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EX-32 - EXHIBIT 32 - FBL FINANCIAL GROUP INCex32q22017.htm
EX-31.2 - EXHIBIT 31.2 - FBL FINANCIAL GROUP INCex312q22017.htm
EX-31.1 - EXHIBIT 31.1 - FBL FINANCIAL GROUP INCex311q22017.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

(Mark one)
 
 
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended June 30, 2017
 
 
 
or
 
 
 
[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from____________________ to____________________
 
 
 
Commission File Number: 1-11917
ffglogoa01.jpg
(Exact name of registrant as specified in its charter)
 
 
 
Iowa
 
42-1411715
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5400 University Avenue, West Des Moines, Iowa
 
50266-5997
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(515) 225-5400
(Registrant's telephone number, including area code)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 Title of each class
 
Outstanding at August 1, 2017
Class A Common Stock, without par value
 
24,918,085
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, 2017
TABLE OF CONTENTS


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



1


ITEM 1. FINANCIAL STATEMENTS

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

 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2017 - $6,727,792; 2016 - $6,661,711)
$
7,212,546

 
$
7,008,790

Equity securities - available for sale, at fair value (cost: 2017 - $122,662; 2016 - $130,479)
131,435

 
132,968

Mortgage loans
878,435

 
816,471

Real estate
1,543

 
1,955

Policy loans
188,630

 
188,254

Short-term investments
29,621

 
16,348

Other investments
12,693

 
9,874

Total investments
8,454,903

 
8,174,660

 
 
 
 
Cash and cash equivalents
43,809

 
33,583

Securities and indebtedness of related parties
133,153

 
137,422

Accrued investment income
77,711

 
78,437

Amounts receivable from affiliates
4,749

 
3,790

Reinsurance recoverable
106,596

 
105,290

Deferred acquisition costs
296,637

 
330,324

Value of insurance in force acquired
6,316

 
9,226

Current income taxes recoverable

 
4,309

Other assets
93,143

 
92,021

Assets held in separate accounts
625,971

 
597,072

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,842,988

 
$
9,566,134


 


2




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

 
June 30,
2017
 
December 31,
2016
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
5,174,178

 
$
5,100,625

Traditional life insurance and accident and health products
1,724,747

 
1,698,792

Other policy claims and benefits
37,535

 
43,395

Supplementary contracts without life contingencies
328,904

 
330,232

Advance premiums and other deposits
267,922

 
265,221

Amounts payable to affiliates
1,014

 
862

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

 
97,000

Current income taxes payable
7,500

 

Deferred income taxes
198,365

 
163,495

Other liabilities
128,983

 
81,182

Liabilities related to separate accounts
625,971

 
597,072

Total liabilities
8,592,119

 
8,377,876

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

 
3,000

Class A common stock, without par value - authorized 88,500,000 shares, issued and outstanding 24,917,155 shares in 2017 and 24,882,542 shares in 2016
153,343

 
152,903

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

 
72

Accumulated other comprehensive income
212,357

 
149,555

Retained earnings
882,012

 
882,672

Total FBL Financial Group, Inc. stockholders' equity
1,250,784

 
1,188,202

Noncontrolling interest
85

 
56

Total stockholders' equity
1,250,869

 
1,188,258

Total liabilities and stockholders' equity
$
9,842,988

 
$
9,566,134


See accompanying notes.


3




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

 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Interest sensitive product charges
$
29,456

 
$
29,027

 
$
58,657

 
$
57,138

Traditional life insurance premiums
50,262

 
49,605

 
98,696

 
99,743

Net investment income
103,908

 
100,722

 
204,902

 
199,107

Net realized capital gains (losses) on sales of investments
921

 
(2,269
)
 
518

 
(679
)
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses

 
(25
)
 
(66
)
 
(3,744
)
Non-credit portion in other comprehensive income

 

 

 
1,522

Net impairment losses recognized in earnings

 
(25
)
 
(66
)
 
(2,222
)
Other income
4,450

 
4,225

 
8,210

 
7,864

Total revenues
188,997

 
181,285

 
370,917

 
360,951

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Interest sensitive product benefits
58,251

 
58,559

 
121,011

 
112,978

Traditional life insurance benefits
42,610

 
43,369

 
85,564

 
87,938

Policyholder dividends
2,557

 
2,515

 
5,110

 
5,555

Underwriting, acquisition and insurance expenses
36,341

 
38,938

 
70,694

 
76,652

Interest expense
1,213

 
1,213

 
2,425

 
2,425

Other expenses
4,740

 
4,435

 
8,891

 
8,793

Total benefits and expenses
145,712

 
149,029

 
293,695

 
294,341

 
43,285

 
32,256

 
77,222

 
66,610

Income taxes
(13,891
)
 
(10,477
)
 
(24,624
)
 
(21,546
)
Equity income, net of related income taxes
2,924

 
2,613

 
6,155

 
5,265

Net income
32,318

 
24,392

 
58,753

 
50,329

Net income attributable to noncontrolling interest
(27
)
 
(12
)
 
(29
)
 
(3
)
Net income attributable to FBL Financial Group, Inc.
$
32,291

 
$
24,380

 
$
58,724

 
$
50,326

 
 
 
 
 
 
 
 
Earnings per common share
$
1.29

 
$
0.97

 
$
2.34

 
$
2.01

Earnings per common share - assuming dilution
$
1.29

 
$
0.97

 
$
2.34

 
$
2.01

 
 
 
 
 
 
 
 
Cash dividend per common share
$
0.44

 
$
0.42

 
$
0.88

 
$
0.84

Special cash dividend per common share
$

 
$

 
$
1.50

 
$
2.00


See accompanying notes.


4




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
32,318

 
$
24,392

 
$
58,753

 
$
50,329

Other comprehensive income (1)
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses
46,570

 
90,055

 
62,431

 
162,258

Non-credit impairment losses

 

 

 
(952
)
Change in underfunded status of postretirement benefit plans
189

 
149

 
371

 
284

Total other comprehensive income, net of tax
46,759

 
90,204

 
62,802

 
161,590

Total comprehensive income, net of tax
79,077

 
114,596

 
121,555

 
211,919

Comprehensive income attributable to noncontrolling interest
(27
)
 
(12
)
 
(29
)
 
(3
)
Total comprehensive income applicable to FBL Financial Group, Inc.
$
79,050

 
$
114,584

 
$
121,526

 
$
211,916


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


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
 
FBL Financial Group, Inc. Stockholders' Equity
 
 
 
 
 
Series B Preferred Stock
 
Class A and Class B Common Stock
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Non-
controlling Interest
 
Total Stockholders' Equity
Balance at January 1, 2016
$
3,000

 
$
149,320

 
$
114,532

 
$
867,574

 
$
48

 
$
1,134,474

Net income - 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

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
3,000

 
$
152,975

 
$
149,555

 
$
882,672

 
$
56

 
$
1,188,258

Net income - six months ended June 30, 2017

 

 

 
58,724

 
29

 
58,753

Other comprehensive income

 

 
62,802

 

 

 
62,802

Issuance of common stock under compensation plans

 
440

 

 

 

 
440

Dividends on preferred stock

 

 

 
(75
)
 

 
(75
)
Dividends on common stock

 

 

 
(59,309
)
 

 
(59,309
)
Balance at June 30, 2017
$
3,000

 
$
153,415

 
$
212,357

 
$
882,012

 
$
85

 
$
1,250,869


See accompanying notes.


5




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

 
Six months ended June 30,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
58,753

 
$
50,329

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
79,938

 
75,226

Charges for mortality, surrenders and administration
(58,037
)
 
(55,579
)
Net realized (gains) losses on investments
(452
)
 
2,901

Change in fair value of derivatives
(2,466
)
 
2,800

Increase in liabilities for life insurance and other future policy benefits
43,282

 
44,169

Deferral of acquisition costs
(21,908
)
 
(20,977
)
Amortization of deferred acquisition costs and value of insurance in force
16,565

 
22,379

Change in reinsurance recoverable
(2,728
)
 
(1,880
)
Provision for deferred income taxes
1,054

 
1,993

Other
6,787

 
(4,270
)
Net cash provided by operating activities
120,788

 
117,091

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
293,162

 
289,644

Equity securities - available for sale
8,928

 
3,571

Mortgage loans
28,584

 
34,641

Derivative instruments
5,892

 
75

Policy loans
19,410

 
18,532

Securities and indebtedness of related parties
3,859

 
7,293

Real estate
717

 

Other long-term investments
14

 

Acquisitions:
 
 
 
Fixed maturities - available for sale
(294,258
)
 
(328,264
)
Equity securities - available for sale
(1,102
)
 
(11,162
)
Mortgage loans
(90,450
)
 
(61,125
)
Derivative instruments
(4,557
)
 
(3,311
)
Policy loans
(19,786
)
 
(20,187
)
Securities and indebtedness of related parties
(6,859
)
 
(8,131
)
Short-term investments, net change
(13,273
)
 
5,694

Purchases and disposals of property and equipment, net
(5,954
)
 
(5,831
)
Net cash used in investing activities
(75,673
)
 
(78,561
)




6




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

 
Six months ended June 30,
 
2017
 
2016
Financing activities
 
 
 
Contract holder account deposits
$
263,551

 
$
319,337

Contract holder account withdrawals
(239,237
)
 
(177,676
)
Dividends paid
(59,384
)
 
(70,625
)
Repayments of debt

 
(15,000
)
Issuance or repurchase of common stock, net
181

 
1,005

Other financing activities

 
484

Net cash provided by (used in) financing activities
(34,889
)
 
57,525

Increase in cash and cash equivalents
10,226

 
96,055

Cash and cash equivalents at beginning of period
33,583

 
29,490

Cash and cash equivalents at end of period
$
43,809

 
$
125,545

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash (paid) received during the period for:
 
 
 
Interest
$
(2,425
)
 
$
(2,429
)
Income taxes
(3,602
)
 
(2,001
)

See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017

1. Significant Accounting Policies

Basis of Presentation

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

Operating results for the three- and six-month periods ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. We encourage you to refer to the notes to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2016 for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgments and estimates and other information necessary to understand our financial position and results of operations.

Adoption of New Accounting Pronouncements

In March 2016, the FASB issued guidance that impacts the accounting for share-based compensation, including the accounting for excess tax benefits and deficiencies, classification of excess tax benefits within the consolidated statement of cash flows, and the accounting for forfeitures. The new guidance, which we adopted prospectively on January 1, 2017, resulted in a federal income tax benefit of $0.5 million ($0.02 per basic and diluted common share) for the six months ended June 30, 2017 and $0.1 million ($0.01 per basic and diluted common share) for the quarter ended June 30, 2017. Prior year periods were not restated.

Recent Accounting Pronouncements

In January 2016, the FASB issued guidance that amends certain aspects of the recognition and measurement of financial instruments. The new guidance primarily affects the accounting for equity investments, the presentation and disclosure requirements for financial instruments and the methodology for assessing the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale fixed maturity securities. The guidance becomes effective for fiscal years beginning after December 15, 2017. The primary impact of this guidance on us will be in the recognition of gains or losses from changes in the fair value of our equity security investments through the statement of operations, rather than as unrealized gains or losses reflected in other comprehensive income. Additionally, there will no longer be a requirement to assess equity securities for other-than-temporary impairments, as such securities will be measured at fair value through net income. Note 2 provides further information as to our current level of unrealized gains or losses on these securities.

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

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


8


post-transition, including whether to adopt a short-term lease recognition exemption. The guidance becomes effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard will be applied as of the beginning of the earliest comparative period presented in the financial statements (date of initial application). We are currently evaluating the impact of this guidance on our consolidated financial statements.

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


2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
June 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,483,707

 
$
292,934

 
$
(24,045
)
 
$
3,752,596

 
$
(243
)
Residential mortgage-backed
410,628

 
35,783

 
(1,729
)
 
444,682

 
266

Commercial mortgage-backed
616,281

 
38,592

 
(1,913
)
 
652,960

 

Other asset-backed
790,178

 
15,712

 
(3,890
)
 
802,000

 
2,303

United States Government and agencies
26,583

 
1,716

 
(25
)
 
28,274

 

State and political subdivisions
1,400,415

 
134,139

 
(2,520
)
 
1,532,034

 

Total fixed maturities
$
6,727,792

 
$
518,876

 
$
(34,122
)
 
$
7,212,546

 
$
2,326

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

 
$
8,956

 
$
(475
)
 
$
101,432

 
 
Common stocks
29,711

 
292

 

 
30,003

 
 
Total equity securities
$
122,662

 
$
9,248

 
$
(475
)
 
$
131,435

 
 


9


Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,529,997

 
$
228,601

 
$
(49,943
)
 
$
3,708,655

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

 
29,121

 
(2,931
)
 
422,300

 
(983
)
Commercial mortgage-backed
546,446

 
33,645

 
(4,137
)
 
575,954

 

Other asset-backed
771,570

 
8,846

 
(9,766
)
 
770,650

 
2,544

United States Government and agencies
30,575

 
1,629

 
(132
)
 
32,072

 

State and political subdivisions
1,387,013

 
119,298

 
(7,152
)
 
1,499,159

 

Total fixed maturities
$
6,661,711

 
$
421,140

 
$
(74,061
)
 
$
7,008,790

 
$
479

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

 
$
4,050

 
$
(1,675
)
 
$
102,417

 
 
Common stocks
30,437

 
114

 

 
30,551

 
 
Total equity securities
$
130,479

 
$
4,164

 
$
(1,675
)
 
$
132,968

 
 

(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for residential mortgage-backed and other asset-backed securities at June 30, 2017 and other asset-backed securities at December 31, 2016 were in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2)
Corporate securities include hybrid preferred securities with a fair value of $24.3 million at June 30, 2017 and $23.3 million at December 31, 2016. Corporate securities also include redeemable preferred stock with a fair value of $26.2 million at June 30, 2017 and $24.5 million at December 31, 2016.

Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
 
 
 
 
June 30, 2017
 
Amortized
Cost
 

Fair Value
 
(Dollars in thousands)
Due in one year or less
$
173,479

 
$
178,072

Due after one year through five years
674,859

 
725,874

Due after five years through ten years
718,196

 
760,134

Due after ten years
3,344,171

 
3,648,824

 
4,910,705

 
5,312,904

Mortgage-backed and other asset-backed
1,817,087

 
1,899,642

Total fixed maturities
$
6,727,792

 
$
7,212,546


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



10


Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income
 
 
 
 
 
June 30,
2017
 
December 31,
2016
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
484,754

 
$
347,079

Equity securities - available for sale
8,773

 
2,489

 
493,527

 
349,568

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(137,017
)
 
(95,647
)
Value of insurance in force acquired
(14,202
)
 
(12,382
)
Unearned revenue reserve
9,834

 
4,215

Adjustments for assumed changes in policyholder liabilities
(14,137
)
 
(3,795
)
Provision for deferred income taxes
(118,300
)
 
(84,684
)
Net unrealized investment gains
$
219,705

 
$
157,275


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

Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
June 30, 2017
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 

Fair Value
 
Unrealized Losses
 

Fair Value
 
Unrealized Losses
 
 Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
264,992

 
$
(4,967
)
 
$
160,828

 
$
(19,078
)
 
$
425,820

 
$
(24,045
)
 
70.4
%
Residential mortgage-backed
 
31,007

 
(733
)
 
17,147

 
(996
)
 
48,154

 
(1,729
)
 
5.1

Commercial mortgage-backed
 
77,714

 
(1,657
)
 
6,869

 
(256
)
 
84,583

 
(1,913
)
 
5.6

Other asset-backed
 
206,033

 
(2,107
)
 
57,931

 
(1,783
)
 
263,964

 
(3,890
)
 
11.4

United States Government and agencies
 
6,699

 
(25
)
 

 

 
6,699

 
(25
)
 
0.1

State and political subdivisions
 
72,395

 
(2,520
)
 

 

 
72,395

 
(2,520
)
 
7.4

Total fixed maturities
 
$
658,840

 
$
(12,009
)
 
$
242,775

 
$
(22,113
)
 
$
901,615

 
$
(34,122
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$

 
$

 
$
4,525

 
$
(475
)
 
$
4,525

 
$
(475
)
 
 
Total equity securities
 
$

 
$

 
$
4,525

 
$
(475
)
 
$
4,525

 
$
(475
)
 
 



11


Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
742,626

 
$
(23,142
)
 
$
220,939

 
$
(26,801
)
 
$
963,565

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

 
(1,014
)
 
22,744

 
(1,917
)
 
74,617

 
(2,931
)
 
4.0

Commercial mortgage-backed
 
95,690

 
(3,590
)
 
6,610

 
(547
)
 
102,300

 
(4,137
)
 
5.6

Other asset-backed
 
371,829

 
(5,810
)
 
95,740

 
(3,956
)
 
467,569

 
(9,766
)
 
13.2

United States Government and agencies
 
6,438

 
(132
)
 

 

 
6,438

 
(132
)
 
0.2

State and political subdivisions
 
150,052

 
(7,152
)
 

 

 
150,052

 
(7,152
)
 
9.7

Total fixed maturities
 
$
1,418,508

 
$
(40,840
)
 
$
346,033

 
$
(33,221
)
 
$
1,764,541

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

 
$
(150
)
 
$
13,438

 
$
(1,525
)
 
$
26,212

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

 
$
(150
)
 
$
13,438

 
$
(1,525
)
 
$
26,212

 
$
(1,675
)
 
 

Fixed maturities in the above tables include 286 securities from 221 issuers at June 30, 2017 and 516 securities from 404 issuers at December 31, 2016.

Unrealized losses decreased during the six months ended June 30, 2017 primarily due to a decrease in treasury rates as well as a general decrease in credit spreads. We do not consider securities to be OTTI when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality when recovery of all amounts due under the contractual terms of the security is anticipated. Based on our intent not to sell or our belief that we will not be required to sell these securities before recovery of their amortized cost basis, we do not consider these investments to be OTTI at June 30, 2017. We will continue to monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified.

Our largest unrealized loss was from an oil field service provider and totaled $2.6 million at June 30, 2017.

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

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
 
 
 
 
Six months ended June 30,
 
2017

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

 
(2,172
)
Reductions due to investments sold or paid down
829

 
622

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

 

Balance at end of period
$
(13,084
)
 
$
(13,048
)



12


The table above sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which a portion of the OTTI was recognized in other comprehensive income and corresponding changes in such amounts. Credit loss impairments with no portion of the loss recognized in other comprehensive income, such as securities for which OTTI was measured at fair value, are excluded from the table.
Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Gross gains
$
1,081

 
$
5,789

 
$
1,205

 
$
7,379

Gross losses
(414
)
 
(8,378
)
 
(941
)
 
(8,378
)
Other long-term investments
40

 

 
40

 

Real estate
304

 

 
304

 

Equity investments
(90
)
 

 
(90
)
 

Securities and indebtedness of related parties

 
320

 

 
320

 
921

 
(2,269
)
 
518

 
(679
)
Impairment losses recognized in earnings:
 
 
 
 
 
 
 
Credit-related portion of fixed maturity losses (1)

 

 

 
(2,172
)
Other credit-related (2)

 
(25
)
 
(66
)
 
(50
)
Net realized losses on investments recorded in income
$
921

 
$
(2,294
)
 
$
452

 
$
(2,901
)

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

Proceeds from sales of fixed maturities totaled $85.1 million during the six months ended June 30, 2017 and $105.4 million during the six months ended June 30, 2016.

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

Mortgage Loans

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

Any loan delinquent on contractual payments is considered non-performing. At June 30, 2017 and December 31, 2016, there were no non-performing loans over 90 days past due on contractual payments. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely. At June 30, 2017, we had committed to provide additional funding for mortgage loans totaling $35.8 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.



13


Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
379,495

 
43.2
%
 
$
361,088

 
44.2
%
Retail
 
287,522

 
32.7

 
240,602

 
29.5

Industrial
 
153,176

 
17.5

 
154,005

 
18.9

Other
 
58,242

 
6.6

 
60,776

 
7.4

Total
 
$
878,435

 
100.0
%
 
$
816,471

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
259,992

 
29.6
%
 
$
266,019

 
32.6
%
West North Central
 
127,602

 
14.5

 
105,753

 
12.9

Pacific
 
120,547

 
13.7

 
104,337

 
12.8

East North Central
 
97,120

 
11.1

 
91,550

 
11.2

Mountain
 
89,871

 
10.2

 
79,707

 
9.8

West South Central
 
82,598

 
9.4

 
74,258

 
9.1

Other
 
100,705

 
11.5

 
94,847

 
11.6

Total
 
$
878,435

 
100.0
%
 
$
816,471

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Loan-to-Value Ratio
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
318,429

 
36.2
%
 
$
274,953

 
33.7
%
51% - 60%
 
215,223

 
24.5

 
210,555

 
25.8

61% - 70%
 
258,571

 
29.5

 
233,216

 
28.5

71% - 80%
 
56,244

 
6.4

 
67,607

 
8.3

81% - 90%
 
29,968

 
3.4

 
30,140

 
3.7

Total
 
$
878,435

 
100.0
%
 
$
816,471

 
100.0
%

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



14


Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2017
 
$
89,960

 
10.2
%
 
$

 
%
2016
 
156,747

 
17.9

 
158,817

 
19.4

2015
 
147,319

 
16.8

 
149,302

 
18.3

2014
 
79,335

 
9.0

 
80,771

 
9.9

2013
 
68,530

 
7.8

 
69,887

 
8.6

2012 and prior
 
336,544

 
38.3

 
357,694

 
43.8

Total
 
$
878,435

 
100.0
%
 
$
816,471

 
100.0
%

 Impaired Mortgage Loans
 
 
 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Unpaid principal balance
$
19,199

 
$
21,459

Less:
 
 
 
Related allowance
(615
)
 
(713
)
Carrying value of impaired mortgage loans
$
18,584

 
$
20,746

 Allowance on Mortgage Loans
 
Six months ended June 30,
 
2017
 
2016
 
(Dollars in thousands)
Balance at beginning of period
$
713

 
$
851

Recoveries
(98
)
 
(7
)
Balance at end of period
$
615

 
$
844


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, 2017 or 2016.

Low Income Housing Tax Credit Investments (LIHTC)

We invest in non-guaranteed federal LIHTC, which are included in securities and indebtedness of related parties on the balance sheet. The carrying value of these investments totaled $87.6 million at June 30, 2017 and $91.3 million at December 31, 2016. There were no impairment losses recorded on these investments during the first six months of 2017 or 2016. We use the equity method of accounting for these investments and recorded the following in our consolidated statement of operations.


15


LIHTC Equity Income (Loss), Net of Related Income Taxes
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Equity losses from LIHTC
 
$
(2,938
)
 
$
(2,508
)
 
$
(4,743
)
 
$
(4,047
)
Income tax benefits:
 
 
 
 
 
 
 
 
Tax benefits from equity losses
 
1,028

 
878

 
1,660

 
1,416

Investment tax credits
 
3,568

 
3,552

 
7,097

 
7,002

Equity income from LIHTC, net of related income tax benefits
 
$
1,658

 
$
1,922

 
$
4,014

 
$
4,371


At June 30, 2017, we had committed to provide additional funds for limited partnerships and limited liability companies in which we invest. The amounts of these unfunded commitments totaled $43.1 million, including $2.7 million for LIHTC commitments, which are summarized by year in the following table.

LIHTC Commitments by Year
 
 
June 30, 2017
 
(Dollars in thousands)
2017
$
1,478

2018
299

2019-2025
878

Total
$
2,655


Variable Interest Entities

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

We have reviewed the circumstances surrounding our investments in VIEs, which are classified as securities and indebtedness of related parties and consist of LIHTC, limited partnerships or limited liability companies accounted for under the equity method. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carrying value and any unfunded commitments that exist for each particular VIE. We also have not provided additional support or other guarantees that was not previously contractually required (financial or otherwise) to any of the VIEs as of June 30, 2017 or December 31, 2016. Based on this analysis, none of our VIEs were required to be consolidated for any reporting periods presented in this Form 10-Q.




16


VIE Investments by Category
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value
 
Maximum Exposure to Loss
 
(Dollars in thousands)
LIHTC
$
87,647

 
$
90,302

 
$
91,255

 
$
95,058

Investment companies
20,912

 
47,704

 
23,379

 
45,569

Real estate limited partnerships
11,303

 
23,755

 
10,790

 
14,558

Other
807

 
2,055

 
429

 
2,034

Total
$
120,669

 
$
163,816

 
$
125,853

 
$
157,219


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

Derivative Instruments

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

Derivatives Instruments by Type
 
 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Assets
 
 
 
Freestanding derivatives:
 
 
 
Call options (reported in other investments)
$
11,790

 
$
9,360

Embedded derivatives:
 
 
 
Modified coinsurance (reported in reinsurance recoverable)
2,151

 
3,411

Interest-only security (reported in fixed maturities)
2,672

 
3,374

Total assets
$
16,613

 
$
16,145

 
 
 
 
Liabilities
 
 
 
Embedded derivatives:
 
 
 
Indexed annuity and universal life products (reported in liability for future policy benefits)
$
22,295

 
$
15,778

Modified coinsurance agreements (reported in other liabilities)
276

 
114

Total liabilities
$
22,571

 
$
15,892






17


Derivative Income (Loss)
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Call options
$
1,400

 
$
304

 
$
3,765

 
$
(111
)
Change in fair value of embedded derivatives:
 
 
 
 
 
 
 
Modified coinsurance agreements
(12
)
 
666

 
(1,422
)
 
827

Interest-only security
(174
)
 
(710
)
 
(195
)
 
(465
)
Indexed annuity and universal life products
(91
)
 
(1,521
)
 
318

 
(2,689
)
Total income (loss) from derivatives
$
1,123

 
$
(1,261
)
 
$
2,466

 
$
(2,438
)

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

We are exposed to credit losses in the event of nonperformance of the derivative counterparties. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings (currently rated A- or better by nationally recognized statistical rating organizations). We have also entered into credit support agreements with the counterparties requiring them to post collateral when net exposures exceed pre-determined thresholds that vary by counterparty. The net amount of such exposure is essentially the market value less collateral held for such agreements with each counterparty. The call options are supported by securities collateral received of $7.2 million at June 30, 2017, which is held in a separate custodial account. Subject to certain constraints, we are permitted to sell or re-pledge this collateral, but do not have legal rights to the collateral; accordingly, it has not been recorded on our balance sheet. At June 30, 2017, none of the collateral had been sold or re-pledged. As of June 30, 2017, our net derivative exposure was $4.8 million.


3. Fair Values

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

Fair Values and Carrying Values
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities - available for sale
$
7,212,546

 
$
7,212,546

 
$
7,008,790

 
$
7,008,790

Equity securities - available for sale
131,435

 
131,435

 
132,968

 
132,968

Mortgage loans
878,435

 
904,209

 
816,471

 
840,337

Policy loans
188,630

 
233,461

 
188,254

 
230,656

Other investments
12,642

 
13,802

 
9,809

 
11,272

Cash, cash equivalents and short-term investments
73,430

 
73,430

 
49,931

 
49,931

Reinsurance recoverable
2,151

 
2,151

 
3,411

 
3,411

Assets held in separate accounts
625,971

 
625,971

 
597,072

 
597,072




18


Fair Values and Carrying Values (continued)
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$
4,096,486

 
$
4,042,680

 
$
4,044,148

 
$
3,903,177

Supplementary contracts without life contingencies
328,904

 
335,425

 
330,232

 
330,633

Advance premiums and other deposits
260,025

 
260,025

 
257,171

 
257,171

Long-term debt
97,000

 
76,940

 
97,000

 
67,599

Other liabilities
276

 
276

 
114

 
114

Liabilities related to separate accounts
625,971

 
623,191

 
597,072

 
593,760


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

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

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

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

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

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

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

Fixed maturities:

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

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

Also included in Level 2 are private placement corporate bonds for which quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a


19


risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread.

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

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

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

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

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

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

We compare prices between different pricing sources for unusual disparity.

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

Equity securities:

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

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

Level 3 equity securities consist of non-redeemable preferred stock for which no active market exists, and fair value estimates for these securities is based on the values of comparable securities that are actively traded. Increases in spreads used in our


20


matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.

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

Mortgage loans:

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

Policy loans:

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

Other investments:

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

Cash, cash equivalents and short-term investments:

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

Reinsurance recoverable:

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

Assets held in separate accounts:

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

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

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


21


the fair values of these financial instruments. For contracts with known maturities, increases in current rates will result in a decrease in discounted cash flows and a decrease in the estimated fair value of the policy obligation.

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

Long-term debt:

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

Other liabilities:

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

Liabilities related to separate accounts:

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



22


Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels
 
 
 
June 30, 2017
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Corporate securities
$

 
$
3,716,055

 
$
36,541

 
$
3,752,596

Residential mortgage-backed securities

 
438,663

 
6,019

 
444,682

Commercial mortgage-backed securities

 
574,236

 
78,724

 
652,960

Other asset-backed securities

 
703,612

 
98,388

 
802,000

United States Government and agencies
9,022

 
19,252

 

 
28,274

State and political subdivisions

 
1,532,034

 

 
1,532,034

Total fixed maturities
9,022

 
6,983,852

 
219,672

 
7,212,546

Non-redeemable preferred stocks

 
93,907

 
7,525

 
101,432

Common stocks
4,035

 
25,968

 

 
30,003

Other investments

 
11,790

 

 
11,790

Cash, cash equivalents and short-term investments
73,430

 

 

 
73,430

Reinsurance recoverable

 
2,151

 

 
2,151

Assets held in separate accounts
625,971

 

 

 
625,971

Total assets
$
712,458

 
$
7,117,668

 
$
227,197

 
$
8,057,323

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$

 
$

 
$
22,295

 
$
22,295

Other liabilities

 
276

 

 
276

Total liabilities
$

 
$
276

 
$
22,295

 
$
22,571



23


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

 
$
3,649,536

 
$
59,119

 
$
3,708,655

Residential mortgage-backed securities

 
422,300

 

 
422,300

Commercial mortgage-backed securities

 
494,520

 
81,434

 
575,954

Other asset-backed securities

 
716,282

 
54,368

 
770,650

United States Government and agencies
11,943

 
20,129

 

 
32,072

State and political subdivisions

 
1,499,159

 

 
1,499,159

Total fixed maturities
11,943

 
6,801,926

 
194,921

 
7,008,790

Non-redeemable preferred stocks

 
95,006

 
7,411

 
102,417

Common stocks
3,056

 
27,495

 

 
30,551

Other investments

 
9,360

 

 
9,360

Cash, cash equivalents and short-term investments
49,931

 

 

 
49,931

Reinsurance recoverable

 
3,411

 

 
3,411

Assets held in separate accounts
597,072

 

 

 
597,072

Total assets
$
662,002

 
$
6,937,198

 
$
202,332

 
$
7,801,532

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$

 
$

 
$
15,778

 
$
15,778

Other liabilities

 
114

 

 
114

Total liabilities
$

 
$
114

 
$
15,778

 
$
15,892


Level 3 Fixed Maturities by Valuation Source - Recurring Basis
 
 
 
June 30, 2017
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
7,493

 
$
29,048

 
$
36,541

Residential mortgage-backed securities
6,019

 

 
6,019

Commercial mortgage-backed securities
78,724

 

 
78,724

Other asset-backed securities
88,086

 
10,302

 
98,388

Total
$
180,322

 
$
39,350

 
$
219,672

Percent of total
82.1
%
 
17.9
%
 
100.0
%

 
December 31, 2016
 
Third-party vendors
 
Priced
internally
 
Total
 
(Dollars in thousands)
Corporate securities
$
17,684

 
$
41,435

 
$
59,119

Commercial mortgage-backed securities
81,434

 

 
81,434

Other asset-backed securities
39,308

 
15,060

 
54,368

Total
$
138,426

 
$
56,495

 
$
194,921

Percent of total
71.0
%
 
29.0
%
 
100.0
%



24


Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis
 
 
 
June 30, 2017
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
27,586

 
Discounted cash flow
 
Credit spread
 
0.87% - 6.21% (3.74%)
Commercial mortgage-backed
73,002

 
Discounted cash flow
 
Credit spread
 
1.40% - 4.10% (2.50%)
Other asset-backed securities
7,569

 
Discounted cash flow
 
Credit spread
 
1.51% - 4.63% (3.25%)
Non-redeemable preferred stocks
7,525

 
Discounted cash flow
 
Credit spread
 
3.32% (3.32%)
Total assets
$
115,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits - indexed product embedded derivatives
$
22,295

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.50% - 1.75% (1.10%)
0.15% - 0.40% (0.25%)

 
December 31, 2016
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(Dollars in thousands)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Corporate securities
$
47,398

 
Discounted cash flow
 
Credit spread
 
0.58% - 4.25% (2.81%)
Commercial mortgage-backed
81,434

 
Discounted cash flow
 
Credit spread
 
1.10% - 4.15% (2.95%)
Other asset-backed securities
6,461

 
Discounted cash flow
 
Credit spread
 
1.08% - 4.87% (3.45%)
Non-redeemable preferred stocks
7,411

 
Discounted cash flow
 
Credit spread
 
4.05% (4.05%)
Total assets
$
142,704

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

 
Discounted cash flow
 
Credit risk
Risk margin
 
0.80% - 2.00% (1.25%)
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


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

 
$

 
$
(3,311
)
 
$

 
$
(778
)
 
$
4,408

 
$
(22,877
)
 
$
(20
)
 
$
36,541

Residential mortgage-backed securities

 
21,326

 

 

 
(1
)
 

 
(15,307
)
 
1

 
6,019

Commercial mortgage-backed securities
81,434

 
5,723

 
(394
)
 

 
6,547

 

 
(14,544
)
 
(42
)
 
78,724

Other asset-backed securities
54,368

 
63,542

 
(3,921
)
 

 
269

 
10,959

 
(26,817
)
 
(12
)
 
98,388

Non-redeemable preferred stocks
7,411

 

 

 

 
114

 

 

 

 
7,525

Total assets
$
202,332

 
$
90,591

 
$
(7,626
)
 
$

 
$
6,151

 
$
15,367

 
$
(79,545
)
 
$
(73
)
 
$
227,197

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

 
$
3,566

 
$
(909
)
 
$
3,860

 
$

 
$

 
$

 
$

 
$
22,295


 
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 and political subdivisions

 

 

 

 
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 - indexed product embedded derivatives
$
9,374

 
$
2,852

 
$
(469
)
 
$
1,343

 
$

 
$

 
$

 
$

 
$
13,100


(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.



26


Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels
 
 
 
June 30, 2017
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Mortgage loans
$

 
$

 
$
904,209

 
$
904,209

Policy loans

 

 
233,461

 
233,461

Other investments

 

 
2,012

 
2,012

Total assets
$

 
$

 
$
1,139,682

 
$
1,139,682

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
4,020,385

 
$
4,020,385

Supplementary contracts without life contingencies

 

 
335,425

 
335,425

Advance premiums and other deposits

 

 
260,025

 
260,025

Long-term debt

 

 
76,940

 
76,940

Liabilities related to separate accounts

 

 
623,191

 
623,191

Total liabilities
$

 
$

 
$
5,315,966

 
$
5,315,966


 
December 31, 2016
 
Quoted prices in active markets
for identical assets (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Mortgage loans
$

 
$

 
$
840,337

 
$
840,337

Policy loans

 

 
230,656

 
230,656

Other investments
 
 
 
 
1,912

 
1,912

Total assets
$

 
$

 
$
1,072,905

 
$
1,072,905

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Future policy benefits
$

 
$

 
$
3,887,399

 
$
3,887,399

Supplementary contracts without life contingencies

 

 
330,633

 
330,633

Advance premiums and other deposits

 

 
257,171

 
257,171

Long-term debt

 

 
67,599

 
67,599

Liabilities related to separate accounts

 

 
593,760

 
593,760

Total liabilities
$

 
$

 
$
5,136,562

 
$
5,136,562


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 six months ended June 30, 2017 or June 30, 2016.


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.



27


Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Multiemployer Plan
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Service cost
$
1,388

 
$
1,448

 
$
2,776

 
$
2,896

Interest cost
3,531

 
3,612

 
7,062

 
7,224

Expected return on assets
(4,796
)
 
(4,466
)
 
(9,592
)
 
(8,932
)
Amortization of prior service cost
33

 
36

 
66

 
72

Amortization of actuarial loss
2,530

 
2,358

 
5,060

 
4,716

Net periodic pension cost
$
2,686

 
$
2,988

 
$
5,372

 
$
5,976

 
 
 
 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
$
851

 
$
952

 
$
1,702

 
$
1,904


Components of Net Periodic Pension Cost for FBL and Affiliates Combined - Other Plans
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Service cost
$
109

 
$
84

 
$
218

 
$
168

Interest cost
251

 
241

 
502

 
482

Amortization of actuarial loss
293

 
230

 
586

 
460

Net periodic pension cost
$
653

 
$
555

 
$
1,306

 
$
1,110

 
 
 
 
 
 
 
 
FBL Financial Group, Inc. share of net periodic pension costs
$
388

 
$
315

 
$
776

 
$
630

 

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

Our Board of Directors approved a program to repurchase our Class A common stock. The repurchase program authorizes 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 program, we made no repurchases during the six months ended June 30, 2017 and repurchased 10,322 shares for $0.6 million during the six months ended June 30, 2016. At June 30, 2017, $49.5 million remains available for repurchase under the repurchase program. 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.



28


Special Dividends

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

Reconciliation of Outstanding Common Stock
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Total
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
(Dollars in thousands)
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

 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2017
24,882,542

 
$
152,903

 
11,413

 
$
72

 
24,893,955

 
$
152,975

Issuance of common stock under compensation plans
34,613

 
440

 

 

 
34,613

 
440

Outstanding at June 30, 2017
24,917,155

 
$
153,343

 
11,413

 
$
72

 
24,928,568

 
$
153,415


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, 2016
$
120,787

 
$
(114
)
 
$
(6,141
)
 
$
114,532

Other comprehensive loss 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

 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
156,963

 
$
311

 
$
(7,719
)
 
$
149,555

Other comprehensive income before reclassifications
61,285

 
1,201

 

 
62,486

Reclassification adjustments
(55
)
 

 
371

 
316

Balance at June 30, 2017
$
218,193

 
$
1,512

 
$
(7,348
)
 
$
212,357


(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.



29


Accumulated Other Comprehensive Income Reclassification Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
Unrealized Net Investment Gains (Losses) on Available For Sale Securities (1)
 
Accumulated Non-Credit Impairment Losses (1)
 
Underfunded Status of Postretirement Benefit
Plans
 
Total
 
(Dollars in thousands)
Realized capital gains on sales of investments
$
(174
)
 
$

 
$

 
$
(174
)
Adjustments for assumed changes in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities
89

 

 

 
89

Other expenses - change in unrecognized postretirement items:
 
 
 
 
 
 


Net actuarial loss

 

 
571

 
571

Reclassifications before income taxes
(85
)
 

 
571

 
486

Income taxes
30

 

 
(200
)
 
(170
)
Reclassification adjustments
$
(55
)
 
$

 
$
371

 
$
316


 
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
)

(1)
See Note 2 for further information.



30


7. Earnings per Share

Computation of Earnings per Common Share
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income attributable to FBL Financial Group, Inc.
$
32,291

 
$
24,380

 
$
58,724

 
$
50,326

Less: Dividends on Series B preferred stock
37

 
37

 
75

 
75

Income available to common stockholders
$
32,254

 
$
24,343

 
$
58,649

 
$
50,251

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares - basic
25,031,312

 
24,987,878

 
25,033,307

 
24,969,727

Effect of dilutive securities - stock-based compensation
19,663

 
42,566

 
20,777

 
50,358

Weighted average shares - diluted
25,050,975

 
25,030,444

 
25,054,084

 
25,020,085

 
 
 
 
 
 
 
 
Earnings per common share
$
1.29

 
$
0.97

 
$
2.34

 
$
2.01

Earnings per common share - assuming dilution:
$
1.29

 
$
0.97

 
$
2.34

 
$
2.01

 
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 use operating income (a non-GAAP measure), in addition to net income, to measure our performance. Operating income, for the periods presented, consists of net income adjusted to exclude the impact of realized gains and losses on investments and the change in net unrealized gains and losses on derivatives, which can fluctuate greatly from period to period. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income (loss). Specifically, call options relating to our indexed business are one-year assets while the embedded derivatives in the indexed contracts represent the rights of the contract holder to receive index credits over the entire period the indexed annuities are expected to be in force.
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.
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 adjustments are net of amortization of unearned revenue reserves, deferred acquisition costs and value of insurance in force acquired, as well as changes in interest sensitive product reserves and income taxes attributable to these items. While not applicable for the periods reported herein, our operating income policy also calls for adjustments to net income relating to the following:

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



31


In the fourth quarter of 2016, due to changes in product offerings since the last amendment to our policy for calculating operating income, we refined our calculation of operating income to include offsets related to changes in interest sensitive product reserves. These offsets, net of tax, decreased operating income $0.7 million in the second quarter of 2017 and $0.3 million in the six months ended June 30, 2017. These offsets, net of tax, not taken into account in the computation of operating income for the second quarter of 2016 would have increased operating income by less than $0.1 million and increased operating income for the six months ended June 30, 2016 by $0.1 million.

Reconciliation Between Net Income and Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Net income attributable to FBL Financial Group, Inc.
$
32,291

 
$
24,380

 
$
58,724

 
$
50,326

Operating income adjustments:
 
 
 
 
 
 
 
Realized gains/losses on investments (1)
(788
)
 
1,147

 
(234
)
 
1,544

Change in net unrealized gains/losses on derivatives (1)
(686
)
 
149

 
(685
)
 
124

Operating income
$
30,817

 
$
25,676

 
$
57,805

 
$
51,994


Financial Information Concerning our Operating Segments
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Pre-tax operating income:
 
 
 
 
 
 
 
Annuity
$
18,174

 
$
16,348

 
$
34,595

 
$
33,496

Life Insurance
17,631

 
14,473

 
31,380

 
28,544

Corporate and Other
4,195

 
1,972

 
8,357

 
4,461

Total pre-tax operating income
40,000

 
32,793

 
74,332

 
66,501

Income taxes on operating income
(9,183
)
 
(7,117
)
 
(16,527
)
 
(14,507
)
Operating income
$
30,817

 
$
25,676

 
$
57,805

 
$
51,994

 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
Annuity
$
56,833

 
$
53,954

 
$
111,884

 
$
106,133

Life Insurance
107,068

 
104,724

 
211,211

 
208,327

Corporate and Other
24,104

 
23,283

 
47,770

 
46,707

 
188,005

 
181,961

 
370,865

 
361,167

Net realized gains/losses on investments (1)
794

 
(2,261
)
 
313

 
(2,868
)
Change in net unrealized gains/losses on derivatives (1)
198

 
1,585

 
(261
)
 
2,652

Consolidated revenues
$
188,997

 
$
181,285

 
$
370,917

 
$
360,951


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

Interest expense is attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significant during the periods presented above. Goodwill at June 30, 2017 and December 31, 2016 was allocated among the segments as follows: Annuity ($3.9 million) and Life Insurance ($6.1 million).

Prior to 2017, securities and indebtedness of related parties were attributable to the Corporate and Other segment. In 2017, we began to assign a portion of our investments held in securities and indebtedness of related parties to the Life Insurance segment. The following chart provides the related equity income (loss) by segment.



32


Equity Income (Loss) by Operating Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Pre-tax equity income (loss):
 
 
 
 
 
 
 
Life Insurance
$
1,289

 
$

 
$
2,455

 
$

Corporate and Other
(2,279
)
 
(1,446
)
 
(3,903
)
 
(2,674
)
Total pre-tax equity loss
(990
)
 
(1,446
)
 
(1,448
)
 
(2,674
)
 
 
 
 
 
 
 
 
Income taxes
3,914

 
4,059

 
7,603

 
7,939

Equity income, net of related income taxes
$
2,924

 
$
2,613

 
$
6,155

 
$
5,265


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 $165.9 million for the quarter ended June 30, 2017 and $186.9 million for the same period in 2016. Net premiums collected totaled $335.7 million for the six months ended June 30, 2017 and $360.1 million for the same period in 2016.

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,
 
2017

2016
 
2017
 
2016
 
(Dollars in thousands)
Traditional and universal life insurance premiums collected
$
75,162

 
$
70,211

 
$
148,735

 
$
141,924

Premiums collected on interest sensitive products
(26,164
)
 
(21,173
)
 
(50,879
)
 
(42,209
)
Traditional life insurance premiums collected
48,998

 
49,038

 
97,856

 
99,715

Change in due premiums and other
1,264

 
567

 
840

 
28

Traditional life insurance premiums as included in the Consolidated Statements of Operations
$
50,262

 
$
49,605

 
$
98,696

 
$
99,743


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.



33


Interest Sensitive Product Charges by Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017

2016
 
2017
 
2016
 
(Dollars in thousands)
Annuity
 
 
 
 
 
 
 
Surrender charges and other
$
1,202

 
$
932

 
$
2,337

 
$
1,874

 
 
 
 
 
 
 
 
Life Insurance
 
 
 
 
 
 
 
Administration charges
$
3,899

 
$
3,583

 
$
7,764

 
$
7,087

Cost of insurance charges
12,369

 
12,042

 
24,404

 
23,867

Surrender charges
469

 
310

 
994

 
526

Amortization of policy initiation fees
620

 
720

 
1,284

 
948

Total
$
17,357

 
$
16,655

 
$
34,446

 
$
32,428

 
 
 
 
 
 
 
 
Corporate and Other
 
 
 
 
 
 
 
Administration charges
$
1,377

 
$
1,478

 
$
2,802

 
$
2,919

Cost of insurance charges
7,269

 
7,433

 
14,594

 
14,949

Surrender charges
27

 
47

 
79

 
73

Separate account charges
2,027

 
1,993

 
4,029

 
3,971

Amortization of policy initiation fees
197

 
489

 
370

 
924

Total
$
10,897

 
$
11,440

 
$
21,874

 
$
22,836

 
 
 
 
 
 
 
 
Interest sensitive product charges as included in the Consolidated Statements of Operations
$
29,456

 
$
29,027

 
$
58,657

 
$
57,138




34


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, 2016 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, 2016 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 2.6% during the second quarter of 2017 based on recent estimates.
U.S. unemployment was estimated to be 4.4% at the end of the second quarter of 2017.
U.S. net farm income is forecast to decrease 8.7% and farm real estate values are forecast to decrease 0.3% during 2017 according to recent U.S. Department of Agriculture forecasts.
The U.S. 10-year Treasury yield decreased during the second quarter of 2017 to 2.31% at June 30, 2017 from 2.40% at March 31, 2017.
Continued uncertainty as to actions the United States government will take to address the national debt, including potential actions to change the tax advantages of life insurance.


35


The ultimate resolution of the Department of Labor's new rules that expand our 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. The benchmark 10-year U.S. Treasury yield decreased while credit spreads tightened during the second quarter of 2017. Low crediting rates pose challenges to maintaining attractive annuity and universal life products, although our rates are comparable to other insurance companies, allowing us to maintain our competitive position within the market. We experienced an increase in the fair value of our fixed maturity security portfolio during the second quarter of 2017 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, 2017 and 2016

 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(Dollars in thousands, except per share data)
Net income attributable to FBL Financial Group, Inc.
$
32,291

 
$
24,380

 
32
 %
 
$
58,724

 
$
50,326

 
17
 %
Operating income adjustments:
 
 
 
 
 
 
 
 
 
 
 
Realized gains/losses on investments (1)
(788
)
 
1,147

 
(169
)%
 
(234
)
 
1,544

 
(115
)%
Change in net unrealized gains/losses on derivatives (1)
(686
)
 
149

 
(560
)%
 
(685
)
 
124

 
(652
)%
Operating income (2)
$
30,817

 
$
25,676

 
20
 %
 
$
57,805

 
$
51,994

 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax operating income:
 
 
 
 
 
 
 
 
 
 
 
Annuity segment
$
18,174

 
$
16,348

 
11
 %
 
$
34,595

 
$
33,496

 
3
 %
Life Insurance segment
17,631

 
14,473

 
22
 %
 
31,380

 
28,544

 
10
 %
Corporate and Other segment
4,195

 
1,972

 
113
 %
 
8,357

 
4,461

 
87
 %
Total pre-tax operating income
40,000

 
32,793

 
22
 %
 
74,332

 
66,501

 
12
 %
Income taxes on operating income
(9,183
)
 
(7,117
)
 
29
 %
 
(16,527
)
 
(14,507
)
 
14
 %
Operating income (2)
$
30,817

 
$
25,676

 
20
 %
 
$
57,805

 
$
51,994

 
11
 %
 
 
 
 
 
 
 
 
 
 
 

Earnings per common share - assuming dilution
$
1.29

 
$
0.97

 
33
 %
 
$
2.34

 
$
2.01

 
16
 %
Operating income per common share - assuming dilution (2)
1.23

 
1.02

 
21
 %
 
2.30

 
2.08

 
11
 %
Effective tax rate on operating income
23
%
 
22
%
 
 
 
22
%
 
22
%
 

Average invested assets, at amortized cost (3)
 
 
 
 

 
$
8,001,013

 
$
7,647,041

 
5
 %
Annualized yield on average invested assets (3)
 
 
 
 
 
 
5.35
%
 
5.44
%
 


(1)
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs and value of insurance in force acquired, as well as changes in interest sensitive product reserves and income taxes attributable to these items.
(2)
Operating income is a non-GAAP measure of earnings, see Note 8 to our consolidated financial statements.
(3)
Average invested assets and annualized yield including, beginning in 2017, investments held as securities and indebtedness of related parties; 2016 amounts have been adjusted for comparability.

Our net income and operating income increased in the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, primarily due to the impact from an increase in the volume of business in force and the impact of prior-year unlocking in 2016, partially offset by increases in death benefits. The increase for the six-month period was also impacted by a decrease in amortization of deferred acquisition costs from the impact of market performance on our variable business. See the discussion that follows for details regarding operating income by segment.

We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired, deferred sales inducements, unearned revenue reserve for participating life insurance and interest sensitive products, as well as certain reserves on interest sensitive products, as applicable, through an “unlocking” process.


36


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,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
1,202

 
$
932

 
29
 %
 
$
2,337

 
$
1,874

 
25
 %
Net investment income
55,631

 
53,022

 
5
 %
 
109,547

 
104,259

 
5
 %
Total operating revenues
56,833

 
53,954

 
5
 %
 
111,884

 
106,133

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
29,865

 
27,591

 
8
 %
 
59,743

 
54,077

 
10
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commissions net of deferrals
483

 
523

 
(8
)%
 
1,014

 
1,093

 
(7
)%
Amortization of deferred acquisition costs
2,783

 
3,905

 
(29
)%
 
5,311

 
6,243

 
(15
)%
Amortization of value of insurance in force
170

 
372

 
(54
)%
 
340

 
547

 
(38
)%
Other underwriting expenses
5,358

 
5,215

 
3
 %
 
10,881

 
10,677

 
2
 %
Total underwriting, acquisition and insurance expenses
8,794

 
10,015

 
(12
)%
 
17,546

 
18,560

 
(5
)%
Total benefits and expenses
38,659

 
37,606

 
3
 %
 
77,289

 
72,637

 
6
 %
Pre-tax operating income (1)
$
18,174

 
$
16,348

 
11
 %
 
$
34,595

 
$
33,496

 
3
 %
Other data
 
 
 
 
 
 
 
 
 
 
 
Annuity premiums collected, direct (2)
$
76,539

 
$
100,447

 
(24
)%
 
$
158,002

 
$
186,122

 
(15
)%
Policy liabilities and accruals, end of period
 
 
 
 
 
 
4,236,547

 
4,072,349

 
4
 %
Average invested assets, at amortized cost
 
 
 
 
 
 
4,327,948

 
4,090,279

 
6
 %
Other investment-related income included in net investment income (3)
2,515

 
3,064

 
(18
)%
 
3,115

 
4,548

 
(32
)%
Average individual annuity account value
 
 
 
 
 
 
3,009,171

 
2,837,274

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
 
 
 
 
 
 
5.20
%
 
5.34
%
 
 
Weighted average interest crediting rate
 
 
 
 
 
 
2.62
%
 
2.70
%
 
 
Spread
 
 
 
 
 
 
2.58
%
 
2.64
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
 
 
 
 
 
 
4.1
%
 
3.7
%
 
 

(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 8 to our consolidated financial statements.
(2)
Premiums collected is a non-GAAP measure of sales production, see Note 8 to our consolidated financial statements.
(3)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.

Pre-tax operating income for the Annuity segment increased in the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, primarily due to the impact of an increase in the volume of business in force and the impact of unlocking in 2016, partially offset by lower other investment-related income.



37


The average aggregate account value for individual annuity contracts in force increased in the six months ended June 30, 2017, 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, benefits and expenses. Premiums collected were lower in the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, due to decreased sales of indexed annuity products and fixed rate deferred annuity products. Individual fixed rate deferred annuity collected premiums were $46.9 million in the second quarter of 2017 and $103.8 million in the six months ended June 30, 2017, compared to $60.7 million in the second quarter of 2016 and $115.2 million in the six months ended June 30, 2016. Indexed annuity collected premiums were $28.8 million in the second quarter of 2017 and $52.3 million in the six months ended June 30, 2017, compared to $36.7 million in the second quarter of 2016 and $65.9 million in the six months ended June 30, 2016.

The Annuity segment also includes advances on our funding agreements with FHLB. Outstanding funding agreements totaled $399.2 million at June 30, 2017 and $408.8 million at June 30, 2016.

Amortization of deferred acquisition costs and the volume of insurance in force changed during the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, due to changes in actual and expected profits on the underlying business. Amortization was also impacted in the second quarter of 2016 due to unlocking our projected investment and spread income assumptions. There was no unlocking that took place in 2017. The impact of unlocking on pre-tax operating income for the quarter and six months ended June 30, 2016 was as follows:
Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2016
 
(Dollars in thousands)
Amortization of deferred sales inducements reported in interest sensitive product benefits
$
1

 
$
1

Amortization of deferred acquisition costs
(1,219
)
 
(1,219
)
Amortization of value of insurance in force acquired
(194
)
 
(194
)
Decrease to pre-tax operating income (1)
$
(1,412
)
 
$
(1,412
)

(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 8 to our consolidated financial statements.

The weighted average yield on cash and invested assets for individual annuities decreased for the six months ended June 30, 2017, compared to the prior year period, primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by higher other investment-related income. 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 2016 and 2017 in response to the declining portfolio yield and a change in the underlying product mix.



38


Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
17,370

 
$
16,549

 
5
 %
 
$
34,310

 
$
32,260

 
6
 %
Traditional life insurance premiums
50,262

 
49,605

 
1
 %
 
98,696

 
99,743

 
(1
)%
Net investment income
39,436

 
38,570

 
2
 %
 
78,205

 
76,324

 
2
 %
Total operating revenues
107,068

 
104,724

 
2
 %
 
211,211

 
208,327

 
1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 

Interest sensitive product benefits:
 
 
 
 
 
 
 
 
 
 

Interest credited
7,983

 
8,130

 
(2
)%
 
16,170

 
16,396

 
(1
)%
Death benefits and other
13,622

 
12,169

 
12
 %
 
27,894

 
20,972

 
33
 %
Total interest sensitive product benefits
21,605

 
20,299

 
6
 %
 
44,064

 
37,368

 
18
 %
Traditional life insurance benefits:
 
 
 
 
 
 
 
 
 
 

Death benefits
19,997

 
20,019

 
 %
 
41,664

 
41,142

 
1
 %
Surrender and other benefits
8,936

 
8,215

 
9
 %
 
19,365

 
16,856

 
15
 %
Increase in traditional life future policy benefits
13,678

 
15,160

 
(10
)%
 
24,537

 
29,961

 
(18
)%
Total traditional life insurance benefits
42,611

 
43,394

 
(2
)%
 
85,566

 
87,959

 
(3
)%
Distributions to participating policyholders
2,557

 
2,515

 
2
 %
 
5,110

 
5,555

 
(8
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 

Commission expense, net of deferrals
4,874

 
4,338

 
12
 %
 
9,777

 
8,808

 
11
 %
Amortization of deferred acquisition costs
4,519

 
4,878

 
(7
)%
 
8,430

 
10,102

 
(17
)%
Amortization of value of insurance in force
375

 
377

 
(1
)%
 
750

 
754

 
(1
)%
Other underwriting expenses
14,185

 
14,450

 
(2
)%
 
28,589

 
29,237

 
(2
)%
Total underwriting, acquisition and insurance expenses
23,953

 
24,043

 
 %
 
47,546

 
48,901

 
(3
)%
Total benefits and expenses
90,726

 
90,251

 
1
 %
 
182,286

 
179,783

 
1
 %
 
16,342

 
14,473

 
13
 %
 
28,925

 
28,544

 
1
 %
Equity income, before tax
1,289

 

 
N/A

 
2,455

 

 
N/A

Pre-tax operating income (1)
$
17,631

 
$
14,473

 
22
 %
 
$
31,380

 
$
28,544

 
10
 %



39


Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(Dollars in thousands)
Other data
 
 
 
 
 
 
 
 
 
 
 
Life premiums collected, net of reinsurance (2)
$
75,162

 
$
70,211

 
7
%
 
$
148,735

 
$
141,924

 
5
%
Policy liabilities and accruals, end of period
 
 
 
 

 
2,833,191

 
2,721,230

 
4
%
Life insurance in force, end of period
 
 
 
 

 
56,967,379

 
54,995,983

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

 
2,900,290

 
2,790,979

 
4
%
Other investment-related income included in net investment income (4)
763

 
370

 
106
%
 
884

 
491

 
80
%
Average interest sensitive life account value
 
 
 
 

 
824,152

 
806,052

 
2
%
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets (3)
 
 
 
 
 
 
5.59
%
 
5.58
%
 
 
Weighted average interest crediting rate
 
 
 
 
 
 
3.77
%
 
3.80
%
 
 
Spread
 
 
 
 
 
 
1.82
%
 
1.78
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
 
 
 
 
 
 
4.9
%
 
5.8
%
 
 
Death benefits, net of reinsurance and reserves released
21,292

 
17,753

 
20
%
 
$
44,273

 
$
36,455

 
21
%

(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 8 to our consolidated financial statements.
(2)
Premiums collected is a non-GAAP measure of sales production, see Note 8 to our consolidated financial statements.
(3)
Average invested assets and weighted average yield including investments held as securities and indebtedness of related parties.
(4)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.

Pre-tax operating income for the Life Insurance segment increased in the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, primarily due to the impact of an increase in the volume of business in force and the impact of unlocking in 2016, partially offset by an increase in death benefits.

Amortization of deferred acquisition costs, deferred sales inducements, the value of insurance in force and unearned revenue reserves changed during the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, due to changes in actual and expected profits on the underlying business. Amortization, as well as reserves held on certain interest sensitive products, was also impacted in the second quarter of 2016 due to unlocking our projected investment and spread income assumptions. There was no unlocking that took place in 2017. The impact of unlocking on pre-tax operating income for the quarter and six months ended June 30, 2016 was as follows:
Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2016
 
(Dollars in thousands)
Amortization of unearned revenue reserve reported in interest sensitive product charges and other income
$
114

 
$
114

Amortization of deferred sales inducements reported in interest sensitive product benefits
3

 
3

Amortization of deferred acquisition costs
(274
)
 
(274
)
Changes in interest sensitive products reserves
(3,211
)
 
(3,211
)
Decrease to pre-tax operating income (1)
$
(3,368
)
 
$
(3,368
)

(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 8 to our consolidated financial statements.


40


Death benefits, net of reinsurance and reserves released, increased in the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, primarily due to increases in the average size of claims. Surrenders and other benefits increased in the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, primarily due to an increase in the average size of policies surrendered.

In 2017, we began to assign a portion of our investments held in securities and indebtedness of related parties to the Life Insurance segment. These investments include equity interests in limited liability partnerships and corporations, accounted for under the equity method of accounting. Equity income, before tax, consists of our proportionate share of gains and losses attributable to our relative ownership interest in these investments. See the Equity Income discussion that follows for additional information regarding these investments.

The weighted average yield on cash and invested assets for interest sensitive life insurance products increased for the six months ended June 30, 2017, compared to the prior year period, due to higher other investment-related income and transfer of higher yielding assets from the Corporate and Other segment into the Life Insurance segment, resulting in improved yields. This is partially offset by lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. See the "Financial Condition" section 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 actions taken in 2016 and 2017 in response to the declining portfolio yield.

Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(Dollars in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
10,894

 
$
11,425

 
(5
)%
 
$
21,872

 
$
22,821

 
(4
)%
Net investment income
8,643

 
7,545

 
15
 %
 
17,411

 
15,872

 
10
 %
Other income
4,567

 
4,313

 
6
 %
 
8,487

 
8,014

 
6
 %
Total operating revenues
24,104

 
23,283

 
4
 %
 
47,770

 
46,707

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
7,894

 
9,145

 
(14
)%
 
17,953

 
18,843

 
(5
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
812

 
822

 
(1
)%
 
1,533

 
1,579

 
(3
)%
Amortization of deferred acquisition costs
1,223

 
2,569

 
(52
)%
 
1,860

 
4,557

 
(59
)%
Other underwriting expenses
1,721

 
1,669

 
3
 %
 
2,819

 
3,372

 
(16
)%
Total underwriting, acquisition and insurance expenses
3,756

 
5,060

 
(26
)%
 
6,212

 
9,508

 
(35
)%
Interest expense
1,213

 
1,213

 
 %
 
2,425

 
2,425

 
 %
Other expenses
4,740

 
4,435

 
7
 %
 
8,891

 
8,793

 
1
 %
Total benefits and expenses
17,603

 
19,853

 
(11
)%
 
35,481

 
39,569

 
(10
)%
 
6,501

 
3,430

 
90
 %
 
12,289

 
7,138

 
72
 %
Net income attributable to noncontrolling interest
(27
)
 
(12
)
 
125
 %
 
(29
)
 
(3
)
 
867
 %
Equity loss, before tax
(2,279
)
 
(1,446
)
 
58
 %
 
(3,903
)
 
(2,674
)
 
46
 %
Pre-tax operating income (1)
$
4,195

 
$
1,972

 
113
 %
 
$
8,357

 
$
4,461

 
87
 %


41


Corporate and Other Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Other data
 
 
 
 
 
 
 
 
 
 
 
Average invested assets, at amortized cost (2)
 
 
 
 

 
$
772,775

 
$
785,782

 
(2
)%
Other investment-related income included in net investment income (3)
117

 
(289
)
 
(140
)%
 
467

 
(286
)
 
(263
)%
Average interest sensitive life account value
 
 
 
 

 
362,195

 
348,827

 
4
 %
Death benefits, net of reinsurance and reserves released
4,679

 
5,914

 
(21
)%
 
11,564

 
12,367

 
(6
)%
Estimated impact on pre-tax income from separate account performance on amortization of deferred acquisition costs (1)
330

 
(96
)
 
(444
)%
 
1,261

 
(696
)
 
(281
)%

(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 8 to our consolidated financial statements.
(2)
Average invested assets including, beginning in 2017, investments held as securities and indebtedness of related parties; the prior period amount has been adjusted for comparability.
(3)
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.

Pre-tax operating income increased for the Corporate and Other segment in the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, primarily due to decreases in death benefits, the impact of unlocking in 2016, and decreases in amortization of deferred acquisition costs from the impact of market performance on our variable business, partially offset by an increase in pre-tax equity losses.

Death benefits, net of reinsurance and reserves released, decreased in the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, primarily due to decreases in the average size of claims.

Amortization of deferred acquisition costs, deferred sales inducements and unearned revenue reserves changed during the second quarter of 2017 and the six months ended June 30, 2017, compared to the prior year periods, due to the impact of market performance on our variable business and unlocking, in the second quarter of 2016, of our projected investment and spread income assumptions. There was no unlocking that took place in 2017. The impact of unlocking on pre-tax operating income for the quarter and six months ended June 30, 2016 was as follows:
Impact of Unlocking on Pre-tax Operating Income
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2016
 
(Dollars in thousands)
Amortization of unearned revenue reserve reported in interest sensitive product charges
$
183

 
$
183

Amortization of deferred sales inducements reported in interest sensitive product benefits
(13
)
 
(13
)
Amortization of deferred acquisition costs
(1,037
)
 
(1,037
)
Changes in certain product reserves reported in interest sensitive product benefits
(54
)
 
(54
)
Increase (decrease) to pre-tax operating income (1)
$
(921
)
 
$
(921
)

(1)
Pre-tax operating income is a non-GAAP measure of earnings, see Note 8 to our consolidated financial statements.

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

In 2017, we began to assign a portion of our investments held in securities and indebtedness of related parties from the Corporate and Other segment to the Life Insurance segment. These investments include equity interests in limited liability partnerships and corporations, accounted for under the equity method of accounting. Equity loss, before tax, consists of our proportionate share of gains and losses attributable to our relative ownership interest in these investments. See the Equity Income discussion that follows for additional information regarding these investments.


42


Equity Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Equity income (loss):
 
 
 
 
 
 
 
Low income housing tax credit partnerships
$
(2,938
)
 
$
(2,508
)
 
$
(4,743
)
 
$
(4,047
)
Other equity method investments
1,948

 
1,062

 
3,295

 
1,373

 
(990
)
 
(1,446
)
 
(1,448
)
 
(2,674
)
Income taxes:
 
 
 
 
 
 
 
Taxes on equity income (loss)
346

 
507

 
506

 
937

Investment tax credits
3,568

 
3,552

 
7,097

 
7,002

Equity income, net of related income taxes
$
2,924

 
$
2,613

 
$
6,155

 
$
5,265


Equity income 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 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 LIHTC 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.

Income Taxes on Operating Income

The effective tax rate on operating income was 23.0% for the second quarter of 2017 and 22.2% for the six months ended June 30, 2017, compared with 21.7% for the second quarter of 2016 and 21.8% for the six months ended June 30, 2016. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of low-income housing tax credits from equity method investees and tax-exempt interest and dividend income.

Impact of Operating Income Adjustments on FBL Net Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Realized gains (losses) on investments
$
921

 
$
(2,294
)
 
$
452

 
$
(2,901
)
Change in net unrealized gains/losses on derivatives
107

 
64

 
58

 
(37
)
Change in amortization of:
 
 
 
 
 
 
 
Deferred acquisition costs
349

 
202

 
614

 
334

Value of insurance in force acquired

 

 

 
3

Unearned revenue reserve
(127
)
 
33

 
(139
)
 
33

Reserve change offset on interest sensitive products (1)
1,018

 

 
428

 

Income tax offset
(794
)
 
699

 
(494
)
 
900

Net impact of operating income adjustments
$
1,474

 
$
(1,296
)
 
$
919

 
$
(1,668
)



43


Impact of Operating Income Adjustments on FBL Net Income, continued
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Summary of adjustments noted above after offsets and income taxes:
 
 
 
 
 
 
 
Net realized gains/losses on investments
$
788

 
$
(1,147
)
 
$
234

 
$
(1,544
)
Change in net unrealized gains/losses on derivatives
686

 
(149
)
 
685

 
(124
)
Net impact of operating income adjustments
$
1,474

 
$
(1,296
)
 
$
919

 
$
(1,668
)
Net impact per common share - basic
$
0.06

 
$
(0.05
)
 
$
0.04

 
$
(0.07
)
Net impact per common share - assuming dilution
$
0.06

 
$
(0.05
)
 
$
0.04

 
$
(0.07
)

(1)
In the fourth quarter of 2016, we refined our calculation of operating income to include offsets relating to changes in interest sensitive product reserves; see Note 8 to our consolidated financial statements for additional details. These offsets, net of tax, not taken into account would have increased operating income in the second quarter of 2016 by less than $0.1 million and increased operating income for the six months ended June 30, 2016 by $0.1 million.

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,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Realized gains (losses) on investments:
 
 
 
 
 
 
 
Realized gains on sales
$
1,425

 
$
6,108

 
$
1,549

 
$
7,698

Realized losses on sales
(504
)
 
(8,377
)
 
(1,031
)
 
(8,377
)
Total other-than-temporary impairment charges

 
(25
)
 
(66
)
 
(3,744
)
Net realized investment gains (losses)
921

 
(2,294
)
 
452

 
(4,423
)
Non-credit losses included in other comprehensive income

 

 

 
1,522

Total reported in statements of operations
$
921

 
$
(2,294
)
 
$
452

 
$
(2,901
)

The level of realized gains (losses) is subject to fluctuation from period to period due to movements in credit spreads and prevailing interest rates, changes in the economic environment, the timing of the sales of the investments generating realized gains and losses, as well as the timing of other than temporary impairment charges. During the three months ended June 30, 2017, we sold securities to reduce our exposure to the energy sector, resulting in realized gains of $0.4 million and realized losses of $0.4 million. During the six months ended June 30, 2017, we sold securities to reduce our exposure to a retailer, resulting in realized losses of $0.5 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, 2017 and December 31, 2016.

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

Six months ended June 30,
 
2017

2016

2017

2016
 
(Dollars in thousands)
Residential mortgage-backed
$

 
$

 
$
66

 
$
2,172

Other

 
25

 

 
50

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

 
$
25

 
$
66

 
$
2,222


Other-than-temporary credit impairment losses for the six months ended June 30, 2017 were incurred within a residential mortgage-backed security due to defaults in the underlying loans, resulting in a decline in the present value of expected cash


44


flows. 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 3.4% to $8,454.9 million at June 30, 2017 compared to $8,174.7 million at December 31, 2016. The portfolio increased due to positive cash flows from operating activities, as well as an increase of $137.7 million of net unrealized appreciation of fixed maturities during 2017. Additional details regarding securities in an unrealized gain or loss position at June 30, 2017 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,
 
 
2017
 
2016
 
 
(Dollars in thousands)
Cost of acquisitions:
 
 
 
 
Corporate
 
$
93,917

 
$
144,739

Mortgage- and asset-backed
 
232,152

 
185,644

United States Government and agencies
 
748

 
500

Tax-exempt municipals
 
17,566

 
8,135

Taxable municipals
 
11,715

 
15,750

Total
 
$
356,098

 
$
354,768

Effective annual yield
 
4.03
%
 
4.37
%
Credit quality
 
 
 
 
NAIC 1 designation
 
67.9
%
 
63.0
%
NAIC 2 designation
 
32.1
%
 
37.0
%
Weighted-average life in years
 
13.0

 
12.0
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.

A portion of the securities acquired during the six months ended June 30, 2017 and June 30, 2016 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 4.06% during the six months ended June 30, 2017 and was 4.64% during the six months ended June 30, 2016.



45


Investment Portfolio Summary 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
(Dollars in thousands)
Fixed maturities - available for sale:
 
 
 
 
 
 
 
Public
$
5,475,416

 
64.8
%
 
$
5,320,670

 
65.2
%
144A private placement
1,498,696

 
17.7

 
1,442,589

 
17.6

Private placement
238,434

 
2.8

 
245,531

 
3.0

Total fixed maturities - available for sale
7,212,546

 
85.3

 
7,008,790

 
85.8

Equity securities
131,435

 
1.6

 
132,968

 
1.6

Mortgage loans
878,435

 
10.3

 
816,471

 
10.0

Real estate
1,543

 

 
1,955

 

Policy loans
188,630

 
2.2

 
188,254

 
2.3

Short-term investments
29,621

 
0.4

 
16,348

 
0.2

Other investments
12,693

 
0.2

 
9,874

 
0.1

Total investments
$
8,454,903

 
100.0
%
 
$
8,174,660

 
100.0
%

As of June 30, 2017, 96.2% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of June 30, 2017, no single non-investment grade holding exceeded 0.2% of total investments.

Credit Quality by NAIC Designation and Equivalent Rating
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
NAIC Designation
 
Equivalent Rating (1)
 
Carrying Value
 
Percent
 
Carrying Value
 
Percent
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
4,612,495

 
63.9
%
 
$
4,465,027

 
63.7
%
2
 
BBB
 
2,326,702

 
32.3

 
2,232,384

 
31.9

 
 
Total investment grade
 
6,939,197

 
96.2

 
6,697,411

 
95.6

3
 
BB
 
194,560

 
2.7

 
209,092

 
2.9

4
 
B
 
58,146

 
0.8

 
81,210

 
1.2

5
 
CCC
 
12,861

 
0.2

 
13,705

 
0.2

6
 
In or near default
 
7,782

 
0.1

 
7,372

 
0.1

 
 
Total below investment grade
 
273,349

 
3.8

 
311,379

 
4.4

 
 
Total fixed maturities - available for sale
 
$
7,212,546

 
100.0
%
 
$
7,008,790

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



46


Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
 
 
 
June 30, 2017
 
Total Carrying Value
 
Carrying
Value of
Securities
with Gross
Unrealized
Gains
 
Gross Unrealized Gains
 
Carrying Value of Securities
with Gross Unrealized Losses
 
Gross Unrealized Losses
 
(Dollars in thousands)
Corporate securities:
 
 
 
 
 
 
 
 
 
Basic industrial
$
356,200

 
$
306,159

 
$
23,699

 
$
50,041

 
$
(2,166
)
Capital goods
293,544

 
273,875

 
22,357

 
19,669

 
(1,517
)
Communications
151,607

 
129,124

 
12,081

 
22,483

 
(1,631
)
Consumer cyclical
126,344

 
110,602

 
9,456

 
15,742

 
(733
)
Consumer non-cyclical
500,261

 
436,656

 
34,716

 
63,605

 
(2,924
)
Energy
473,493

 
374,360

 
27,768

 
99,133

 
(9,509
)
Finance
753,793

 
644,658

 
48,978

 
109,135

 
(1,973
)
Transportation
103,296

 
90,653

 
7,387

 
12,643

 
(622
)
Utilities
814,511

 
785,997

 
94,540

 
28,514

 
(2,856
)
Other
179,547

 
174,692

 
11,952

 
4,855

 
(114
)
Total corporate securities
3,752,596

 
3,326,776

 
292,934

 
425,820

 
(24,045
)
Mortgage- and asset-backed securities
1,899,642

 
1,502,941

 
90,087

 
396,701

 
(7,532
)
United States Government and agencies
28,274

 
21,575

 
1,716

 
6,699

 
(25
)
State and political subdivisions
1,532,034

 
1,459,639

 
134,139

 
72,395

 
(2,520
)
Total
$
7,212,546

 
$
6,310,931

 
$
518,876

 
$
901,615

 
$
(34,122
)

 
December 31, 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
$
342,832

 
$
220,528

 
$
15,557

 
$
122,304

 
$
(6,904
)
Capital goods
273,602

 
222,671

 
17,451

 
50,931

 
(2,580
)
Communications
148,355

 
114,397

 
9,923

 
33,958

 
(2,819
)
Consumer cyclical
132,492

 
110,335

 
8,387

 
22,157

 
(602
)
Consumer non-cyclical
477,132

 
309,320

 
22,128

 
167,812

 
(8,181
)
Energy
490,128

 
336,139

 
25,404

 
153,989

 
(13,643
)
Finance
753,213

 
529,277

 
34,925

 
223,936

 
(6,672
)
Transportation
109,228

 
95,944

 
6,215

 
13,284

 
(1,929
)
Utilities
802,346

 
667,397

 
80,459

 
134,949

 
(5,489
)
Other
179,327

 
139,082

 
8,152

 
40,245

 
(1,124
)
Total corporate securities
3,708,655

 
2,745,090

 
228,601

 
963,565

 
(49,943
)
Mortgage- and asset-backed securities
1,768,904

 
1,124,418

 
71,612

 
644,486

 
(16,834
)
United States Government and agencies
32,072

 
25,634

 
1,629

 
6,438

 
(132
)
State and political subdivisions
1,499,159

 
1,349,107

 
119,298

 
150,052

 
(7,152
)
Total
$
7,008,790

 
$
5,244,249

 
$
421,140

 
$
1,764,541

 
$
(74,061
)



47


Gross Unrealized Gains and Gross Unrealized Losses by Energy Industry Classification
 
 
 
June 30, 2017
 
Total Carrying Value
 
Carrying
Value of Securities
with Gross Unrealized Gains
 
Gross Unrealized Gains
 
Carrying
Value of Securities
with Gross Unrealized Losses
 
Gross Unrealized Losses
 
(Dollars in thousands)
Energy securities:
 
 
 
 
 
 
 
 
 
Midstream
$
186,548

 
$
146,053

 
$
7,697

 
$
40,495

 
$
(1,654
)
Oil field services
40,093

 
24,441

 
2,104

 
15,652

 
(5,956
)
Independent exploration & production
123,733

 
93,803

 
7,362

 
29,930

 
(1,410
)
Integrated energy
79,055

 
73,469

 
7,213

 
5,586

 
(159
)
Refiners
44,064

 
36,594

 
3,392

 
7,470

 
(330
)
Total
$
473,493

 
$
374,360

 
$
27,768

 
$
99,133

 
$
(9,509
)

 
December 31, 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
$
179,533

 
$
112,683

 
$
6,333

 
$
66,850

 
$
(3,997
)
Oil field services
54,898

 
27,135

 
2,181

 
27,763

 
(5,648
)
Independent exploration & production
128,329

 
98,242

 
8,092

 
30,087

 
(2,477
)
Integrated energy
84,319

 
64,107

 
5,759

 
20,212

 
(494
)
Refiners
43,049

 
33,972

 
3,039

 
9,077

 
(1,027
)
Total
$
490,128

 
$
336,139

 
$
25,404

 
$
153,989

 
$
(13,643
)

At June 30, 2017, 83.7% of our energy holdings were investment grade. Our non-investment grade holdings included oil field services issuers with a carrying value of $17.9 million and an unrealized loss of $5.1 million and midstream issuers with a carrying value of $22.2 million and an unrealized loss of $0.3 million.

Non-Sovereign European Debt Exposure
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
Amortized Cost
 
Carrying Value
 
Amortized Cost
 
Carrying Value
 
(Dollars in thousands)
Italy
$
19,724

 
$
21,558

 
$
19,720

 
$
20,769

Spain
27,105

 
30,378

 
27,130

 
29,932

Ireland
14,005

 
15,112

 
13,988

 
15,143

Subtotal
60,834

 
67,048

 
60,838

 
65,844

United Kingdom
149,364

 
157,076

 
151,724

 
154,865

Netherlands
51,830

 
56,198

 
57,839

 
61,184

France
32,051

 
36,026

 
32,052

 
34,698

Other countries
91,054

 
97,066

 
95,047

 
99,494

Subtotal
324,299

 
346,366

 
336,662

 
350,241

Total European exposure
$
385,133

 
$
413,414

 
$
397,500

 
$
416,085


The table above reflects our exposure to non-sovereign European debt. This represents 5.7% of total fixed maturities as of June 30, 2017 and 5.9% as of December 31, 2016. 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.


48


Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
NAIC Designation
 
Equivalent Rating
 
Carrying Value of Securities with Gross Unrealized Losses
 
Percent of Total
 
Gross Unrealized Losses
 
Percent of Total
 
 
 
 
(Dollars in thousands)
1
 
AAA, AA, A
 
$
492,561

 
54.6
%
 
$
(9,707
)
 
28.5
%
2
 
BBB
 
305,718

 
33.9

 
(9,971
)
 
29.2

 
 
Total investment grade
 
798,279

 
88.5

 
(19,678
)
 
57.7

3
 
BB
 
62,070

 
6.9

 
(5,506
)
 
16.1

4
 
B
 
29,122

 
3.2

 
(6,759
)
 
19.8

5
 
CCC
 
4,394

 
0.5

 
(1,876
)
 
5.5

6
 
In or near default
 
7,750

 
0.9

 
(303
)
 
0.9

 
 
Total below investment grade
 
103,336

 
11.5

 
(14,444
)
 
42.3

 
 
Total
 
$
901,615

 
100.0
%
 
$
(34,122
)
 
100.0
%

 
 
 
 
December 31, 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
 
$
941,794

 
53.4
%
 
$
(27,615
)
 
37.3
%
2
 
BBB
 
679,428

 
38.5

 
(28,472
)
 
38.4

 
 
Total investment grade
 
1,621,222

 
91.9

 
(56,087
)
 
75.7

3
 
BB
 
77,750

 
4.4

 
(7,658
)
 
10.4

4
 
B
 
54,958

 
3.1

 
(8,163
)
 
11.0

5
 
CCC
 
3,270

 
0.2

 
(1,461
)
 
2.0

6
 
In or near default
 
7,341

 
0.4

 
(692
)
 
0.9

 
 
Total below investment grade
 
143,319

 
8.1

 
(17,974
)
 
24.3

 
 
Total
 
$
1,764,541

 
100.0
%
 
$
(74,061
)
 
100.0
%

Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
June 30, 2017
 
Amortized Cost
 
Gross Unrealized Losses
 
Fair Value
is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
Fair Value is Less than 75% of Cost
 
Fair Value is
75% or Greater
than Cost
 
(Dollars in thousands)
Three months or less
$

 
$
201,951

 
$

 
$
(1,732
)
Greater than three months to six months

 
22,195

 

 
(458
)
Greater than six months to nine months

 
331,719

 

 
(5,815
)
Greater than nine months to twelve months

 
114,984

 

 
(4,004
)
Greater than twelve months
24,231

 
240,657

 
(8,140
)
 
(13,973
)
Total
$
24,231

 
$
911,506

 
$
(8,140
)
 
$
(25,982
)



49


Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 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
$

 
$
1,218,024

 
$

 
$
(30,040
)
Greater than three months to six months

 
218,857

 

 
(10,522
)
Greater than six months to nine months

 
9,702

 

 
(79
)
Greater than nine months to twelve months

 
12,765

 

 
(199
)
Greater than twelve months
18,947

 
360,307

 
(5,926
)
 
(27,295
)
Total
$
18,947

 
$
1,819,655

 
$
(5,926
)
 
$
(68,135
)

Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
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
$
1,236

 
$
(7
)
 
$
414

 
$
(104
)
Due after one year through five years
15,541

 
(1,901
)
 
14,883

 
(283
)
Due after five years through ten years
111,859

 
(2,856
)
 
234,944

 
(7,686
)
Due after ten years
376,278

 
(21,826
)
 
869,814

 
(49,154
)
 
504,914

 
(26,590
)
 
1,120,055

 
(57,227
)
Mortgage- and asset-backed
396,701

 
(7,532
)
 
644,486

 
(16,834
)
Total
$
901,615

 
$
(34,122
)
 
$
1,764,541

 
$
(74,061
)

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

Mortgage- and Asset-Backed Securities

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

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

At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed. See Note 1 to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2016 for more detail on accounting for the amortization of premium and accrual of discount on mortgage-backed and asset-backed securities.

Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans. We also have a partnership interest in one fund at June 30, 2017 and two funds at December 31, 2016, 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 $3.3 million at June 30, 2017 and $8.0 million at December 31, 2016. We do not own any direct investments in subprime lenders.



50


Mortgage- and Asset-Backed Securities by Collateral Type
 
 
 
June 30, 2017
 
December 31, 2016
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
Amortized Cost
 
Carrying Value
 
Percent
of Fixed Maturities
 
(Dollars in thousands)
Government agency
$
181,178

 
$
193,953

 
2.9
%
 
$
190,016

 
$
201,135

 
2.9
%
Prime
150,872

 
162,154

 
2.4

 
121,101

 
129,988

 
1.9

Alt-A
105,524

 
119,687

 
1.8

 
114,625

 
125,363

 
1.8

Subprime
138,290

 
143,239

 
2.1

 
129,504

 
127,529

 
1.8

Commercial mortgage
616,281

 
652,960

 
9.7

 
546,446

 
575,954

 
8.2

Non-mortgage
624,942

 
627,649

 
9.3

 
612,434

 
608,935

 
8.7

Total
$
1,817,087

 
$
1,899,642

 
28.2
%
 
$
1,714,126

 
$
1,768,904

 
25.3
%

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

The residential mortgage-backed portfolio includes government agency pass-through and collateralized mortgage obligation (CMO) securities. With a government agency pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" with varying stated maturities that provide sequential retirement of the bonds. While each tranche receives monthly interest payments, a subsequent tranche is not entitled to receive payment of principal until the entire principal of the preceding tranche is paid off. We primarily invest in sequential tranches, which allow us to manage cash flow stability and prepayment risk by the level of tranche in which we invest. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. PAC bonds provide more predictable cash flows within a range of prepayment speeds and provide some protection against prepayment risk. TAC bonds provide protection from a rise in the prepayment rate due to falling interest rates. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to excessive prepayments risk.

Residential Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
June 30, 2017
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
94,757

 
$
98,289

 
$
83,008

 
$
103,948

 
$
222,102

 
$
231,692

 
$
399,867

 
$
433,929

2
779

 
786

 
906

 
915

 

 

 
1,685

 
1,701

3

 

 
5,172

 
5,727

 

 

 
5,172

 
5,727

4

 

 
3,893

 
3,314

 

 

 
3,893

 
3,314

5
11

 
11

 

 

 

 

 
11

 
11

Total
$
95,547

 
$
99,086

 
$
92,979

 
$
113,904

 
$
222,102

 
$
231,692

 
$
410,628

 
$
444,682


 
December 31, 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
$
106,819

 
$
110,696

 
$
86,461

 
$
102,877

 
$
188,782

 
$
195,947

 
$
382,062

 
$
409,520

2
1,026

 
1,032

 
3,515

 
3,444

 

 

 
4,541

 
4,476

3

 

 
5,397

 
4,686

 

 

 
5,397

 
4,686

4

 

 
4,098

 
3,607

 

 

 
4,098

 
3,607

5
12

 
11

 

 

 

 

 
12

 
11

Total
$
107,857

 
$
111,739

 
$
99,471

 
$
114,614

 
$
188,782

 
$
195,947

 
$
396,110

 
$
422,300




51


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

Commercial Mortgage-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
June 30, 2017
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
9,105

 
$
9,917

 
$
131,858

 
$
145,487

 
$
441,317

 
$
460,153

 
$
582,280

 
$
615,557

2

 

 
26,001

 
28,943

 

 

 
26,001

 
28,943

3

 

 
8,000

 
8,460

 

 

 
8,000

 
8,460

Total (1)
$
9,105

 
$
9,917

 
$
165,859

 
$
182,890

 
$
441,317

 
$
460,153

 
$
616,281

 
$
652,960


 
December 31, 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
$
9,330

 
$
9,549

 
$
133,036

 
$
142,404

 
$
364,936

 
$
384,026

 
$
507,302

 
$
535,979

2

 

 
31,144

 
31,775

 

 

 
31,144

 
31,775

3

 

 
8,000

 
8,200

 

 

 
8,000

 
8,200

Total (1)
$
9,330

 
$
9,549

 
$
172,180

 
$
182,379

 
$
364,936

 
$
384,026

 
$
546,446

 
$
575,954


(1)
The CMBS portfolio included government agency-backed securities with a carrying value of $451.1 million at June 30, 2017 and $387.4 million at December 31, 2016.

Also included in the commercial mortgage-backed securities are military housing bonds totaling $161.1 million at June 30, 2017 and $148.0 million at December 31, 2016. These bonds are used to fund the construction of multi-family homes on United States military bases. The bonds are backed by a first mortgage lien on residential military housing projects.

The other asset-backed securities are backed by both residential and non-residential collateral. The collateral for residential asset-backed securities primarily consists of second lien fixed-rate home equity loans. The cash flows of these securities are less subject to prepayment risk than residential mortgage-backed securities as the borrowers are less likely to refinance than those with only a first lien mortgage. The collateral for non-residential asset-backed securities primarily includes securities backed by credit card receivables, auto dealer receivables, auto installment loans, aircraft leases, middle market and syndicated business loans, timeshare receivables and trade and account receivables. The majority of these securities are high quality, short-duration assets with limited cash flow variability.
Other Asset-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
June 30, 2017
 
2004 & Prior
 
2005 to 2008
 
2009 & After
 
Total
NAIC Designation
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
(Dollars in thousands)
1
$
11,392

 
$
11,002

 
$
161,136

 
$
170,670

 
$
468,480

 
$
470,132

 
$
641,008

 
$
651,804

2
1,836

 
1,946

 
5,122

 
5,197

 
108,157

 
109,685

 
115,115

 
116,828

3

 

 

 

 
19,408

 
19,032

 
19,408

 
19,032

4
194

 
186

 

 

 

 

 
194

 
186

5

 

 

 

 
6,400

 
6,400

 
6,400

 
6,400

6

 

 
8,053

 
7,750

 

 

 
8,053

 
7,750

Total
$
13,422

 
$
13,134

 
$
174,311

 
$
183,617

 
$
602,445

 
$
605,249

 
$
790,178

 
$
802,000


 


52


Other Asset-Backed Securities by NAIC Designation and Origination Year
 
 
 
 
 
December 31, 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
$
10,723

 
$
10,258

 
$
163,214

 
$
166,553

 
$
479,281

 
$
476,630

 
$
653,218

 
$
653,441

2
1,951

 
2,100

 
5,441

 
5,519

 
70,001

 
69,670

 
77,393

 
77,289

3

 

 

 

 
25,084

 
24,743

 
25,084

 
24,743

4
192

 
189

 

 

 
1,250

 
1,247

 
1,442

 
1,436

5

 

 

 

 
6,400

 
6,400

 
6,400

 
6,400

6

 

 
8,033

 
7,341

 

 

 
8,033

 
7,341

Total
$
12,866

 
$
12,547

 
$
176,688

 
$
179,413

 
$
582,016

 
$
578,690

 
$
771,570

 
$
770,650


States and Political Subdivision Securities

States and political subdivision securities totaled $1,532.0 million, or 21.2% of total fixed maturities, at June 30, 2017, and $1,499.2 million, or 21.4% of total fixed maturities at December 31, 2016 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, 2017. As of June 30, 2017, our Illinois-related portfolio holdings were rated investment grade, and were trading at 109.0% of amortized cost. Our municipal bond exposure had an average rating of Aa2/AA and our holdings were trading at 109.4% of amortized cost at June 30, 2017.

Equity Securities

Equity securities totaled $131.4 million at June 30, 2017 and $133.0 million at December 31, 2016. Gross unrealized gains totaled $9.2 million and gross unrealized losses totaled $0.5 million at June 30, 2017. At December 31, 2016, gross unrealized gains totaled $4.2 million and gross unrealized losses totaled $1.7 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 $878.4 million at June 30, 2017 and $816.5 million at December 31, 2016. 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 182 at June 30, 2017 and 178 at December 31, 2016. In the first six months of 2017, new loans ranged from $3.2 million to $12.5 million in size, with an average loan size of $7.5 million, an average loan term of 17 years and an average yield of 4.21%. 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 3.1% that are interest only loans at June 30, 2017. At June 30, 2017, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 55.5% and the weighted average debt service coverage ratio was 1.6 based on the results of our 2016 annual study. See Note 2 to our consolidated financial statements for further discussion regarding our mortgage loans.

Other Assets

Deferred acquisition costs decreased 10.2% to $296.6 million at June 30, 2017, compared to December 31, 2016, primarily due to a $41.4 million increase in the impact of the change in net unrealized appreciation on fixed maturity securities during the period. Assets held in separate accounts increased 4.8% to $626.0 million primarily due to market performance on the underlying investment portfolios.



53


Liabilities

Future policy benefits increased 1.5% to $6,898.9 million at June 30, 2017, compared to December 31, 2016, primarily due to an increase in the volume of annuity and life business in force. Other liabilities increased 58.9% to $129.0 million primarily due to an increase in our liability for unsettled security trades. Deferred income taxes increased 21.3% to $198.4 million primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments. Liabilities related to separate accounts increased 4.8% to $626.0 million primarily due to market performance on the underlying investment portfolios.

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 2017. We paid a special cash dividend of $1.50 per share on Class A and Class B common stock and increased our regular quarterly dividend by 4.8% to $0.44 per share during March 2017.

Our stockholders' equity increased 5.3% to $1,250.8 million at June 30, 2017, compared to $1,188.2 million at December 31, 2016, 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, 2017, FBL's common stockholders' equity was $1,247.8 million, or $50.05 per share, compared to $1,185.2 million, or $47.61 per share, at December 31, 2016. Included in stockholders' equity per common share is $8.51 at June 30, 2017 and $6.01 at December 31, 2016 attributable to accumulated other comprehensive income.

Liquidity and Capital Resources

Cash Flows

During the first six months of 2017, our operating activities generated cash flows totaling $120.8 million, consisting of net income of $58.8 million adjusted for non-cash operating revenues and expenses netting to $62.0 million. We used cash of $75.7 million in our investing activities during the 2017 period. The primary uses were $417.0 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $360.6 million in sales, maturities and repayments of investments. Our financing activities used cash of $34.9 million during the 2017 period. The primary financing uses were $239.2 million for return of policyholder account balances on interest sensitive products and $59.4 million for dividends paid to stockholders, which was partially offset by $263.6 million in receipts from interest sensitive products credited to policyholder account balances.

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, 2017 included management fees from subsidiaries and affiliates totaling $4.0 million and dividends of $42.5 million. Cash outflows are principally for salaries, taxes and other expenses related to providing management services, dividends on outstanding stock and interest on our parent company debt.

We paid regular cash dividends on our common and preferred stock during the six-month period ended June 30 totaling $22.0 million in 2017 and $21.0 million in 2016. In addition, we paid a special $1.50 per common share cash dividend in March 2017 totaling $37.4 million and a $2.00 per common share cash dividend in March 2016 totaling $49.7 million. It is anticipated that quarterly cash dividend requirements for 2017 will be $0.0075 per Series B preferred share and $0.44 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 $22.0 million for the remainder of 2017. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2017. The parent company had available cash and investments totaling $56.6 million at June 30, 2017. The parent company expects to rely on available cash resources, dividends from Farm Bureau Life and management fee income to make dividend payments to its stockholders and interest payments on its debt. In addition, our parent company and Farm Bureau Life have entered into a reciprocal line of credit arrangement, which provides additional liquidity for either entity up to $20.0 million. We had no material commitments for capital expenditures as of June 30, 2017.


54



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 of Directors. At June 30, 2017, $49.5 million remains available for repurchase under the current $50.0 million Class A common stock repurchase program. We made no common stock repurchases during the six months ended June 30, 2017. 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, 2017 and June 30, 2016. Interest payments on our debt outstanding at June 30, 2017 are estimated to be $2.4 million for the remainder of 2017.

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 $140.7 million for the six months ended June 30, 2017 and $258.9 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, 2016, Farm Bureau Life’s statutory unassigned surplus was $483.8 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 included in Item 8 of our 2016 Form 10-K. During the remainder of 2017, the maximum amount legally available for distribution to the parent company without further regulatory approval is $63.6 million.

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, 2017, our statutory total adjusted capital is estimated at $699.7 million, resulting in a RBC ratio of 563%, based on company action level capital of $124.3 million.

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

Contractual Obligations

In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments that are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. There have been no material changes to our total contractual obligations since December 31, 2016.



55



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, 2016.


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, 2017, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



56


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. Recently, the DOL modified the applicability dates of the Final Rule. We were required to be in compliance with the Impartial Conduct standards of the Final Rule, which was effective June 9, 2017 and are required to comply with the remaining provisions of the Final Rule by January 1, 2018. The rule has not been in effect for a sufficient period to determine if there will be a material sales impact. We continue to monitor developments that may impact the remaining provisions of the Final Rule.

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, 2016.


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

(c) Issuer Repurchases of Equity Securities

We had no issuer repurchases of equity securities for the quarter ended June 30, 2017. We have $49.5 million available under a stock 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.

 
 
 
 
 
 
 
 
 






57


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, 2017 as follows: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Financial Statements
 
 
+
Filed or furnished herewith
*
Exhibit relates to a compensatory plan for management or directors.
#
In accordance with Rule 402 of Regulation S-T, the XBRL related information in this report shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.


58




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 3, 2017                


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



59