 15, 2016. Certain requirements must be adopted prospectively, while others are required to be adopted on a modified prospective basis, or retroactively. We are currently evaluating the impact of this new guidance on our consolidated financial statements.

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

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



8
Table of Contents

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

In June 2016, the FASB issued guidance amending the accounting for the credit impairment of financial instruments. Under the new guidance, impairment losses are required to be estimated using an expected loss model under which a valuation allowance is established and adjusted over time. The valuation allowance will be based on the probability of loss over the life of the instrument, considering historical, current and forecasted information. The new guidance differs significantly from the incurred loss model used today, and will result in the earlier recognition of impairment losses. The new guidance will also increase the volatility of earnings to the extent actual results differ from the assumptions used in the establishment of the valuation allowance. The financial instruments for which we will be required to use the new model include but are not limited to, mortgage loans, lease receivables, and reinsurance recoverables. Our available-for-sale fixed maturities will continue to apply the incurred loss model, however, rather than impairment losses resulting in a permanent reduction of carrying value as they do today, such losses will be in the form of a valuation allowance which can be increased in the case of future credit losses or decreased should conditions improve. 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.


2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
June 30, 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)
$
3,415,019

 
$
350,826

 
$
(46,345
)
 
$
3,719,500

 
$
98

Residential mortgage-backed
399,625

 
40,284

 
(3,337
)
 
436,572

 
(1,404
)
Commercial mortgage-backed
551,349

 
73,452

 
(539
)
 
624,262

 
—

Other asset-backed
676,366

 
12,647

 
(6,974
)
 
682,039

 
3,866

United States Government and agencies
39,042

 
4,576

 
—

 
43,618

 
—

State, municipal and other governments
1,362,592

 
197,876

 
(1
)
 
1,560,467

 
—

Total fixed maturities
$
6,443,993

 
$
679,661

 
$
(57,196
)
 
$
7,066,458

 
$
2,560

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
100,041

 
$
8,515

 
$
(1,523
)
 
$
107,033

 
 
Common stocks
31,965

 
475

 
—

 
32,440

 
 
Total equity securities
$
132,006

 
$
8,990

 
$
(1,523
)
 
$
139,473

 
 


9
Table of Contents

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

 
$
192,149

 
$
(137,844
)
 
$
3,518,707

 
$
351

Residential mortgage-backed
436,969

 
33,880

 
(5,343
)
 
465,506

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

 
42,284

 
(2,487
)
 
553,992

 
—

Other asset-backed
578,692

 
11,554

 
(7,124
)
 
583,122

 
3,058

United States Government and agencies
41,050

 
3,129

 
(81
)
 
44,098

 
—

State, municipal and other governments
1,344,611

 
129,923

 
(2,183
)
 
1,472,351

 
—

Total fixed maturities
$
6,379,919

 
$
412,919

 
$
(155,062
)
 
$
6,637,776

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

 
$
6,095

 
$
(1,173
)
 
$
91,951

 
 
Common stocks
29,307

 
450

 
(41
)
 
29,716

 
 
Total equity securities
$
116,336

 
$
6,545

 
$
(1,214
)
 
$
121,667

 
 

(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for corporate and other asset-backed securities were in an unrealized gain position at June 30, 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 $27.2 million at June 30, 2016 and $43.5 million at December 31, 2015. Corporate securities also include redeemable preferred stock with a carrying value of $26.1 million at June 30, 2016 and $24.8 million at December 31, 2015.

Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
 
 
 
 
June 30, 2016
 
Amortized
Cost
 

Fair Value
 
(Dollars in thousands)
Due in one year or less
$
74,983

 
$
76,678

Due after one year through five years
743,828

 
808,721

Due after five years through ten years
751,522

 
801,916

Due after ten years
3,246,320

 
3,636,270

 
4,816,653

 
5,323,585

Mortgage-backed and other asset-backed
1,627,340

 
1,742,873

Total fixed maturities
$
6,443,993

 
$
7,066,458


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



10
Table of Contents

Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income
 
 
 
 
 
June 30,
2016
 
December 31,
2015
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
622,465

 
$
257,857

Equity securities - available for sale
7,467

 
5,331

 
629,932

 
263,188

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(191,075
)
 
(73,735
)
Value of insurance in force acquired
(2,978
)
 
(3,087
)
Unearned revenue reserve
10,530

 
3,352

Adjustments for assumed changes in policyholder liabilities
(12,597
)
 
(4,090
)
Provision for deferred income taxes
(151,833
)
 
(64,955
)
Net unrealized investment gains
$
281,979

 
$
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
 
 
 
 
 
 
 
 
 
June 30, 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
 
$
173,503

 
$
(11,032
)
 
$
287,820

 
$
(35,313
)
 
$
461,323

 
$
(46,345
)
 
81.0
%
Residential mortgage-backed
 
28,821

 
(963
)
 
25,346

 
(2,374
)
 
54,167

 
(3,337
)
 
5.8

Commercial mortgage-backed
 
6,755

 
(7
)
 
20,217

 
(532
)
 
26,972

 
(539
)
 
0.9

Other asset-backed
 
134,122

 
(1,659
)
 
96,872

 
(5,315
)
 
230,994

 
(6,974
)
 
12.3

State, municipal and other governments
 
4,074

 
(1
)
 
—

 
—

 
4,074

 
(1
)
 
—

Total fixed maturities
 
$
347,275

 
$
(13,662
)
 
$
430,255

 
$
(43,534
)
 
$
777,530

 
$
(57,196
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
2,978

 
$
(23
)
 
$
13,463

 
$
(1,500
)
 
$
16,441

 
$
(1,523
)
 
 
Total equity securities
 
$
2,978

 
$
(23
)
 
$
13,463

 
$
(1,500
)
 
$
16,441

 
$
(1,523
)
 
 



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Table of Contents

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 244 securities from 201 issuers at June 30, 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 June 30, 2016.

Corporate securities: The largest unrealized losses were in the energy sector ($176.1 million fair value and $23.2 million unrealized loss) and the basic industrial sector ($84.6 million fair value and $9.2 million unrealized loss). The largest unrealized losses in the energy sector were in the midstream ($73.3 million fair value and $8.2 million unrealized loss) and the oil field services ($24.2 million fair value and $7.4 million unrealized loss) sub-sectors, with the majority of losses attributable to credit spread widening and low oil prices. Energy-related companies have been negatively impacted by the rapid decline in oil prices, which has pressured revenues and margins. The largest unrealized losses in the basic industrial sector were in the metal/mining ($127.7 million fair value and $7.2 million unrealized loss) and the chemicals ($150.3 million fair value and $1.7 million unrealized loss) sub-sectors and are primarily attributable to credit spread widening and low prices for industrial commodities. 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 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.
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


12
Table of Contents

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 $2.4 million at June 30, 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 June 30, 2016 was $1.4 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 $0.9 million.

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

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

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

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

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



13
Table of Contents

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
 
 
 
 
Six months ended June 30,
 
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
622

 
496

Balance at end of period
$
(13,048
)
 
$
(16,276
)

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 June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Gross gains
$
5,789

 
$
2,528

 
$
7,379

 
$
2,748

Gross losses
(8,378
)
 
(1,017
)
 
(8,378
)
 
(1,603
)
Securities and indebtedness of related parties
320

 
6,457

 
320

 
6,457

 
(2,269
)
 
7,968

 
(679
)
 
7,602

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

 
—

 
(2,172
)
 
—

Other credit-related
(25
)
 
(160
)
 
(50
)
 
(160
)
Net realized losses on investments recorded in income
$
(2,294
)
 
$
7,808

 
$
(2,901
)
 
$
7,442


(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 $105.4 million during the six months ended June 30, 2016 and $69.2 million during the six months ended June 30, 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 June 30, 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


14
Table of Contents

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 June 30, 2016, we had committed to provide additional funding for mortgage loans totaling $31.6 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.

Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
350,577

 
45.9
%
 
$
333,400

 
44.8
%
Retail
 
223,492

 
29.3

 
227,039

 
30.5

Industrial
 
139,384

 
18.3

 
133,085

 
17.9

Other
 
49,974

 
6.5

 
50,779

 
6.8

Total
 
$
763,427

 
100.0
%
 
$
744,303

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
239,503

 
31.4
%
 
$
233,522

 
31.4
%
Pacific
 
104,599

 
13.7

 
100,188

 
13.4

West North Central
 
95,791

 
12.4

 
102,555

 
13.8

East North Central
 
89,089

 
11.7

 
86,019

 
11.5

Mountain
 
76,520

 
10.0

 
78,750

 
10.6

West South Central
 
61,463

 
8.1

 
66,677

 
9.0

Other
 
96,462

 
12.7

 
76,592

 
10.3

Total
 
$
763,427

 
100.0
%
 
$
744,303

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Loan-to-Value Ratio
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
269,661

 
35.3
%
 
$
264,605

 
35.6
%
51% - 60%
 
196,223

 
25.7

 
169,045

 
22.7

61% - 70%
 
243,203

 
31.9

 
234,544

 
31.5

71% - 80%
 
45,371

 
5.9

 
67,072

 
9.0

81% - 90%
 
8,969

 
1.2

 
9,037

 
1.2

Total
 
$
763,427

 
100.0
%
 
$
744,303

 
100.0
%

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



15
Table of Contents

Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2016
 
$
60,983

 
8.0
%
 
$
—

 
—
%
2015
 
152,706

 
20.0

 
154,582

 
20.9

2014
 
82,174

 
10.8

 
83,546

 
11.2

2013
 
78,058

 
10.2

 
79,879

 
10.7

2012
 
64,484

 
8.4

 
65,817

 
8.8

2011 and prior
 
325,022

 
42.6

 
360,479

 
48.4

Total
 
$
763,427

 
100.0
%
 
$
744,303

 
100.0
%

 Impaired Mortgage Loans
 
 
 
June 30, 2016
 
December 31, 2015
 
(Dollars in thousands)
Unpaid principal balance
$
21,602

 
$
21,766

Less:
 
 
 
Related allowance
(844
)
 
(851
)
Discount
—

 
(87
)
Carrying value of impaired mortgage loans
$
20,758

 
$
20,828

 Allowance on Mortgage Loans
 
Six months ended June 30,
 
2016
 
2015
 
(Dollars in thousands)
Balance at beginning of period
$
851

 
$
857

Charge offs
(7
)
 
(6
)
Balance at end of period
$
844

 
$
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 six months ended June 30, 2016 or 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 $92.8 million at June 30, 2016 and $94.2 million at December 31, 2015. There were no impairment losses recorded on these investments during the second 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
Table of Contents

LIHTC Equity Income (Loss), Net of Related Income Taxes
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in thousands)
Equity losses from LIHTC
 
$
(2,508
)
 
$
(1,997
)
 
$
(4,047
)
 
$
(3,842
)
Income tax benefits:
 
 
 
 
 
 
 
 
Tax benefits from equity losses
 
878

 
699

 
1,416

 
1,345

Investment tax credits
 
3,552

 
3,488

 
7,002

 
6,675

Equity income from LIHTC, net of related income tax benefits
 
$
1,922

 
$
2,190

 
$
4,371

 
$
4,178


At June 30, 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 $29.3 million, including $5.7 million for LIHTC commitments, which are summarized by year in the following table.

LIHTC Commitments by Year
 
 
June 30, 2016
 
(Dollars in thousands)
2016
$
3,666

2017
1,518

2018-2024
564

Total
$
5,748


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 carrying 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 June 30, 2016 or December 31, 2015.



17
Table of Contents

VIE Investments by Category
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value (1)
 
Maximum Exposure to Loss (1)
 
(Dollars in thousands)
LIHTC
$
92,811

 
$
98,559

 
$
94,170

 
$
102,626

Investment companies
16,917

 
34,259

 
20,004

 
35,604

Real estate limited partnerships
10,665

 
15,090

 
9,554

 
15,610

Other
639

 
2,440

 
637

 
2,448

Total
$
121,032

 
$
150,348

 
$
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.

In addition, we make passive investments in the normal course of business in structured securities issued by VIEs for which we are not the investment manager. These structured securities include all of the residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities included in our fixed maturities. Our maximum exposure to loss on these securities is limited to our carrying value 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

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 and they are held at fair value. Our primary exposure relates to purchased call options, which provide an economic hedge to the embedded derivatives in our index 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.

Derivatives Instruments by Type
 
 
June 30, 2016
 
December 31, 2015
 
(Dollars in thousands)
Assets
 
 
 
Freestanding derivatives:
 
 
 
Call options (reported in other investments)
$
5,638

 
$
2,331

Embedded derivatives:
 
 
 
Modified coinsurance (reported in reinsurance recoverable)
3,514

 
2,636

Interest-only security (reported in fixed maturities)
3,493

 
4,551

Total assets
$
12,645

 
$
9,518

 
 
 
 
Liabilities
 
 
 
Embedded derivatives:
 
 
 
Index annuity and universal life products (reported in liability for future policy benefits)
$
13,100

 
$
9,374

Modified coinsurance agreements (reported in other liabilities)
107

 
56

Total liabilities
$
13,207

 
$
9,430






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Table of Contents

Derivative Income (Loss)
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Change in fair value of free standing derivatives:
 
 
 
 
 
 
 
Call options
$
1,629

 
$
(313
)
 
$
2,289

 
$
(684
)
Change in fair value of embedded derivatives:
 
 
 
 
 
 
 
Modified coinsurance agreements
666

 
(416
)
 
827

 
(206
)
Interest-only security
(710
)
 
—

 
(465
)
 
—

Index annuity and universal life products
(1,521
)
 
200

 
(2,689
)
 
217

Call option amortization
(1,334
)
 
(729
)
 
(2,474
)
 
(1,356
)
Call option proceeds
9


875


74


1,953

Total income (loss) from derivatives
$
(1,261
)
 
$
(383
)
 
$
(2,438
)
 
$
(76
)

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

The call options are supported by securities collateral received of $3.6 million at June 30, 2016, 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 June 30, 2016, none of the collateral had been sold or re-pledged. All of our counterparties are rated A- or better by a nationally recognized statistical rating organization.


3. Fair Values

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

Fair Values and Carrying Values
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities - available for sale
$
7,066,458

 
$
7,066,458

 
$
6,637,776

 
$
6,637,776

Equity securities - available for sale
139,473

 
139,473

 
121,667

 
121,667

Mortgage loans
763,427

 
817,972

 
744,303

 
780,624

Policy loans
187,439

 
246,850

 
185,784

 
230,153

Other investments
6,237

 
7,546

 
2,331

 
2,331

Cash, cash equivalents and short-term investments
148,102

 
148,102

 
57,741

 
57,741

Reinsurance recoverable
3,514

 
3,514

 
2,636

 
2,636

Assets held in separate accounts
603,706

 
603,706

 
625,257

 
625,257


Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
3,911,073

 
$
3,926,697

 
$
3,750,186

 
$
3,618,145

Supplementary contracts without life contingencies
335,898

 
345,762

 
339,929

 
339,717

Advance premiums and other deposits
246,626

 
246,626

 
245,269

 
245,269

Short-term debt
—

 
—

 
15,000

 
15,000

Long-term debt
97,000

 
65,485

 
97,000

 
68,133

Other liabilities
107

 
107

 
56

 
56

Liabilities related to separate accounts
603,706

 
599,803

 
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,


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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, 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


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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.

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.



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Table of Contents

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 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.



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Table of Contents

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.

Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
 
 
June 30, 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
$
—

 
$
3,655,292

 
$
64,208

 
$
3,719,500

Residential mortgage-backed securities
—

 
436,572

 
—

 
436,572

Commercial mortgage-backed securities
—

 
531,029

 
93,233

 
624,262

Other asset-backed securities
—

 
630,012

 
52,027

 
682,039

United States Government and agencies
13,150

 
21,175

 
9,293

 
43,618

State, municipal and other governments
—

 
1,560,467

 
—

 
1,560,467

Non-redeemable preferred stocks
—

 
99,665

 
7,368

 
107,033

Common stocks
6,087

 
26,353

 
—

 
32,440

Other investments
—

 
5,638

 
—

 
5,638

Cash, cash equivalents and short-term investments
148,102

 
—

 
—

 
148,102

Reinsurance recoverable
—

 
3,514

 
—

 
3,514

Assets held in separate accounts
603,706

 
—

 
—

 
603,706

Total assets
$
771,045

 
$
6,969,717

 
$
226,129

 
$
7,966,891

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
—

 
$
—

 
$
13,100

 
$
13,100

Other liabilities
—

 
107

 
—

 
107

Total liabilities
$
—

 
$
107

 
$
13,100

 
$
13,207




23
Table of Contents

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

 
$
3,469,631

 
$
49,076

 
$
3,518,707

Residential mortgage-backed securities
—

 
461,777

 
3,729

 
465,506

Commercial mortgage-backed securities
—

 
465,812

 
88,180

 
553,992

Other asset-backed securities
—

 
527,565

 
55,557

 
583,122

United States Government and agencies
14,760

 
20,612

 
8,726

 
44,098

State, municipal and other governments
—

 
1,472,351

 
—

 
1,472,351

Non-redeemable preferred stocks
—

 
84,480

 
7,471

 
91,951

Common stocks
4,728

 
24,988

 
—

 
29,716

Other investments
—

 
2,331

 
—

 
2,331

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

 
—

 
—

 
57,741

Reinsurance recoverable
—

 
2,636

 
—

 
2,636

Assets held in separate accounts
625,257

 
—

 
—

 
625,257

Total assets
$
702,486

 
$
6,532,183

 
$
212,739

 
$
7,447,408

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
—

 
$
—

 
$
9,374

 
$
9,374

Other liabilities
—

 
56

 
—

 
56

Total liabilities
$
—

 
$
56

 
$
9,374

 
$
9,430


Level 3 Fixed Maturities by Valuation Source - Recurring Basis
 
 
 
June 30, 2016
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
23,752

 
$
40,456

 
$
64,208

Commercial mortgage-backed securities
93,233

 
—

 
93,233

Other asset-backed securities
31,441

 
20,586

 
52,027

United States Government and agencies
—

 
9,293

 
9,293

Total
$
148,426

 
$
70,335

 
$
218,761

Percent of total
67.8
%
 
32.2
%
 
100.0
%

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

 
$
31,868

 
$
49,076

Residential mortgage-backed securities
—

 
3,729

 
3,729

Commercial mortgage-backed securities
88,180

 
—

 
88,180

Other asset-backed securities
35,420

 
20,137

 
55,557

United States Government and agencies
—

 
8,726

 
8,726

Total
$
140,808

 
$
64,460

 
$
205,268

Percent of total
68.6
%
 
31.4
%
 
100.0
%



24
Table of Contents

Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
June 30, 2016
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
50,038

 
Discounted cash flow
 
Credit spread
 
0.95% - 17.75% (10.23%)
Commercial mortgage-backed
93,233

 
Discounted cash flow
 
Credit spread
 
1.15% - 4.25% (3.00%)
Other asset-backed securities
14,187

 
Discounted cash flow
 
Credit spread
 
0.97% - 6.65% (4.74%)
United States Government and agencies
9,293

 
Discounted cash flow
 
Credit spread
 
1.81% (1.81%)
Non-redeemable preferred stocks
7,368

 
Discounted cash flow
 
Credit spread
 
5.00% (5.00%)
Total assets
$
174,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - index annuity embedded derivatives
$
13,100

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.85% - 2.45% (1.55%)
0.15% - 0.40% (0.25%)

 
December 31, 2015
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
33,508

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

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

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

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

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

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

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

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



25
Table of Contents

Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
 
Purchases
 
Disposals
 
Included in net income
 
Included in other compre-hensive income
 
Transfers into
Level 3 (1)
 
Transfers
out of
Level 3 (1)
 
Amort-ization included in net income
 
Balance, June 30, 2016
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
49,076

 
$
2,000

 
$
(3,673
)
 
$
—

 
$
(778
)
 
$
26,738

 
$
(9,124
)
 
$
(31
)
 
$
64,208

Residential mortgage-backed securities
3,729

 
—

 
(3,722
)
 
—

 
(137
)
 
—

 
—

 
130

 
—

Commercial mortgage-backed securities
88,180

 
15,962

 
(815
)
 
—

 
6,259

 
—

 
(16,418
)
 
65

 
93,233

Other asset-backed securities
55,557

 
23,920

 
(1,291
)
 
—

 
410

 
13,698

 
(40,276
)
 
9

 
52,027

United States Government and agencies
8,726

 
—

 
—

 
—

 
563

 
—

 
—

 
4

 
9,293

State, municipal and other governments
—

 
—

 
—

 
—

 
108

 
2,393

 
(2,501
)
 
—

 
—

Non-redeemable preferred stocks
7,471

 
—

 
—

 
—

 
(103
)
 
—

 
—

 
—

 
7,368

Total assets
$
212,739

 
$
41,882

 
$
(9,501
)
 
$
—

 
$
6,322

 
$
42,829

 
$
(68,319
)
 
$
177

 
$
226,129

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

 
$
2,852

 
$
(469
)
 
$
1,343

 
$
—

 
$
—

 
$
—

 
$
—

 
$
13,100

Total liabilities
$
9,374

 
$
2,852

 
$
(469
)
 
$
1,343

 
$
—

 
$
—

 
$
—

 
$
—

 
$
13,100




26
Table of Contents

Level 3 Financial Instruments Changes in Fair Value - Recurring Basis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
Realized and unrealized gains (losses), net
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
Purchases
 
Disposals
 
Included in net income
 
Included in other compre-hensive income
 
Transfers into
Level 3 (1)
 
Transfers
out of
Level 3 (1)
 
Amort-ization included in net income
 
Balance,
June 30, 2015
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
64,239

 
$
8,993

 
$
(8,008
)
 
$
—

 
$
(4,022
)
 
$
18,451

 
$
(5,302
)
 
$
94

 
$
74,445

Residential mortgage-backed securities
—

 
19,354

 
—

 
—

 
93

 
—

 
(4,055
)
 
—

 
15,392

Commercial mortgage-backed securities
77,891

 
3,126

 
(397
)
 
—

 
(3,660
)
 
—

 
—

 
50

 
77,010

Other asset-backed securities
116,141

 
37,290

 
(6,397
)
 
—

 
(253
)
 
—

 
(52,874
)
 
108

 
94,015

United States Government and agencies
9,065

 
—

 
—

 
—

 
(265
)
 
—

 
—

 
3

 
8,803

Non-redeemable preferred stocks
8,054

 
—

 
—

 
—

 
(300
)
 
—

 
—

 
—

 
7,754

Total assets
$
275,390

 
$
68,763

 
$
(14,802
)
 
$
—

 
$
(8,407
)
 
$
18,451

 
$
(62,231
)
 
$
255

 
$
277,419

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

 
$
2,065

 
$
(435
)
 
$
(1,823
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
8,488

Total liabilities
$
8,681

 
$
2,065

 
$
(435
)
 
$
(1,823
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
8,488


(1)
Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using non-binding broker quotes. Transfers out of Level 3 include those assets that we are now able to obtain pricing from a third party pricing vendor that uses observable inputs. The fair values of newly issued securities often require additional estimation until a market is created, which is generally within a few months after issuance. Once a market is created, as was the case for the majority of the security transfers out of the Level 3 category above, Level 2 valuation sources become available. There were no transfers between Level 1 and Level 2 during the periods presented above.



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Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels
 
 
 
June 30, 2016
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Mortgage loans
$
—

 
$
—

 
$
817,972

 
$
817,972

Policy loans
—

 
—

 
246,850

 
246,850

Other investments
—

 
—

 
1,908

 
1,908

Total assets
$
—

 
$
—

 
$
1,066,730

 
$
1,066,730

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
—

 
$
—

 
$
3,913,597

 
$
3,913,597

Supplementary contracts without life contingencies
—

 
—

 
345,762

 
345,762

Advance premiums and other deposits
—

 
—

 
246,626

 
246,626

Long-term debt
—

 
—

 
65,485

 
65,485

Liabilities related to separate accounts
—

 
—

 
599,803

 
599,803

Total liabilities
$
—

 
$
—

 
$
5,171,273

 
$
5,171,273


 
December 31, 2015
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Mortgage loans
$
—

 
$
—

 
$
780,624

 
$
780,624

Policy loans
—

 
—

 
230,153

 
230,153

Total assets
$
—

 
$
—

 
$
1,010,777

 
$
1,010,777

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
—

 
$
—

 
$
3,608,771

 
$
3,608,771

Supplementary contracts without life contingencies
—

 
—

 
339,717

 
339,717

Advance premiums and other deposits
—

 
—

 
245,269

 
245,269

Short-term debt
—

 
—

 
15,000

 
15,000

Long-term debt
—

 
—

 
68,133

 
68,133

Liabilities related to separate accounts
—

 
—

 
620,676

 
620,676

Total liabilities
$
—

 
$
—

 
$
4,897,566

 
$
4,897,566


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

Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate that have been deemed to be impaired during the reporting period. There were no mortgage loans or real estate impaired to fair value during the quarters ended June 30, 2016 or June 30, 2015.


4. Defined Benefit Plan

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



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Table of Contents

Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Multiemployer Plan
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Service cost
$
1,448

 
$
1,488

 
$
2,896

 
$
2,976

Interest cost
3,612

 
3,300

 
7,224

 
6,600

Expected return on assets
(4,466
)
 
(4,463
)
 
(8,932
)
 
(8,926
)
Amortization of prior service cost
36

 
36

 
72

 
72

Amortization of actuarial loss
2,358

 
2,598

 
4,716

 
5,196

Effect of settlement
—

 
4,490

 
—

 
4,490

Net periodic pension cost
$
2,988

 
$
7,449

 
$
5,976

 
$
10,408

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

 
$
2,414

 
$
1,904

 
$
3,373


Pension settlement charges are recognized when total cash payments for lump sum distributions exceed the sum of the service and interest cost for the year.
Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Other Plans
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Service cost
$
84

 
$
109

 
$
168

 
$
218

Interest cost
241

 
250

 
482

 
500

Amortization of prior service cost
—

 
(3
)
 
—

 
(6
)
Amortization of actuarial loss
230

 
382

 
460

 
764

Net periodic pension cost
$
555

 
$
738

 
$
1,110

 
$
1,476

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

 
$
418

 
$
630

 
$
836

 

5. Commitments and Contingencies

Legal Proceedings

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


6. Stockholders' Equity

Share Repurchases

During 2014 and 2016, our Board of Directors approved programs to repurchase our Class A common stock. These repurchase programs authorize us to make repurchases in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. In connection with the Class A repurchase programs, we repurchased 10,322 shares for $0.6 million during the six months ended June 30, 2016 and we made no repurchases during the six months ended June 30, 2015. At June 30, 2016, $49.5 million remains available for repurchase under the program announced in 2016. Completion of this program is dependent on market conditions and other factors. There is no


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guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.

Special Dividend

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

Reconciliation of Outstanding Common Stock
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
(Dollars in thousands)
Outstanding at January 1, 2015
24,703,903

 
$
144,625

 
11,413

 
$
72

 
24,715,316

 
$
144,697

Issuance of common stock under compensation plans
99,265

 
3,302

 
—

 
—

 
99,265

 
3,302

Purchase of common stock
—

 
—

 
—

 
—

 
—

 
—

Outstanding at June 30, 2015
24,803,168

 
$
147,927

 
11,413

 
$
72

 
24,814,581

 
$
147,999

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2016
24,796,763

 
$
149,248

 
11,413

 
$
72

 
24,808,176

 
$
149,320

Issuance of common stock under compensation plans
62,821

 
2,314

 
—

 
—

 
62,821

 
2,314

Purchase of common stock
(10,322
)
 
(63
)
 
—

 
—

 
(10,322
)
 
(63
)
Outstanding at June 30, 2016
24,849,262

 
$
151,499

 
11,413

 
$
72

 
24,860,675

 
$
151,571


Accumulated Other Comprehensive Income, Net of Tax and Other Offsets
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses
 
Underfunded Status of Postretirement Benefit Plans
 
Total
 
(Dollars in thousands)
Balance at January 1, 2015
$
266,211

 
$
1,131

 
$
(8,932
)
 
$
258,410

Other comprehensive loss before reclassifications
(85,778
)
 
(272
)
 
—

 
(86,050
)
Reclassification adjustments
(636
)
 
—

 
477

 
(159
)
Balance at June 30, 2015
$
179,797

 
$
859

 
$
(8,455
)
 
$
172,201

 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
120,787

 
$
(114
)
 
$
(6,141
)
 
$
114,532

Other comprehensive income before reclassifications
159,244

 
2,730

 
—

 
161,974

Reclassification adjustments
284

 
(952
)
 
284

 
(384
)
Balance at June 30, 2016
$
280,315

 
$
1,664

 
$
(5,857
)
 
$
276,122


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



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Table of Contents

Accumulated Other Comprehensive Income Reclassification Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses (1)
 
Underfunded Status of Postretirement Benefit
Plans
 
Total
 
(Dollars in thousands)
Realized capital losses on sales of investments
$
999

 
$
—

 
$
—

 
$
999

Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
(562
)
 
58

 
—

 
(504
)
Other-than-temporary impairment losses
—

 
(1,522
)
 
—

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


Net actuarial loss
—

 
—

 
437

 
437

Reclassifications before income taxes
437

 
(1,464
)
 
437

 
(590
)
Income taxes
(153
)
 
512

 
(153
)
 
206

Reclassification adjustments
$
284

 
$
(952
)
 
$
284

 
$
(384
)

 
Six months ended June 30, 2015
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses (1)
 
Underfunded Status of Postretirement Benefit
Plans
 
Total
 
(Dollars in thousands)
Realized capital gains on sales of investments
$
(1,145
)
 
$
—

 
$
—

 
$
(1,145
)
Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
167

 
—

 
—

 
167

Other expenses: Change in unrecognized postretirement items:
 
 
 
 
 
 


Prior service costs
—

 
—

 
(6
)
 
(6
)
Net actuarial loss
—

 
—

 
740

 
740

Reclassifications before income taxes
(978
)
 
—

 
734

 
(244
)
Income taxes
342

 
—

 
(257
)
 
85

Reclassification adjustments
$
(636
)
 
$
—

 
$
477

 
$
(159
)

(1)
See Note 2 for further information.



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7. Earnings per Share

Computation of Earnings per Common Share
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income attributable to FBL Financial Group, Inc.
$
24,380

 
$
32,372

 
$
50,326

 
$
55,963

Less: Dividends on Series B preferred stock
37

 
37

 
75

 
75

Income available to common stockholders
$
24,343

 
$
32,335

 
$
50,251

 
$
55,888

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares - basic
24,987,878

 
24,951,492

 
24,969,727

 
24,926,527

Effect of dilutive securities - stock-based compensation
42,566

 
87,541

 
50,358

 
98,592

Weighted average shares - diluted
25,030,444

 
25,039,033

 
25,020,085

 
25,025,119

 
 
 
 
 
 
 
 
Earnings per common share
$
0.97

 
$
1.30

 
$
2.01

 
$
2.24

Earnings per common share - assuming dilution:
$
0.97

 
$
1.29

 
$
2.01

 
$
2.23

 
There were no antidilutive stock options outstanding in either period presented.


8. Segment Information

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

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

We use operating income, in addition to net income, to measure our performance since realized gains and losses on investments and the change in net unrealized gains and losses on derivatives can fluctuate greatly from quarter to quarter. A view of our operating performance without the impact of these items enhances the analysis of our results, although it should not be viewed as a substitute for net income as a measure of financial performance. Operating income is not a measure used in financial statements prepared in accordance with GAAP, but is a common life insurance industry measure of performance. We use operating income for goal setting, determining short-term incentive compensation and evaluating performance on a basis comparable to that used by many in the investment community.



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Table of Contents

Financial Information Concerning our Operating Segments
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
Annuity
$
53,954

 
$
53,464

 
$
106,133

 
$
106,223

Life Insurance
104,724

 
102,456

 
208,327

 
204,466

Corporate and Other
23,283

 
23,743

 
46,707

 
47,448

 
181,961

 
179,663

 
361,167

 
358,137

Net realized gains (losses) on investments (1)
(2,261
)
 
7,811

 
(2,868
)
 
7,445

Change in net unrealized gains/losses on derivatives (1)
1,585

 
(729
)
 
2,652

 
(891
)
Consolidated revenues
$
181,285

 
$
186,745

 
$
360,951

 
$
364,691

 
 
 
 
 
 
 
 
Pre-tax operating income:
 
 
 
 
 
 
 
Annuity
$
16,348

 
$
16,831

 
$
33,496

 
$
33,919

Life Insurance
14,473

 
13,644

 
28,544

 
23,429

Corporate and Other
1,972

 
4,951

 
4,461

 
8,447

 
32,793

 
35,426

 
66,501

 
65,795

Income taxes on operating income
(7,117
)
 
(7,621
)
 
(14,507
)
 
(14,175
)
Net realized gains/losses on investments (1)
(1,147
)
 
4,975

 
(1,544
)
 
4,728

Change in net unrealized gains/losses on derivatives (1)
(149
)
 
(408
)
 
(124
)
 
(385
)
Consolidated net income attributable to FBL Financial Group, Inc.
$
24,380

 
$
32,372

 
$
50,326

 
$
55,963


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

Our investment in equity method investees, the related equity income and interest expense are attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significant during the periods presented above. Goodwill at June 30, 2016 and December 31, 2015 was allocated among the segments as follows: Annuity ($3.9 million) and Life Insurance ($6.1 million).

Premiums collected, which is not a measure used in financial statements prepared according to GAAP, includes premiums received on life insurance policies and deposits on annuities and universal life-type products. Premiums collected is a common life insurance industry measure of agent productivity. Net premiums collected totaled $186.9 million for the quarter ended June 30, 2016 and $158.1 million for the same period in 2015. Net premiums collected totaled $360.1 million for the six months ended June 30, 2016 and $324.4 million for the same period in 2015.

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

Reconciliation of Traditional Life Insurance Premiums, Net of Reinsurance
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016

2015
 
2016
 
2015
 
(Dollars in thousands)
Traditional and universal life insurance premiums collected
$
70,211

 
$
71,087

 
$
141,924

 
$
142,302

Premiums collected on interest sensitive products
(21,173
)
 
(23,335
)
 
(42,209
)
 
(47,026
)
Traditional life insurance premiums collected
49,038

 
47,752

 
99,715

 
95,276

Change in due premiums and other
567

 
1,139

 
28

 
763

Traditional life insurance premiums
$
49,605

 
$
48,891

 
$
99,743

 
$
96,039




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Table of Contents

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

Interest Sensitive Product Charges by Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016

2015
 
2016
 
2015
 
(Dollars in thousands)
Annuity
 
 
 
 
 
 
 
Surrender charges and other
$
932

 
$
655

 
$
1,874

 
$
1,268

 
 
 
 
 
 
 
 
Life Insurance
 
 
 
 
 
 
 
Administration charges
$
3,583

 
$
3,508

 
$
7,087

 
$
7,205

Cost of insurance charges
12,042

 
11,723

 
23,867

 
23,215

Surrender charges
310

 
269

 
526

 
486

Amortization of policy initiation fees
720

 
517

 
948

 
1,016

Total
$
16,655

 
$
16,017

 
$
32,428

 
$
31,922

 
 
 
 
 
 
 
 
Corporate and Other
 
 
 
 
 
 
 
Administration charges
$
1,478

 
$
1,517

 
$
2,919

 
$
3,034

Cost of insurance charges
7,433

 
7,387

 
14,949

 
14,811

Surrender charges
47

 
84

 
73

 
192

Separate account charges
1,993

 
2,279

 
3,971

 
4,518

Amortization of policy initiation fees
489

 
334

 
924

 
649

Total
$
11,440

 
$
11,601

 
$
22,836

 
$
23,204

 
 
 
 
 
 
 
 
Consolidated interest sensitive product charges
$
29,027

 
$
28,273

 
$
57,138

 
$
56,394




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Table of Contents

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

This section includes a summary of FBL Financial Group, Inc.'s consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its life insurance subsidiary, Farm Bureau Life Insurance Company (Farm Bureau Life). Please read this discussion in conjunction with the accompanying consolidated financial statements and related notes. In addition, we encourage you to refer to our Form 10-K for the fiscal year ended December 31, 2015 for a complete description of our significant accounting policies and estimates. Familiarity with this information is important in understanding our financial position and results of operations.

This Form 10-Q includes statements relating to anticipated financial performance, business prospects, new products and similar matters. These statements and others, which include words such as "expect," "anticipate," "believe," "intend" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. A variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. See Part 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for additional information on the risks and uncertainties that may affect the operations, performance, development and results of our business.

Overview

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

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

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

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

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

•
Gross Domestic Product increased at an annual rate of 1.2% during the second quarter 2016 based on recent estimates.
•
U.S. unemployment was estimated to be 4.9% at the end of the second quarter 2016.
•
U.S. net farm income is forecast to decrease 3.0% and farm real estate value is forecast to decrease 1.2% during 2016 according to recent U.S. Department of Agriculture forecasts.
•
The U.S. 10-year Treasury yield decreased during the second quarter of 2016 to 1.49% at June 30, 2016, as the financial markets reacted to the outcome of the British referendum on European Union membership.
•
Continued uncertainty as to actions the United States Congress will take to address the national debt, including potential actions to change the tax advantages of life insurance.


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Table of Contents

•
The Department of Labor recently expanded the fiduciary responsibilities for sales of insurance products to be used in retirement plans. See Part II, Item 1A for further discussion.

The low market interest rate environment continues to impact our investment yields as well as the interest we credit on our interest sensitive products. Late in June, U.S. financial markets experienced significant inflows and a sharp rise in demand for U.S. fixed-income assets as financial markets reacted to the perceived uncertainty created by the British referendum on European Union membership. The benchmark 10-year U.S. Treasury yield decreased during the quarter and credit spreads declined significantly which caused investment yields to remain low. Low crediting rates pose challenges to maintaining attractive annuity and universal life products, although our rates are comparable to other insurance companies, allowing us to maintain our competitive position within the market. During the second quarter of 2016, we unlocked assumptions used to amortize deferred policy acquisition costs to reflect the expectation of lower earned spread rates, primarily driven by the expected continuation of low market interest rates. We experienced an increase in the fair value of our fixed maturity security portfolio during the second quarter of 2016 primarily due to a decrease in market yields. See the segment discussion and “Financial Condition” section that follows for additional information regarding the impact of low market interest rates on our business.

Results of Operations for the Periods Ended June 30, 2016 and 2015

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
(Dollars in thousands, except per share data)
Pre-tax operating income:
 
 
 
 
 
 
 
 
 
 
 
Annuity segment
$
16,348

 
$
16,831

 
(3
)%
 
$
33,496

 
$
33,919

 
(1
)%
Life Insurance segment
14,473

 
13,644

 
6
 %
 
28,544

 
23,429

 
22
 %
Corporate and Other segment
1,972

 
4,951

 
(60
)%
 
4,461

 
8,447

 
(47
)%
Total pre-tax operating income
32,793

 
35,426

 
(7
)%
 
66,501

 
65,795

 
1
 %
Income taxes on operating income
(7,117
)
 
(7,621
)
 
(7
)%
 
(14,507
)
 
(14,175
)
 
2
 %
Operating income
25,676

 
27,805

 
(8
)%
 
51,994

 
51,620

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains/losses on investments (1)
(1,147
)
 
4,975

 
(123
)%
 
(1,544
)
 
4,728

 
(133
)%
Change in net unrealized gains/losses on derivatives (1)
(149
)
 
(408
)
 
(63
)%
 
(124
)
 
(385
)
 
(68
)%
Net income attributable to FBL Financial Group, Inc.
$
24,380

 
$
32,372

 
(25
)%
 
$
50,326

 
$
55,963

 
(10
)%
 
 
 
 
 
 
 
 
 
 
 

Operating income per common share - assuming dilution
$
1.02

 
$
1.11

 
(8
)%
 
$
2.08

 
$
2.06

 
1
 %
Earnings per common share - assuming dilution
0.97

 
1.29

 
(25
)%
 
2.01

 
2.23

 
(10
)%
Effective tax rate on operating income
22
%
 
22
%
 
 
 
22
%
 
22
%
 

Average invested assets, at amortized cost
 
 
 
 

 
$
7,514,961

 
$
7,192,570

 
4
 %
Annualized yield on average invested assets
 
 
 
 
 
 
5.41
%
 
5.61
%
 

Impact on operating income of unlocking deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and certain product reserves, net of tax
$
(3,706
)
 
$
—

 
N/A
 
$
(3,706
)
 
$
—

 
N/A

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

Our operating income decreased in the second quarter of 2016, compared to the prior year period, primarily due to the impact of unlocking, partially offset by an increase in the volume of business in force. Our operating income increased in the six months ended June 30, 2016, compared to the prior year period, primarily due to a decrease in death benefits and the impact of an increase in the volume of business in force, partially offset by lower investment fee income and the impact of unlocking. Net income for the quarter and six-month period, compared to the prior year periods, was also impacted by a decrease in net realized gains. See the discussion that follows for details regarding operating income by segment.


36
Table of Contents


We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve for participating life insurance and interest sensitive products, as well as certain reserves on interest sensitive products, as applicable, through an “unlocking” process. These assumptions typically consist of withdrawal and lapse rates, earned spreads and mortality with revisions based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. During the second quarter of 2016, we incurred additional amortization through unlocking as a result of our analysis of the impact of the low interest rate environment on projected investment and spread income. See the discussion that follows for further details of the unlocking impact to our operating segments.

Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
932

 
$
655

 
42
 %
 
$
1,874

 
$
1,268

 
48
 %
Net investment income
53,022

 
52,809

 
—
 %
 
104,259

 
104,955

 
(1
)%
Total operating revenues
53,954

 
53,464

 
1
 %
 
106,133

 
106,223

 
—
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
27,591

 
28,162

 
(2
)%
 
54,077

 
55,615

 
(3
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commissions net of deferrals
523

 
435

 
20
 %
 
1,093

 
981

 
11
 %
Amortization of deferred acquisition costs
3,905

 
2,751

 
42
 %
 
6,243

 
5,480

 
14
 %
Amortization of value of insurance in force
372

 
250

 
49
 %
 
547

 
452

 
21
 %
Other underwriting expenses
5,215

 
5,035

 
4
 %
 
10,677

 
9,776

 
9
 %
Total underwriting, acquisition and insurance expenses
10,015

 
8,471

 
18
 %
 
18,560

 
16,689

 
11
 %
Total benefits and expenses
37,606

 
36,633

 
3
 %
 
72,637

 
72,304

 
—
 %
Pre-tax operating income
$
16,348

 
$
16,831

 
(3
)%
 
$
33,496

 
$
33,919

 
(1
)%
Other data
 
 
 
 
 
 
 
 
 
 
 
Annuity premiums collected, direct
$
100,447

 
$
70,024

 
43
%
 
$
186,122

 
$
146,359

 
27
 %
Policy liabilities and accruals, end of period
 
 
 
 
 
 
4,072,349

 
3,859,059

 
6
 %
Average invested assets, at amortized cost
 
 
 
 
 
 
4,090,279

 
3,914,752

 
4
 %
Investment fee income included in net investment income (1)
3,064

 
2,818

 
9
%
 
4,548

 
5,216

 
(13
)%
Average individual annuity account value
 
 
 
 
 
 
2,837,274

 
2,636,957

 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
 
 
 
 
 
 
5.34
%
 
5.62
%
 
 
Weighted average interest crediting rate
 
 
 
 
 
 
2.70
%
 
2.83
%
 
 
Spread
 
 
 
 
 
 
2.64
%
 
2.79
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
 
 
 
 
 
 
3.7
%
 
4.3
%
 
 
Impact on pre-tax income of unlocking deferred acquisition costs and value of insurance in force acquired
(1,412
)
 
—

 
N/A

 
$
(1,412
)
 
$
—

 
N/A


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



37
Table of Contents

Pre-tax operating income for the Annuity segment decreased in the second quarter of 2016 and the six months ended June 30, 2016, compared to the prior year periods, primarily due to the impact of unlocking, partially offset by higher spread income earned from an increase in the volume of business in force. The decrease for the six-month period was also impacted by an increase in other underwriting expenses.

The average aggregate account value for individual annuity contracts in force increased in the six months ended June 30, 2016, compared to the prior year period, due to continued sales and the crediting of interest. Continued growth in our business in force contributes to increases in revenues and expenses. Premiums collected were higher in the second quarter of 2016 and the six months ended June 30, 2016, compared to the prior year periods, primarily due to increased sales of index annuity products as well as the reintroduction of a multi-year guaranteed annuity product in the first quarter of 2016. The amount of premiums collected is highly dependent upon the relationship between the current crediting rates of our products compared to those of competing products.

The Annuity segment also includes advances on our funding agreements with FHLB. Outstanding funding agreements totaled $408.8 million at June 30, 2016 and $424.1 million at June 30, 2015.

Amortization of deferred acquisition costs changed during the second quarter of 2016 and the six months ended June 30, 2016, compared to the prior year periods, primarily due to the impact of unlocking as a result of our analysis of the impact of the low interest rate environment on projected investment and spread income. The impact of unlocking on pre-tax operating income for the quarter and six months ended June 30, 2016 and 2015 was as follows:
Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Amortization of deferred acquisition costs
$
(1,218
)
 
$
—

 
$
(1,218
)
 
$
—

Amortization of value of insurance in force acquired
(194
)
 
—

 
(194
)
 
—

Decrease to pre-tax operating income
$
(1,412
)
 
$
—

 
$
(1,412
)
 
$
—


The weighted average yield on cash and invested assets for individual annuities decreased for the six months ended June 30, 2016, compared to the prior year period, primarily due to lower investment fee income and lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. See the "Financial Condition" section for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our individual annuity products decreased due to crediting rate actions taken in 2015 in response to the declining portfolio yield and a change in the underlying product mix.



38
Table of Contents

Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
16,549

 
$
15,928

 
4
 %
 
$
32,260

 
$
31,746

 
2
 %
Traditional life insurance premiums
49,605

 
48,891

 
1
 %
 
99,743

 
96,039

 
4
 %
Net investment income
38,570

 
37,637

 
2
 %
 
76,324

 
76,681

 
—
 %
Total operating revenues
104,724

 
102,456

 
2
 %
 
208,327

 
204,466

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 

Interest sensitive product benefits:
 
 
 
 
 
 
 
 
 
 

Interest credited
8,130

 
8,065

 
1
 %
 
16,396

 
16,250

 
1
 %
Death benefits and other
12,169

 
10,119

 
20
 %
 
20,972

 
22,634

 
(7
)%
Total interest sensitive product benefits
20,299

 
18,184

 
12
 %
 
37,368

 
38,884

 
(4
)%
Traditional life insurance benefits:
 
 
 
 
 
 
 
 
 
 

Death benefits
20,019

 
21,054

 
(5
)%
 
41,142

 
45,429

 
(9
)%
Surrender and other benefits
8,215

 
7,044

 
17
 %
 
16,856

 
14,326

 
18
 %
Increase in traditional life future policy benefits
15,160

 
16,555

 
(8
)%
 
29,961

 
30,607

 
(2
)%
Total traditional life insurance benefits
43,394

 
44,653

 
(3
)%
 
87,959

 
90,362

 
(3
)%
Distributions to participating policyholders
2,515

 
2,956

 
(15
)%
 
5,555

 
5,917

 
(6
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 

Commission expense, net of deferrals
4,338

 
4,123

 
5
 %
 
8,808

 
8,750

 
1
 %
Amortization of deferred acquisition costs
4,878

 
4,049

 
20
 %
 
10,102

 
8,015

 
26
 %
Amortization of value of insurance in force
377

 
344

 
10
 %
 
754

 
723

 
4
 %
Other underwriting expenses
14,450

 
14,503

 
—
 %
 
29,237

 
28,386

 
3
 %
Total underwriting, acquisition and insurance expenses
24,043

 
23,019

 
4
 %
 
48,901

 
45,874

 
7
 %
Total benefits and expenses
90,251

 
88,812

 
2
 %
 
179,783

 
181,037

 
(1
)%
Pre-tax operating income
$
14,473

 
$
13,644

 
6
 %
 
$
28,544

 
$
23,429

 
22
 %



39
Table of Contents

Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
(Dollars in thousands)
Other data
 
 
 
 
 
 
 
 
 
 
 
Life premiums collected, net of reinsurance
$
70,211

 
$
71,087

 
(1
)%
 
$
141,924

 
$
142,302

 
—
 %
Policy liabilities and accruals, end of period
 
 
 
 

 
2,721,230

 
2,632,940

 
3
 %
Life insurance in force, end of period
 
 
 
 

 
54,995,983

 
53,177,611

 
3
 %
Average invested assets, at amortized cost
 
 
 
 

 
2,790,979

 
2,650,972

 
5
 %
Investment fee income included in net investment income (1)
370

 
781

 
(53
)%
 
491

 
3,235

 
(85
)%
Average interest sensitive life account value
 
 
 
 

 
806,052

 
786,218

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
 
 
 
 
 
 
5.58
%
 
6.13
%
 
 
Weighted average interest crediting rate
 
 
 
 
 
 
3.80
%
 
3.85
%
 
 
Spread
 
 
 
 
 
 
1.78
%
 
2.28
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
 
 
 
 
 
 
5.8
%
 
5.5
%
 
 
Death benefits, net of reinsurance and reserves released
17,753

 
20,356

 
(13
)%
 
$
36,455

 
$
44,847

 
(19
)%
Impact on pre-tax income of unlocking deferred acquisition costs, unearned revenue reserve and certain product reserves
(3,368
)
 
—

 
N/A

 
(3,368
)
 
—

 
N/A


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

Pre-tax operating income for the Life Insurance segment increased in the second quarter of 2016 and the six months ended June 30, 2016, compared to the prior year periods, primarily due to a decrease in death benefits and the impact of an increase in the volume of business in force, partially offset by the impact of unlocking and a decrease in investment fee income.

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

Other interest sensitive product benefits and amortization of deferred acquisition costs were impacted by unlocking as a result of our analysis of the effect of the low interest rate environment on projected investment and spread income. Amortization in the periods also reflected changes in actual and expected profits on the underlying business. The impact of unlocking on pre-tax operating income for the quarter and six months ended June 30, 2016 and 2015 was as follows:
Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Amortization of unearned revenue reserve reported in interest sensitive product charges and other income
$
114

 
$
—

 
$
114

 
$
—

Amortization of deferred acquisition costs
(271
)
 
—

 
(271
)
 
—

Changes in certain product reserves reported in interest sensitive product benefits
(3,211
)
 
—

 
(3,211
)
 
—

Decrease to pre-tax operating income
$
(3,368
)
 
$
—

 
$
(3,368
)
 
$
—


Death benefits, net of reinsurance and reserves released, decreased in the second quarter of 2016 and the six months ended June 30, 2016, compared to the prior year periods, due to decreases in the claim counts and the average size of claims.


40
Table of Contents


The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased for the six months ended June 30, 2016, compared to the prior year period, due to lower investment fee income and lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. See the "Financial Condition" section for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our interest sensitive life insurance products decreased due to crediting rate decreases taken in 2015 and 2016 in response to the declining portfolio yield.

Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
11,425

 
$
11,598

 
(1
)%
 
$
22,821

 
$
23,201

 
(2
)%
Net investment income
7,545

 
7,772

 
(3
)%
 
15,872

 
15,517

 
2
 %
Other income
4,313

 
4,373

 
(1
)%
 
8,014

 
8,730

 
(8
)%
Total operating revenues
23,283

 
23,743

 
(2
)%
 
46,707

 
47,448

 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
9,145

 
7,227

 
27
 %
 
18,843

 
14,899

 
26
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
822

 
790

 
4
 %
 
1,579

 
1,754

 
(10
)%
Amortization of deferred acquisition costs
2,569

 
1,809

 
42
 %
 
4,557

 
3,572

 
28
 %
Other underwriting expenses
1,669

 
1,474

 
13
 %
 
3,372

 
3,382

 
—
 %
Total underwriting, acquisition and insurance expenses
5,060

 
4,073

 
24
 %
 
9,508

 
8,708

 
9
 %
Interest expense
1,213

 
1,212

 
—
 %
 
2,425

 
2,424

 
—
 %
Other expenses
4,435

 
4,618

 
(4
)%
 
8,793

 
9,148

 
(4
)%
Total benefits and expenses
19,853

 
17,130

 
16
 %
 
39,569

 
35,179

 
12
 %
 
3,430

 
6,613

 
(48
)%
 
7,138

 
12,269

 
(42
)%
Net loss attributable to noncontrolling interest
(12
)
 
9

 
(233
)%
 
(3
)
 
30

 
(110
)%
Equity loss, before tax
(1,446
)
 
(1,671
)
 
(13
)%
 
(2,674
)
 
(3,852
)
 
(31
)%
Pre-tax operating income
$
1,972

 
$
4,951

 
(60
)%
 
$
4,461

 
$
8,447

 
(47
)%
 
 
 
 
 
 
 
 
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
 
 
Average invested assets, at amortized cost
 
 
 
 
 
 
$
653,703

 
$
626,846

 
4
 %
Investment fee income (loss) included in net investment income (1)
$
(289
)
 
$
151

 
(291
)%
 
(286
)
 
351

 
(181
)%
Average interest sensitive life account value
 
 
 
 
 
 
348,827

 
338,710

 
3
 %
Death benefits, net of reinsurance and reserves released
5,914

 
4,207

 
41
 %
 
12,367

 
8,856

 
40
 %
Impact on pre-tax income of unlocking of deferred acquisition costs, unearned revenue reserve and certain product reserves
(921
)
 
—

 
N/A

 
(921
)
 
—

 
N/A

Estimated impact on pre-tax income from separate account performance on amortization of deferred acquisition costs
(96
)
 
(350
)
 
(73
)%
 
(696
)
 
(398
)
 
75
 %

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

Pre-tax operating income decreased for the Corporate and Other segment in the second quarter of 2016, compared to the prior year period, primarily due to increases in death benefits and the impact of unlocking. Pre-tax operating income decreased for


41
Table of Contents

the six months ended June 30, 2016, compared to the prior year period, primarily due to increases in death benefits and the impact of unlocking, partially offset by a decrease in pre-tax equity loss.

Death benefits, net of reinsurance and reserves released, increased in the second quarter of 2016 and the six months ended June 30, 2016, compared to the prior year periods, due to increases in claim counts and the average size of claims.

Amortization of deferred acquisition costs and unearned revenue reserves changed during the second quarter of 2016 and the six months ended June 30, 2016, compared to the prior year periods, primarily due to the impact of unlocking as a result of our analysis of the impact of the low interest rate environment on projected investment and spread income. The impact of unlocking on pre-tax operating income for the quarter and six months ended June 30, 2016 and 2015 was as follows:
Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Amortization of unearned revenue reserve reported in interest sensitive product charges
$
183

 
$
—

 
$
183

 
$
—

Amortization of deferred acquisition costs
(1,050
)
 
—

 
(1,050
)
 
—

Changes in certain product reserves reported in interest sensitive product benefits
(54
)
 
—

 
(54
)
 
—

Decrease to pre-tax operating income
$
(921
)
 
$
—

 
$
(921
)
 
$
—


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

Equity loss, before tax, includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies where we exhibit some control but have a minority ownership interest. Given the timing of availability of financial information from our equity investees, we will consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of bond and equity securities held by the investment partnerships, the timing and success of initial public offerings or exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures. Our low income housing tax credit investments generate pre-tax losses and after-tax gains as the related tax credits are realized. The timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and the approval of tax credits.
Equity Income, Net of Related Income Taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Equity income (loss):
 
 
 
 
 
 
 
Low income housing tax credit partnerships
$
(2,508
)
 
$
(1,997
)
 
$
(4,047
)
 
$
(3,842
)
Other equity method investments
1,062

 
326

 
1,373

 
(10
)
 
(1,446
)
 
(1,671
)
 
(2,674
)
 
(3,852
)
Income taxes:
 
 
 
 
 
 
 
Taxes on equity income (loss)
507

 
585

 
937

 
1,348

Investment tax credits
3,552

 
3,488

 
7,002

 
6,675

Equity income, net of related income taxes
$
2,613

 
$
2,402

 
$
5,265

 
$
4,171


Income Taxes on Operating Income

The effective tax rate on operating income was 21.7% for the second quarter of 2016 and 21.8% for the six months ended June 30, 2016, compared with 21.5% for the second quarter and the six months ended June 30, 2015. The effective tax rates differ


42
Table of Contents

from the federal statutory rate of 35% primarily due to the impact of low-income housing tax credits and tax-exempt interest and dividend income.

Impact of Operating Income Adjustments on FBL Net Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Net realized gains (losses) on investments
$
(2,294
)
 
$
7,808

 
$
(2,901
)
 
$
7,442

Change in net unrealized gains/losses on derivatives
64

 
(529
)
 
(37
)
 
(674
)
Change in amortization of:
 
 
 
 
 
 
 
Deferred acquisition costs
202

 
(251
)
 
334

 
(83
)
Value of insurance in force acquired
—

 
(5
)
 
3

 
(6
)
Unearned revenue reserve
33

 
3

 
33

 
3

Income tax offset
699

 
(2,459
)
 
900

 
(2,339
)
Net impact of operating income adjustments
$
(1,296
)
 
$
4,567

 
$
(1,668
)
 
$
4,343


Summary of adjustments noted above after offsets and income taxes:
 
 
 
 
 
 
 
Net realized gains/losses on investments
$
(1,147
)
 
$
4,975

 
$
(1,544
)
 
$
4,728

Change in net unrealized gains/losses on derivatives
(149
)
 
(408
)
 
(124
)
 
(385
)
Net impact of operating income adjustments
$
(1,296
)
 
$
4,567

 
$
(1,668
)
 
$
4,343

Net impact per common share - basic
$
(0.05
)
 
$
0.18

 
$
(0.07
)
 
$
0.17

Net impact per common share - assuming dilution
$
(0.05
)
 
$
0.18

 
$
(0.07
)
 
$
0.17


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

Realized Gains (Losses) on Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Realized gains (losses) on investments:
 
 
 
 
 
 
 
Realized gains on sales
$
6,108

 
$
8,985

 
$
7,698

 
$
9,205

Realized losses on sales
(8,377
)
 
(1,017
)
 
(8,377
)
 
(1,603
)
Total other-than-temporary impairment charges
(25
)
 
(160
)
 
(3,744
)
 
(160
)
Net realized investment losses
(2,294
)
 
7,808

 
(4,423
)
 
7,442

Non-credit losses included in other comprehensive income (loss)
—

 
—

 
1,522

 
—

Total reported in statements of operations
$
(2,294
)
 
$
7,808

 
$
(2,901
)
 
$
7,442


The level of realized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate, economic environment and timing of the sale of investments. During the three months ended June 30, 2016, we sold securities to decrease our exposure to the energy sector, resulting in realized gains of $3.9 million and realized losses of $8.4 million. See "Financial Condition - Investments" and Note 2 to our consolidated financial statements for details regarding our unrealized gains and losses on available-for-sale securities at June 30, 2016 and December 31, 2015.



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Table of Contents

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

Six months ended June 30,
 
2016

2015

2016

2015
 
(Dollars in thousands)
 
(Dollars in thousands)
Residential mortgage-backed
$
—

 
$
—

 
$
2,172

 
$
—

Other
25

 
160

 
50

 
160

Total other-than-temporary impairment losses reported in net income
$
25

 
$
160

 
$
2,222

 
$
160


Other-than-temporary credit impairment losses for the six months ended June 30, 2016 were incurred within residential mortgage-backed securities due to reduced reliance on insurance credit support resulting in a decline in the present value of expected cash flows. An impairment charge was also recognized on other assets for the three and six months ended June 30, 2016 due to uncollectibility.


Financial Condition

Investments

Our investment portfolio increased 6.0% to $8,187.6 million at June 30, 2016 compared to $7,722.8 million at December 31, 2015. The portfolio increased due to positive cash flows from operating and financing activities, as well as an increase of $364.6 million of net unrealized appreciation of fixed maturities during 2016. Additional details regarding securities in an unrealized loss position at June 30, 2016 are included in the discussion that follows and in Note 2 to our consolidated financial statements. Details regarding investment impairments are discussed above in the "Realized Gains (Losses) on Investments" section under "Results of Operations."
 
We manage the investment portfolio to optimize risk-adjusted yield within the context of prudent asset-liability management. We evaluate multiple cash flow testing scenarios as part of this process. The Company's investment policy calls for investing primarily in high quality fixed maturities and commercial mortgage loans.

Fixed Maturity Acquisitions Selected Information
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
2016
 
2015
 
 
(Dollars in thousands)
Cost of acquisitions:
 
 
 
 
Corporate
 
$
144,739

 
$
216,849

Mortgage- and asset-backed
 
185,644

 
161,747

United States Government and agencies
 
500

 
1,500

Tax-exempt municipals
 
8,135

 
29,134

Taxable municipals
 
15,750

 
32,998

Total
 
$
354,768

 
$
442,228

Effective annual yield
 
4.37
%
 
4.22
%
Credit quality
 
 
 
 
NAIC 1 designation
 
63.0
%
 
58.5
%
NAIC 2 designation
 
37.0
%
 
40.4
%
Non-investment grade
 
—
%
 
1.1
%
Weighted-average life in years
 
12.0

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



44
Table of Contents

A portion of the securities acquired during the six months ended June 30, 2016 and June 30, 2015 were obtained with the proceeds from advances on our funding agreements with the FHLB. The securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products, due to the shorter maturity and relatively low interest rate paid on those advances. In addition, certain municipal securities acquired are exempt from federal income taxes, and accordingly have a higher actual return than reflected in the yields stated above. The average yield of the securities acquired, excluding the securities supporting the funding agreements and using a tax-adjusted yield for the municipal securities, was 4.64% during the six months ended June 30, 2016 and was 4.61% during the six months ended June 30, 2015.

Investment Portfolio Summary 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
(Dollars in thousands)
Fixed maturities - available for sale:
 
 
 
 
 
 
 
Public
$
5,395,977

 
66.0
%
 
$
5,102,378

 
66.1
%
144A private placement
1,403,864

 
17.1

 
1,278,017

 
16.5

Private placement
266,617

 
3.3

 
257,381

 
3.4

Total fixed maturities - available for sale
7,066,458

 
86.4

 
6,637,776

 
86.0

Equity securities
139,473

 
1.7

 
121,667

 
1.6

Mortgage loans
763,427

 
9.3

 
744,303

 
9.6

Real estate
1,955

 
—

 
1,955

 
—

Policy loans
187,439

 
2.2

 
185,784

 
2.4

Short-term investments
22,557

 
0.3

 
28,251

 
0.4

Other investments
6,323

 
0.1

 
3,017

 
—

Total investments
$
8,187,632

 
100.0
%
 
$
7,722,753

 
100.0
%

As of June 30, 2016, 95.8% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of June 30, 2016, no single non-investment grade holding exceeded 0.2% of total investments.

Credit Quality by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
NAIC Designation
 
Equivalent Rating (1)
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
4,584,909

 
64.8
%
 
$
4,351,813

 
65.6
%
2
 
BBB
 
2,188,253

 
31.0

 
2,053,484

 
30.9

 
 
Total investment grade
 
6,773,162

 
95.8

 
6,405,297

 
96.5

3
 
BB
 
195,254

 
2.8

 
162,246

 
2.4

4
 
B
 
66,915

 
0.9

 
37,459

 
0.6

5
 
CCC
 
19,954

 
0.3

 
21,601

 
0.3

6
 
In or near default
 
11,173

 
0.2

 
11,173

 
0.2

 
 
Total below investment grade
 
293,296

 
4.2

 
232,479

 
3.5

 
 
Total fixed maturities - available for sale
 
$
7,066,458

 
100.0
%
 
$
6,637,776

 
100.0
%

(1)
Equivalent ratings are based on those provided by nationally recognized rating agencies with some exceptions for certain residential mortgage, commercial mortgage- and asset-backed securities where they are based on the expected loss of the security rather than the probability of default. This may result in a final designation being higher or lower than the equivalent credit rating.
 


45
Table of Contents

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

Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
 
 
 
June 30, 2016
 
Total Carrying Value
 
Carrying
Value of
Securities
with Gross
Unrealized
Gains
 
Gross Unrealized Gains
 
Carrying Value of Securities
with Gross Unrealized Losses
 
Gross Unrealized Losses
 
(Dollars in thousands)
Corporate securities:
 
 
 
 
 
 
 
 
 
Basic industrial
$
342,147

 
$
257,528

 
$
22,233

 
$
84,619

 
$
(9,201
)
Capital goods
259,061

 
246,916

 
28,641

 
12,145

 
(3,587
)
Communications
147,958

 
127,174

 
14,553

 
20,784

 
(1,121
)
Consumer cyclical
122,070

 
108,013

 
10,955

 
14,057

 
(522
)
Consumer non-cyclical
464,159

 
444,397

 
46,336

 
19,762

 
(1,547
)
Energy
486,339

 
310,252

 
27,477

 
176,087

 
(23,192
)
Finance
738,365

 
652,478

 
54,195

 
85,887

 
(1,777
)
Transportation
106,505

 
98,374

 
9,959

 
8,131

 
(2,150
)
Utilities
872,689

 
849,062

 
124,808

 
23,627

 
(2,507
)
Other
180,207

 
163,983

 
11,669

 
16,224

 
(741
)
Total corporate securities
3,719,500

 
3,258,177

 
350,826

 
461,323

 
(46,345
)
Mortgage- and asset-backed securities
1,742,873

 
1,430,740

 
126,383

 
312,133

 
(10,850
)
United States Government and agencies
43,618

 
43,618

 
4,576

 
—

 
—

State, municipal and other governments
1,560,467

 
1,556,393

 
197,876

 
4,074

 
(1
)
Total
$
7,066,458

 
$
6,288,928

 
$
679,661

 
$
777,530

 
$
(57,196
)

Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Total Carrying Value
 
Carrying
Value of
Securities
with Gross
Unrealized
Gains
 
Gross Unrealized Gains
 
Carrying Value of Securities
with Gross Unrealized Losses
 
Gross Unrealized Losses
 
(Dollars in thousands)
Corporate securities:
 
 
 
 
 
 
 
 
 
Basic industrial
$
328,324

 
$
158,935

 
$
10,434

 
$
169,389

 
$
(32,490
)
Capital goods
240,666

 
179,367

 
15,554

 
61,299

 
(4,532
)
Communications
137,290

 
89,237

 
6,930

 
48,053

 
(4,264
)
Consumer cyclical
123,702

 
107,309

 
7,013

 
16,393

 
(275
)
Consumer non-cyclical
404,439

 
237,336

 
16,466

 
167,103

 
(8,640
)
Energy
483,988

 
214,232

 
14,748

 
269,756

 
(62,431
)
Finance
722,855

 
533,159

 
37,895

 
189,696

 
(6,894
)
Transportation
102,669

 
70,039

 
5,331

 
32,630

 
(3,690
)
Utilities
822,297

 
622,549

 
73,894

 
199,748

 
(10,537
)
Other
152,477

 
75,490

 
3,884

 
76,987

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

 
2,287,653

 
192,149

 
1,231,054

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

 
1,147,663

 
87,718

 
454,957

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

 
39,291

 
3,129

 
4,807

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

 
1,394,371

 
129,923

 
77,980

 
(2,183
)
Total
$
6,637,776

 
$
4,868,978

 
$
412,919

 
$
1,768,798

 
$
(155,062
)



46
Table of Contents

Gross Unrealized Gains and Gross Unrealized Losses by Energy Classification
 
 
 
June 30, 2016
 
Total Carrying Value
 
Carrying
Value of Securities
with Gross Unrealized Gains
 
Gross Unrealized Gains
 
Carrying
Value of Securities
with Gross Unrealized Losses
 
Gross Unrealized Losses
 
(Dollars in thousands)
Energy securities:
 
 
 
 
 
 
 
 
 
Midstream
$
161,742

 
$
88,411

 
$
5,836

 
$
73,331

 
$
(8,174
)
Oil field services
60,196

 
36,013

 
2,715

 
24,183

 
(7,368
)
Independent exploration & production
120,463

 
62,873

 
5,451

 
57,590

 
(5,758
)
Integrated energy
89,624

 
77,571

 
9,232

 
12,053

 
(703
)
Refiners
54,314

 
45,384

 
4,243

 
8,930

 
(1,189
)
Total
$
486,339

 
$
310,252

 
$
27,477

 
$
176,087

 
$
(23,192
)

Gross Unrealized Gains and Gross Unrealized Losses by Energy Classification
 
 
 
December 31, 2015
 
Total Carrying Value
 
Carrying
Value of Securities
with Gross Unrealized Gains
 
Gross Unrealized Gains
 
Carrying
Value of Securities
with Gross Unrealized Losses
 
Gross Unrealized Losses
 
(Dollars in thousands)
Energy securities:
 
 
 
 
 
 
 
 
 
Midstream
$
131,364

 
$
48,886

 
$
2,727

 
$
82,478

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

 
23,476

 
1,691

 
49,089

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

 
52,075

 
4,107

 
79,253

 
(12,346
)
Integrated energy
123,621

 
76,556

 
5,807

 
47,065

 
(8,639
)
Refiners
25,110

 
13,239

 
416

 
11,871

 
(2,202
)
Total
$
483,988

 
$
214,232

 
$
14,748

 
$
269,756

 
$
(62,431
)

At June 30, 2016, 78.6% of our energy holdings were investment grade. Our non-investment grade holdings included oil field services with a carrying value of $31.6 million and an unrealized loss of $6.4 million and independent energy with a carrying value of $41.9 million and an unrealized loss of $2.1 million.

Non-Sovereign European Debt Exposure
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
Italy
$
19,717

 
$
21,686

 
$
19,713

 
$
20,107

Spain
27,154

 
29,268

 
27,178

 
29,617

Ireland
14,046

 
15,667

 
14,046

 
15,546

Subtotal
60,917

 
66,621

 
60,937

 
65,270

United Kingdom
165,909

 
175,030

 
183,897

 
180,291

Netherlands
58,079

 
64,068

 
60,061

 
61,617

France
29,322

 
33,858

 
29,325

 
31,012

Other countries
85,464

 
94,429

 
85,520

 
86,620

Subtotal
338,774

 
367,385

 
358,803

 
359,540

Total European exposure
$
399,691

 
$
434,006

 
$
419,740

 
$
424,810




47
Table of Contents

The table above reflects our exposure to non-sovereign European debt. This represents 6.1% of total fixed maturities as of June 30, 2016 and 6.4% as of December 31, 2015. The exposures are primarily in the industrial, financial and utility sectors. We do not own any securities issued by European governments or companies based in Greece.

Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
NAIC Designation
 
Equivalent Rating
 
Carrying Value of Securities with Gross Unrealized Losses
 
Percent of Total
 
Gross Unrealized Losses
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
323,179

 
41.6
%
 
$
(9,609
)
 
16.8
%
2
 
BBB
 
281,369

 
36.2

 
(20,418
)
 
35.7

 
 
Total investment grade
 
604,548

 
77.8

 
(30,027
)
 
52.5

3
 
BB
 
98,711

 
12.7

 
(12,271
)
 
21.5

4
 
B
 
53,834

 
6.9

 
(11,179
)
 
19.5

5
 
CCC
 
12,527

 
1.6

 
(3,568
)
 
6.2

6
 
In or near default
 
7,910

 
1.0

 
(151
)
 
0.3

 
 
Total below investment grade
 
172,982

 
22.2

 
(27,169
)
 
47.5

 
 
Total
 
$
777,530

 
100.0
%
 
$
(57,196
)
 
100.0
%

 
 
 
 
December 31, 2015
NAIC Designation
 
Equivalent Rating
 
Carrying Value of Securities with Gross Unrealized Losses
 
Percent of Total
 
Gross Unrealized Losses
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
830,141

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

 
45.0

 
(84,057
)
 
54.2

 
 
Total investment grade
 
1,626,508

 
91.9

 
(115,496
)
 
74.5

3
 
BB
 
88,719

 
5.0

 
(24,938
)
 
16.1

4
 
B
 
32,233

 
1.8

 
(7,125
)
 
4.6

5
 
CCC
 
14,146

 
0.8

 
(6,652
)
 
4.3

6
 
In or near default
 
7,192

 
0.5

 
(851
)
 
0.5

 
 
Total below investment grade
 
142,290

 
8.1

 
(39,566
)
 
25.5

 
 
Total
 
$
1,768,798

 
100.0
%
 
$
(155,062
)
 
100.0
%

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
June 30, 2016
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
Fair Value is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
(Dollars in thousands)
Three months or less
$
—

 
$
91,160

 
$
—

 
$
(1,222
)
Greater than three months to six months
—

 
62,214

 
—

 
(914
)
Greater than six months to nine months
—

 
129,392

 
—

 
(3,871
)
Greater than nine months to twelve months
13,204

 
64,967

 
(4,468
)
 
(3,187
)
Greater than twelve months
41,448

 
432,341

 
(12,987
)
 
(30,547
)
Total
$
54,652

 
$
780,074

 
$
(17,455
)
 
$
(39,741
)



48
Table of Contents

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
is Less than 75% of Cost
 
Fair Value is 75% or Greater than Cost
 
Fair Value is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
(Dollars in thousands)
Three months or less
$
2,999

 
$
780,222

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

 
151,010

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

 
572,298

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

 
60,110

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

 
178,093

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

 
$
1,741,733

 
$
(64,370
)
 
$
(90,692
)

Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
Carrying Value of Securities with Gross Unrealized Losses
 
Gross
Unrealized
Losses
 
Carrying Value of Securities with Gross Unrealized Losses
 
Gross
Unrealized
Losses
 
(Dollars in thousands)
Due in one year or less
$
6

 
$
(52
)
 
$
4,289

 
$
(75
)
Due after one year through five years
52,004

 
(2,708
)
 
77,367

 
(9,356
)
Due after five years through ten years
108,449

 
(7,066
)
 
235,609

 
(20,499
)
Due after ten years
304,938

 
(36,520
)
 
996,576

 
(110,178
)
 
465,397

 
(46,346
)
 
1,313,841

 
(140,108
)
Mortgage- and asset-backed
312,133

 
(10,850
)
 
454,957

 
(14,954
)
Total
$
777,530

 
$
(57,196
)
 
$
1,768,798

 
$
(155,062
)

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

Mortgage- and Asset-Backed Securities

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

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

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

Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans. We also have a partnership interest in two funds at June 30, 2016 and at December 31, 2015, that own securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The funds are reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of $7.4 million at June 30, 2016 and $7.6 million at December 31, 2015.



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Mortgage- and Asset-Backed Securities by Collateral Type
 
 
 
June 30, 2016
 
December 31, 2015
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
(Dollars in thousands)
Government agency
$
194,468

 
$
217,713

 
3.1
%
 
$
212,065

 
$
225,886

 
3.4
%
Prime
113,225

 
121,170

 
1.7

 
122,900

 
132,221

 
2.0

Alt-A
124,220

 
134,749

 
1.9

 
136,830

 
147,196

 
2.2

Subprime
106,674

 
101,329

 
1.4

 
77,255

 
73,064

 
1.1

Commercial mortgage
551,349

 
624,262

 
8.8

 
514,195

 
553,992

 
8.3

Non-mortgage
537,404

 
543,650

 
7.7

 
466,611

 
470,261

 
7.1

Total
$
1,627,340

 
$
1,742,873

 
24.6
%
 
$
1,529,856

 
$
1,602,620

 
24.1
%

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

The residential mortgage-backed portfolio includes government agency pass-through and collateralized mortgage obligation (CMO) securities. With a government agency pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" that provide sequential retirement of the bonds. We primarily invest in sequential tranches that provide cash flow stability since principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class and targeted amortization class securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to excessive risk.

Residential Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
June 30, 2016
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
118,801

 
$
123,334

 
$
84,549

 
$
99,460

 
$
184,878

 
$
203,774

 
$
388,228

 
$
426,568

3
—

 
—

 
11,385

 
9,992

 
—

 
—

 
11,385

 
9,992

5
12

 
12

 
—

 
—

 
—

 
—

 
12

 
12

Total
$
118,813

 
$
123,346

 
$
95,934

 
$
109,452

 
$
184,878

 
$
203,774

 
$
399,625

 
$
436,572


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

 
$
139,773

 
$
88,142

 
$
104,361

 
$
200,453

 
$
210,675

 
$
422,558

 
$
454,809

3
—

 
—

 
1,927

 
1,954

 
—

 
—

 
1,927

 
1,954

5
13

 
13

 
12,471

 
8,730

 
—

 
—

 
12,484

 
8,743

Total
$
133,976

 
$
139,786

 
$
102,540

 
$
115,045

 
$
200,453

 
$
210,675

 
$
436,969

 
$
465,506


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



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Commercial Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
June 30, 2016
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
9,703

 
$
10,418

 
$
137,985

 
$
157,004

 
$
361,794

 
$
410,956

 
$
509,482

 
$
578,378

2
—

 
—

 
31,321

 
34,456

 
—

 
—

 
31,321

 
34,456

3
—

 
—

 
8,000

 
9,008

 
—

 
—

 
8,000

 
9,008

4
—

 
—

 
2,546

 
2,420

 
—

 
—

 
2,546

 
2,420

Total (1)
$
9,703

 
$
10,418

 
$
179,852

 
$
202,888

 
$
361,794

 
$
410,956

 
$
551,349

 
$
624,262


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

 
$
10,723

 
$
139,188

 
$
154,864

 
$
325,046

 
$
347,631

 
$
474,647

 
$
513,218

2
—

 
—

 
22,770

 
23,573

 
6,222

 
6,749

 
28,992

 
30,322

3
—

 
—

 
8,000

 
8,197

 
—

 
—

 
8,000

 
8,197

4
—

 
—

 
2,556

 
2,255

 
—

 
—

 
2,556

 
2,255

Total (1)
$
10,413

 
$
10,723

 
$
172,514

 
$
188,889

 
$
331,268

 
$
354,380

 
$
514,195

 
$
553,992


(1) The CMBS portfolio included government agency-backed securities with a carrying value of $418.9 million at June 30, 2016 and $382.8 million at December 31, 2015.

Also included in the commercial mortgage-backed securities are military housing bonds totaling $156.0 million at June 30, 2016 and $122.5 million at December 31, 2015. These bonds are used to fund the construction of multi-family homes on United States military bases. The bonds are backed by a first mortgage lien on residential military housing projects.

The other asset-backed securities are backed by both residential and non-residential collateral. The collateral for residential asset-backed securities primarily consists of second lien fixed-rate home equity loans. The cash flows of these securities are less subject to prepayment risk than residential mortgage-backed securities as the borrowers are less likely to refinance than those with only a first lien mortgage. The collateral for non-residential asset-backed securities primarily includes securities backed by credit card receivables, auto dealer receivables, auto installment loans, aircraft leases, middle market and syndicated business loans, timeshare receivables and trade and account receivables. These securities are high quality, short-duration assets with limited cash flow variability.
Other Asset-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
June 30, 2016
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
11,337

 
$
10,870

 
$
157,266

 
$
158,912

 
$
397,073

 
$
398,808

 
$
565,676

 
$
568,590

2
2,037

 
2,121

 
12,845

 
12,250

 
69,849

 
71,256

 
84,731

 
85,627

3
—

 
—

 
—

 
—

 
8,727

 
8,806

 
8,727

 
8,806

4
211

 
209

 
—

 
—

 
1,250

 
1,264

 
1,461

 
1,473

5
—

 
—

 
—

 
—

 
6,400

 
6,400

 
6,400

 
6,400

6
1,367

 
3,239

 
8,004

 
7,904

 
—

 
—

 
9,371

 
11,143

Total
$
14,952

 
$
16,439

 
$
178,115

 
$
179,066

 
$
483,299

 
$
486,534

 
$
676,366

 
$
682,039


 


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

 
$
11,962

 
$
138,431

 
$
141,869

 
$
341,855

 
$
341,899

 
$
492,589

 
$
495,730

2
2,261

 
2,366

 
12,888

 
12,421

 
44,914

 
44,841

 
60,063

 
59,628

3
—

 
—

 
—

 
—

 
8,816

 
8,792

 
8,816

 
8,792

4
221

 
218

 
—

 
—

 
1,250

 
1,210

 
1,471

 
1,428

5
—

 
—

 
—

 
—

 
6,400

 
6,400

 
6,400

 
6,400

6
1,367

 
3,958

 
7,986

 
7,186

 
—

 
—

 
9,353

 
11,144

Total
$
16,152

 
$
18,504

 
$
159,305

 
$
161,476

 
$
403,235

 
$
403,142

 
$
578,692

 
$
583,122


State, Municipal and Other Government Securities

State, municipal and other government securities totaled $1,560.5 million, or 22.1% of total fixed maturities, at June 30, 2016, and $1,472.4 million, or 22.2% of total fixed maturities at December 31, 2015 and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. We do not hold any Puerto Rico-related bonds. Exposure to the state of Illinois and municipalities within the state accounted for 1.6% of our total fixed maturities at June 30, 2016. As of June 30, 2016, our Illinois-related portfolio holdings were rated investment grade, and were trading at 114.0% of amortized cost. Our municipal bond exposure had an average rating of Aa2/AA and our holdings were trading at 114.5% of amortized cost at June 30, 2016.

Equity Securities

Equity securities totaled $139.5 million at June 30, 2016 and $121.7 million at December 31, 2015. Gross unrealized gains totaled $9.0 million and gross unrealized losses totaled $1.5 million at June 30, 2016. At December 31, 2015, gross unrealized gains totaled $6.5 million and gross unrealized losses totaled $1.2 million on these securities. The unrealized losses were primarily attributable to non-redeemable perpetual preferred securities from issuers in the financial sector. See Note 2 to our consolidated financial statements for further discussion regarding our analysis of unrealized losses related to these securities.
 
Mortgage Loans

Mortgage loans totaled $763.4 million at June 30, 2016 and $744.3 million at December 31, 2015. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of commercial mortgage loans outstanding was 174 at June 30, 2016 and 167 at December 31, 2015. In the first six months of 2016, new loans ranged from $2.1 million to $8.8 million in size, with an average loan size of $5.1 million, an average loan term of 17 years and an average yield of 4.03%. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. The majority of our mortgage loans amortize principal, with 5.3% that are interest only loans at June 30, 2016. At June 30, 2016, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 55.2% and the weighted average debt service coverage ratio was 1.6 based on the results of our 2015 annual study. See Note 2 to our consolidated financial statements for further discussion regarding our mortgage loans.

Asset-Liability Management

Our asset-liability management program includes (i) designing and developing products that encourage persistency and help ensure targeted spreads are earned and, as a result, create a stable liability structure, and (ii) structuring the investment portfolio with duration and cash flow characteristics consistent with the duration and cash flow characteristics of our insurance liabilities. The weighted average life of the fixed maturity and mortgage loan portfolio based on fair values was approximately 10.8 years at June 30, 2016 and 10.9 years at December 31, 2015. The effective duration of the fixed maturity and mortgage loan


52
Table of Contents

portfolios backing our annuity products was 6.1 years at June 30, 2016 and at December 31, 2015. The effective duration of our annuity liabilities was approximately 6.5 years at June 30, 2016 and 6.4 years at December 31, 2015. While it can be difficult to maintain asset and liability durations that are closely matched in a dynamic environment, we have identified various strategies that can be implemented if duration mismatches exceed acceptable tolerances.

Other Assets

Deferred acquisition costs decreased 34.6% to $219.6 million at June 30, 2016, primarily due to a $117.3 million increase in the impact of the change in net unrealized appreciation on fixed maturity securities during the period. Assets held in separate accounts decreased 3.4% to $603.7 million primarily due to policy surrenders and product charges. Cash and cash equivalents increased 325.7% to $125.5 million primarily due to normal fluctuations in timing of payments made and received.

Liabilities

Future policy benefits increased 3.4% to $6,620.8 million at June 30, 2016, primarily due to an increase in the volume of annuity and life business in force. Deferred income taxes increased 65.9% to $224.1 million primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments. Liabilities related to separate accounts decreased 3.4% to $603.7 million primarily due to policy surrenders and product charges.

Stockholders' Equity

As discussed in Note 6 to our consolidated financial statements, stockholders' equity was impacted by capital deployment actions during the first quarter of 2016. We paid a special cash dividend of $2.00 per share on Class A and Class B common stock and increased our regular quarterly dividend by 5% to $0.42 per share during March 2016.

Our stockholders' equity increased 12.6% to $1,277.4 million at June 30, 2016, compared to $1,134.4 million at December 31, 2015, primarily due to the change in unrealized appreciation of fixed maturity securities during the period and net income, partially offset by dividends paid.

At June 30, 2016, FBL's common stockholders' equity was $1,274.4 million, or $51.26 per share, compared to $1,131.4 million, or $45.61 per share, at December 31, 2015. Included in stockholders' equity per common share is $11.10 at June 30, 2016 and $4.62 at December 31, 2015 attributable to accumulated other comprehensive income.

Liquidity and Capital Resources

Cash Flows

During the first six months of 2016, our operating activities generated cash flows totaling $117.1 million, consisting of net income of $50.3 million adjusted for non-cash operating revenues and expenses netting to $66.8 million. We used cash of $78.6 million in our investing activities during the 2016 period. The primary uses were $432.2 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $353.8 million in sales, maturities and repayments of investments. Our financing activities provided cash of $57.5 million during the 2016 period. The primary financing source was $319.3 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $177.7 million for return of policyholder account balances on interest sensitive products and $70.6 million for dividends paid to stockholders.

Sources and Uses of Capital Resources

Parent company cash inflows from operations consist primarily of fees that it charges various subsidiaries and affiliates for management of their operations, expense reimbursements and tax settlements from subsidiaries and affiliates, proceeds from the exercise of employee stock options, investment income and dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during the six months ended June 30, 2016 included management fees from subsidiaries and affiliates totaling $4.4 million and dividends of $55.0 million. Cash outflows are principally for salaries, taxes and other expenses related to providing management services, dividends on outstanding stock, stock repurchases and interest on our parent company debt.

As discussed in Note 6 to our consolidated financial statements, we have periodically taken advantage of opportunities to repurchase our outstanding Class A common stock through Class A common stock repurchase programs approved by our Board


53
Table of Contents

of Directors. At June 30, 2016, $49.5 million remains available for repurchase under the current $50.0 million Class A common stock repurchase program. Under both the current and recently expired repurchase programs, we repurchased 10,322 shares for $0.6 million during the six months ended June 30, 2016. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.

Interest payments on our debt totaled $2.4 million for the six months ended June 30, 2016 and June 30, 2015. Interest payments on our debt outstanding at June 30, 2016 are estimated to be $2.4 million for the remainder of 2016.

Farm Bureau Life's cash inflows primarily consist of premiums; deposits to policyholder account balances; income from investments; sales, maturities and calls of investments; and repayments of investment principal. Farm Bureau Life's cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, current operating expenses and dividends. Life insurance companies generally produce a positive cash flow, which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. Continuing operations and financing activities from Farm Bureau Life relating to interest sensitive products provided funds totaling $258.9 million for the six months ended June 30, 2016 and $215.0 million for the prior year period.

Farm Bureau Life's ability to pay dividends to the parent company is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa. At December 31, 2015, Farm Bureau Life’s statutory unassigned surplus was $469.6 million. There are certain additional limits on the amount of dividends that may be paid within a year without approval of the Insurance Division, Department of Commerce of the State of Iowa (the Iowa Insurance Division) as discussed in Note 7 to our consolidated financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K. During the remainder of 2016, the maximum amount legally available for distribution to the parent company without further regulatory approval is $45.0 million.

We paid regular cash dividends on our common and preferred stock during the six-month period ended June 30 totaling $21.0 million in 2016 and $19.9 million in 2015. In addition, we paid a special $2.00 per common share cash dividend in March 2016 totaling $49.7 million and in March 2015 totaling $49.5 million. It is anticipated that quarterly cash dividend requirements for 2016 will be $0.0075 per Series B preferred share and $0.42 per common share. The level of common stock dividends are analyzed quarterly and are dependent upon our capital and liquidity positions. In addition, alternative uses of excess capital may impact future dividend levels. Assuming these quarterly dividend rates, the common and preferred dividends would total approximately $21.0 million for the remainder of 2016. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2016. The parent company had available cash and investments totaling $57.4 million at June 30, 2016. FBL Financial Group, Inc. expects to rely on available cash resources, dividends from Farm Bureau Life and management fee income to make dividend payments to its stockholders and interest payments on its debt. We had no material commitments for capital expenditures as of June 30, 2016.

We manage the amount of capital held by our insurance subsidiaries to ensure we meet regulatory requirements. State laws specify regulatory actions if an insurer's risk-based capital (RBC) ratio, a measure of solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against a statutory "authorized control level" RBC at which point regulators have the option to assume control of the insurance company. The company action level RBC is 200% of the authorized control level and is the first point at which any action would be triggered. Our adjusted capital and RBC is reported to our insurance regulators annually based on formulas that may be revised throughout the year. We estimate our adjusted capital and RBC quarterly; however, these estimates may differ from annual results should the regulatory formulas change. As of June 30, 2016, our statutory total adjusted capital is estimated at $659.2 million, resulting in a RBC ratio of 541%, based on company action level capital of $121.8 million.

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


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value of eligible collateral, our level of statutory admitted assets and excess reserves and our willingness or capacity to hold activity-based FHLB common stock.

Contractual Obligations

In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments that are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. There have been no material changes to our total contractual obligations since December 31, 2015.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks of Financial Instruments
 
There have been no material changes in the market risks from the information provided in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Form 10-K for the fiscal year ended December 31, 2015.


ITEM 4. CONTROLS AND PROCEDURES

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

Our internal control over financial reporting changes from time-to-time as we modify and enhance our systems and processes to meet our dynamic needs. Changes are also made as we strive to be more efficient in how we conduct our business. While changes have taken place in our internal controls during the quarter ended June 30, 2016, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

On April 8, 2016, the U.S. Department of Labor (DOL) issued regulations (the Final Rule) addressing when companies and individuals providing investment advice with respect to certain employee benefit plans or individual retirement accounts (IRAs) are considered a fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. The Final Rule offers a very broad definition of fiduciary investment advice, which includes services currently offered to some of our customers with such plans or IRAs. The DOL has also issued a new set of prohibited transaction exemptions (PTEs) and amendments to existing PTEs to permit certain common fee and compensation practices to continue. Under the Final Rule the agents who sell fixed indexed annuities and the registered representatives who sell variable annuities or investment products for use in certain employee benefit plans or IRAs would be considered fiduciaries, and could subject themselves and one or more of our companies to additional disclosures, reporting, record keeping and other regulatory requirements. It is not uncommon for our customers to utilize products we offer in such plans. We believe the Final Rule will require adjustments and refinements to our current practices and procedures in order to comply with the Final Rule. We expect to sell all qualified products under PTE 2016-1, formerly known as the Best Interest Contract Exemption, or BICE. We believe that the rule will not have a material impact on sales, assuming the rule does not negatively affect customer behavior. There will be initial one-time expenses incurred to develop the processes to comply with the rule, however, our initial assessment suggests that ongoing administration costs will not be significant. The effective date of the Final Rule is June 7, 2016, but the provisions of the Final Rule will not apply until April 10, 2017. Limited additional transition relief is available until January 1, 2018, under exemptions released with the Final Rule. We continue to analyze the potential effect of the Final Rule on our businesses.

The performance of our company is subject to a variety of risks that you should review. Occurrence of these risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. Please refer to Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.


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

(c) Issuer Purchases of Equity Securities

The following table sets forth issuer purchases of equity securities for the quarter ended June 30, 2016.

Period
 
 (a) Total Number of Shares (or Units) Purchased
 
(b) Average Price Paid per Share (or Unit)
 
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1, 2016 through April 30, 2016
 
—

 
$
—

 
—
 
$50,000,000
May 1, 2016 through May 31, 2016
 
—

 
—

 
—
 
$50,000,000
June 1, 2016 through June 30, 2016
 
9,602

 
56.79

 
9,602
 
$49,454,692
Total
 
9,602

 
$
56.79

 
 
 
 

Activity in this table represents Class A common shares repurchased by the Company in connection with the repurchase program announced on March 3, 2016, which will expire on March 31, 2018. The program authorizes us to make repurchases of Class A common stock in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Completion of the program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.




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ITEM 6. EXHIBITS

(a) Exhibits:
31.1+
Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+
Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32+
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101+#
Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language) from FBL Financial Group, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 as follows: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Financial Statements
 
 
+
Filed or furnished herewith
#
In accordance with Rule 402 of Regulation S-T, the XBRL related information in this report shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.


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SIGNATURES

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


Date: August 4, 2016                


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



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