Certain amounts from 2007 through 2010 have been restated due to the sale of our subsidiary, EquiTrust Life Insurance Company, on December 30, 2011.
When reading the following Management's Discussion and Analysis of Financial Condition and Results of Operations, please refer to our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data," of this report. 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).
We review our financial condition by summarizing our investment portfolio, market risks, sources and uses of cash, capital resources and requirements and commitments.
Our profitability is also impacted by changes in accounting guidance that impact the timing of profit recognition. During the first quarter of 2012 we will be adopting new guidance that will reduce the deferral of costs associated with the issuance of life insurance and annuity products which will increase the amount of such expenses recognized in the current year, and reduce the amount of amortization in future years. We currently estimate that the impact upon adoption will be to reduce stockholders' equity by approximately $75.8 million at December 31, 2011, $101.7 million at December 31, 2010 and $117.1 million at December 31, 2009. Net income from continuing operations is expected to be reduced by $3.1 million ($0.10 per basic and diluted common share) for 2011, $3.3 million ($0.11 per basic and diluted common share) for 2010 and $4.1 million ($0.14 per basic common share and $0.13 per diluted common share) for 2009. Net income (loss) from discontinued operations is expected to increase for 2011 due to a decrease in the loss recognized on the sale of EquiTrust Life by $12.6 million ($0.41 per basic common share and $0.40 per diluted common share). Net income from discontinued operations will decrease $1.7 million ($0.05 per basic and diluted common share) for 2010 and $1.0 million ($0.03 per basic and diluted common share) for 2009.
In addition to the impact from the adoption of the guidance above, the accounting standards setting bodies are currently working on a project evaluating the accounting for insurance contracts, which may significantly impact the timing of profit emergence for those products. It is uncertain what the outcome of that project will be or when it will be completed.
Economic data, in general, surpassed expectations at year-end 2011, and initial Gross Domestic Product estimates indicate the United States economy expanded in the fourth quarter at its fastest pace for the year. Consumer activity suggests improving confidence, while measures of business sentiment and activity reflect a favorable environment. Housing statistics suggest the sector experienced modest improvement late in the year, which is normally a seasonally slow period. In addition, multiple labor market indicators suggest a developing upswing, which is encouraging as employment growth can provide a powerful reinforcement to economic growth.
Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economic recovery 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. 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.
The lapse and withdrawal rates changed in 2011 and 2010 due to normal fluctuations and remain within our expected levels.
operations, and increases in spreads earned and the volume of business in force on our continuing operations.
In connection with the EquiTrust Life sale, we are undertaking certain capital management actions, including the redemption of $225.0 million of our long-term debt in accordance with the mandatory redemption provisions of the underlying notes. This includes $50.0 million Senior Notes with our affiliate, Farm Bureau Property & Casualty Insurance Company (Farm Bureau Property & Casualty), which was extinguished on December 30, 2011. The remaining $175.0 million of unaffiliated debt was extinguished on January 30, 2012, at the make-whole redemption price of $210.9 million. On December 30, 2011, we exercised the provisions of the trust indentures and deposited $211.6 million into two irrevocable defeasance trusts for the principal, accrued interest and estimated make-whole premium. The trust funds were not withdrawable by us, and the note holders were paid from assets in the trusts on January 30, 2012.
Premiums and product charges increased 3.8% in 2011 to $265.6 million and 5.4% in 2010 to $255.9 million primarily due to the impact of an increase in the volume of business in force. The increase in business in force in 2011 and 2010 was primarily attributable to sales by our Farm Bureau Life agency force exceeding the loss of in force amounts through deaths, lapses and surrenders. Our average aggregate traditional life insurance in force, net of reinsurance ceded, totaled $27,416.0 million for 2011, $25,871.0 million for 2010 and $23,992.2 million for 2009. The change in life insurance in force is not proportional to the change in premium income due to a higher concentration of term policies than whole life policies in our traditional life block of business. The premium for a term policy per $1,000 face amount is less than that for a whole life policy.
Net investment income, which excludes investment income on separate account assets relating to variable products, increased 5.8% in 2011 to $343.3 million and 6.9% in 2010 to $324.5 million. The increases are primarily due to an increase in average invested assets compared with the prior year, partially offset by lower investment yields. Average invested assets increased 7.8% to $5,887.5 million (based on securities at amortized cost) in 2011 and 8.5% to $5,460.5 million in 2010. The increases
See the "Financial Condition - Investments" section that follows for a description of how changes in prepayment speeds impact net investment income.
We monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certain investment grade securities on which we have concerns regarding credit quality. If we determine that an unrealized loss is other than temporary, the security is written down to its fair value. A portion of the write down attributable to non-credit factors is recognized in accumulated other comprehensive income (loss). See additional details regarding the non-credit portion of the write downs and our methodology for evaluating investments for other-than-temporary impairment in Notes 1 and 3 to our consolidated financial statements.
Fixed maturity other-than-temporary credit impairment losses for 2011 were incurred within several industry sectors. The energy sector loss related to an oil carrier with credit concerns, including a rating agency downgrade. The manufacturing sector and finance sector losses are related to companies restructuring their debt obligations due to financial difficulties. Losses were also incurred within our residential and other asset-backed securities, generally due to concerns over potential defaults and weakness in underlying collateral values. Furthermore, during 2011 we recognized an other-than-temporary impairment loss of $4.7 million on an equity method investment in an uncertain future financial condition due to current class action litigation.
Fixed maturity other-than-temporary credit impairment losses for 2010 were incurred within our other asset backed securities, generally due to concerns over potential defaults and weakness in underlying collateral values. Financial sector losses were caused by deferred interest coupons on hybrid financial instruments which likely will not be recovered. Fixed maturity other-than-temporary credit impairment losses for 2009 were incurred across several sectors as a result of the economic downturn which reduced the demand for consumer products, lowered collateral values and limited access to operating capital. Particularly impacted during 2009 were the finance sector, other asset-backed securities and our collateralized debt obligations, which incurred losses as collateral values declined and borrower defaults increased. See Note 3 to our consolidated financial statements for further discussion regarding our process for identifying other-than-temporary impairment losses.
Other income and other expenses include revenues and expenses, respectively, relating primarily to our non-insurance operations. Our non-insurance operations include management, advisory, marketing and distribution services and leasing activities. Fluctuations in these financial statement line items are primarily attributable to changes in the level of these services provided during the years. In 2011, other income includes $1.5 million in proceeds received from the merger of the EquiTrust Mutual Funds with funds sponsored by a third party. Merger-related expenses included in other expenses, totaled $1.2 million in 2011. Other income in 2011 also includes a $1.0 million cash settlement for our share of damages awarded upon settlement of litigation involving an agency matter.
Interest sensitive death benefits increased in 2011 primarily due to a higher number of universal life and variable universal life claims as well as an increase in the average amount per claim.
Interest expense decreased 10.8% to $8.5 million in 2011 primarily due to refinancing our $100.0 million 9.25% Senior Notes payable to affiliates with $100.0 million 6.10% Senior Notes payable to the same affiliates in May 2011. Interest expense decreased 8.0% to $9.6 million in 2010 primarily due to the termination of our $60.0 million revolving line of credit agreement with Bank of America N.A. and Bankers Trust Company N.A. during the first quarter of 2009. Our average debt outstanding was $371.2 million in 2011 compared to $371.1 million in 2010 and $380.2 million in 2009.
Equity income, net of related income taxes, totaled $1.3 million in 2011, $3.5 million in 2010 and $0.8 million in 2009. 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 consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. As is normal with these types
The impact of realized gains and losses on investments and unrealized gains and losses on derivatives also includes adjustments for taxes and that portion of amortization of deferred acquisition costs, unearned revenue reserve and value of insurance in force acquired attributable to such gains or losses. Our rationale for using operating income (loss), in addition to net income, to measure our performance is summarized in Note 15 to our consolidated financial statements included in Item 8.
(1) See "Net Income Attributable to FBL Financial Group, Inc." above for additional details on operating income adjustments.
Pre-tax operating income for the Annuity segment increased 16.1% in 2011 to $60.7 million and 51.0% in 2010 to $52.3 million. The increase in 2011 was primarily due to increases in spreads earned and the volume of business in force, partially offset by increases in the amortization of deferred acquisition costs and the value of insurance in force. The increase in 2010 was primarily due to increases in spreads earned and the volume of business in force and decreases in amortization of deferred acquisition costs and the value of insurance in force. The average aggregate account value for annuity contracts in force increased to $2,135.0 million in 2011, $1,940.0 million in 2010 and $1,744.2 million in 2009 due to sales from Farm Bureau Life and in 2010, advances on a funding agreement with the FHLB totaling $228.5 million.
Premiums collected increased 16.6% to $369.2 million in 2011 and 3.6% to $316.6 million in 2010. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rate and perceived security of our products compared to competing products.
Pre-tax operating income for the Life Insurance segment decreased 5.6% in 2011 to $55.4 million and 17.7% in 2010 to $58.7 million. The decrease in 2011 was primarily due to increased mortality experience, an increase in expenses allocated to the segment and the impact of unlocking, partially offset by an increase in our business in force and refinements to valuation estimates. The decrease in 2010 was attributable to increased mortality, refinements to valuation estimates and an increase in expenses allocated to the segment, partially offset by an increase in our business in force.
Death benefits incurred, after the impact of reserves released, increased $5.7 million in 2011 and $7.1 million in 2010. The impact of refining methods and assumptions relating to the value of insurance in force, deferred acquisition costs and certain life insurance reserves decreased benefits and expenses $7.7 million in 2011, $4.6 million in 2010 and $12.1 million in 2009. The impact of unlocking increased amortization $2.2 million in 2011, $1.1 million in 2010 and $0.7 million in 2009. In addition, general expenses increased in 2011 and 2010 due to changes in allocations between the segments.
Weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in 2011 primarily due to lower yields on new acquisitions compared to those on investments maturing or being paid down. The changes in the weighted average interest crediting rates on our interest sensitive life insurance products are due to rate changes made on various products in 2010 and 2011.
The increase in net investment income in 2011 was primarily due to the impact of being more fully invested during 2011 as well as a $1.6 million decrease in losses on interest rate swaps. See Note 4 to our consolidated financial statements for additional information on interest rate swaps.
Death benefits incurred, after the impact of reserves released, on variable policies increased 42.9% to $18.8 million in 2011 and decreased 17.7% to $13.2 million in 2010. Amortization of deferred acquisition costs increased $1.1 million in 2011 and $5.9 million in 2010 primarily due to the impact of market performance on the separate accounts throughout the year. Higher mortality experience largely offset the increase from market performance in 2011, however lower death benefits in 2010 added to the increase in amortization from 2009. Other underwriting expenses, primarily related to our closed block of variable business, decreased $1.8 million in 2011 and $7.5 million in 2010 due to changes in expense allocations between segments and cost saving initiatives in 2009. The reductions in interest expense were due to refinancing our Senior Notes with affiliates in 2011 and changes in our average debt outstanding in 2010, as discussed in Note 8 to our consolidated financial statements and the "Interest Expense" section above.
The table above reflects our exposure to non-sovereign European debt. This represents 5.1% of total fixed maturities as of December 31, 2011 and 5.2% as of December 31, 2010. The exposures are primarily in the industrial, financial and utility sectors. We do not own any securities issued by European governments.
Government National Mortgage Association (GNMA), guarantees principal and interest on mortgage backed securities. The guarantee is backed by the full faith and credit of the United States Government. The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Association (FHLMC) are government-sponsored enterprises (GSE's) that were chartered by Congress to reduce borrowing costs for certain homeowners. GSE's have carried an implicit backing of the U.S. Government but do not have explicit guarantees like GNMA. The Housing and Economic Recovery Act of 2008 allows the government to expand its line of credit to $200 billion each for Fannie Mae and Freddie Mac. Late in 2009, the U.S. Treasury revised these caps to expand as needed to cover losses over the next three years. The revision was intended to show support for these firms throughout the housing crisis by the U.S. Treasury.
During 2009, FGIC was downgraded by rating agencies and in November 2009 was ordered to stop making payments. In March 2010, the Wisconsin Insurance Commissioner placed a temporary moratorium on payments for Ambac wrapped residential mortgage-backed securities. Securities with existing or expected cash flow concerns that are wrapped by FGIC or Ambac have been other-than-temporarily impaired. We do not consider the investments wrapped by other monoline bond insurers to be other-than-temporarily impaired at December 31, 2011, because we do not have reason to believe that those guarantees, if needed, will not be honored. We do not directly own any fixed income or equity investments in monoline bond insurers.
We held one collateralized debt obligation at December 31, 2011, which is backed by credit default swaps with no home equity exposure. As discussed in Note 1 to our financial statements, we began reporting this security at fair value with changes in market value reflected as derivative income or loss within the consolidated statements of operations in accordance with an accounting change adopted in the third quarter of 2010.
Equity securities totaled $57.4 million at December 31, 2011 and $56.5 million at December 31, 2010. Gross unrealized gains totaled $2.3 million and gross unrealized losses totaled $0.5 million at December 31, 2011. At December 31, 2010, gross unrealized gains totaled $2.8 million and gross unrealized losses totaled $1.2 million on these securities. The unrealized losses are primarily attributable to non-redeemable perpetual preferred securities from issuers in the financial sector. See Note 3 to our consolidated financial statements for further discussion regarding our analysis of unrealized losses related to these securities.
Cash and cash equivalents may fluctuate due to timing of payments made and received and the availability of investment options in the marketplace. The increase of $291.5 million in 2011 was primarily due to cash proceeds received from the EquiTrust Life sale on December 30, 2011. In addition, we established two irrevocable defeasance trusts with $126.4 million in cash and $85.2 million in short-term investments at December 31, 2011, which were restricted for the required redemption of our unaffiliated senior notes on January 30, 2012. See Note 2 to our consolidated financial statements for additional details on the trusts and debt redemption.
Securities and indebtedness of related parties increased 52.1% to $64.5 million primarily due to additional investments made in equity method investees specializing in low income housing. Deferred acquisition costs decreased 18.6% to $376.8 million at December 31, 2011, primarily due to the impact of the change in unrealized appreciation/depreciation on fixed maturity securities. The impact of unrealized appreciation/depreciation on fixed maturity securities decreased deferred acquisition costs $148.3 million at December 31, 2011 and $45.8 million at December 31, 2010. Assets held in separate accounts decreased 10.6% to $603.9 million primarily due to market performance on the underlying investment portfolios and a reduction in our closed block of variable business.
Future policy benefits increased 6.5% to $5,146.9 million at December 31, 2011 primarily due to an increase in the volume of annuity business in force. Other liabilities increased 16.7% to $122.2 million primarily due to the embedded derivative related to the make-whole premium on our unaffiliated senior notes, partially offset by a reduction in payables for securities purchased.
FBL Financial Group, Inc. stockholders' equity increased 11.5% to $1,278.1 million at December 31, 2011, compared to $1,146.3 million at December 31, 2010. This increase is primarily attributable to the change in the unrealized appreciation/depreciation on fixed maturity securities and net income, partially offset by Class A common stock repurchases totaling $13.6 million.
For a substantial portion of our business in force, we have the ability to adjust interest or dividend crediting rates in response to changes in portfolio yield. However, the ability to adjust these rates is limited by competitive factors. Surrender rates could increase and new sales could be negatively impacted if the crediting rates are not competitive with the rates on similar products offered by other insurance companies and financial services institutions. In addition, if market rates were to decrease substantially and stay at a low level for an extended period of time, our spread could be lowered due to interest rate guarantees on many of our interest sensitive products. See "Part 1, Item 1 - Business, Segmentation of Our Business" for the ranges of guaranteed rates and where our products fall within those ranges.
The models used to estimate the impact of a 10% change in market interest rates utilize many assumptions and estimates that materially impact the fair value calculations. Key assumptions in the models include an immediate and parallel shift in the yield curve and an acceleration of bond calls and principal prepayments on mortgage and other asset-backed securities. The above estimates do not attempt to measure the financial statement impact on the resulting change in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves and income taxes. Due to the subjectivity of these assumptions, the actual impact of a 10% change in rates on the fair values would likely be different from that estimated.
Equity price risk is limited due to the relatively small equity portfolio held at December 31, 2011. However, we are exposed to equity price risk in the following ways:
0.00% to 1.45% for 2011 and 2010 and 0.00% to 1.44% for 2009. As a result, revenues from these sources do fluctuate with changes in the fair value of the equity, fixed maturity and other securities held by the separate accounts.
We have equity price risk to the extent we may owe amounts under the guaranteed minimum death benefit and guaranteed minimum income benefit provisions of our variable annuity contracts. See Note 6 to our consolidated financial statements for additional discussion of these provisions.
During 2011, our operating activities generated cash flows totaling $359.4 million consisting of net income of $31.3 million adjusted for non-cash revenues and expenses netting to $328.1 million. We generated cash of $272.1 million in our investing activities during 2011. The primary sources were $1,452.8 million of sales, maturities or the repayment of investments and $471.4 million of proceeds from the EquiTrust Life sale, partially offset by $1,954.0 million of investment acquisitions, mostly in fixed maturity securities. Our financing activities used cash of $340.0 million during 2011. The primary uses were $1,391.3 million for return of policyholder account balances on interest sensitive products and $211.6 million transferred to restricted debt defeasance trusts for the redemption of our non-affiliated long-term debt, partially offset by $1,327.0 million in receipts from interest sensitive products credited to policyholder account balances.
Farm Bureau Life's cash inflows primarily consist of premium income, 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, dividends and current operating expenses. 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 $434.0 million in 2011, $565.0 million in 2010 and $312.3 million in 2009.
Prior to the sale, EquiTrust Life provided (used) funds from operations and financing activities relating to interest sensitive products totaling ($123.5) million in 2011, $89.0 million in 2010 and ($368.3) million in 2009, which are reported with other continuing operations in our consolidated statement of cash flows. In 2009, EquiTrust Life also had a net cash payment of $121.6 million for a reinsurance recapture transaction.
We paid cash dividends on our common and preferred stock totaling $8.9 million in 2011, $7.7 million in 2010 and $9.5 million
in 2009. It is anticipated that quarterly cash dividend requirements for 2012 will be $0.0075 per Series B redeemable preferred share and $0.10 per common share. The level of common stock dividends will be analyzed quarterly and will be dependent upon our capital and liquidity positions. Assuming a quarterly dividend rate of $0.10 per common share and no common stock repurchases, the common and preferred dividends would total approximately $10.7 million in 2012.
In the fourth quarter of 2011, the Board of Directors approved a plan to repurchase up to $200.0 million of Class A common stock. The repurchase plan 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. We repurchased 0.4 million shares of stock for $13.6 million in 2011. 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. As of December 31, 2011, we had no other material commitments for capital expenditures.
We manage the amount of our capital to be consistent with statutory and rating agency requirements. As of December 31, 2011, we estimate that we have sufficient capital in Farm Bureau Life to meet our rating objectives. However, this capital may not be sufficient if significant future losses are incurred and access to additional capital is limited.
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. In addition to the restricted debt defeasance trust assets mentioned above, our investment portfolio at December 31, 2011, included $41.8 million of short-term investments, $296.3 million of cash and $598.3 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value. Farm Bureau Life is also a member of the FHLB, which provides a source for additional liquidity if needed. This membership allows us to utilize fixed or floating rate advances offered by the FHLB and secured by qualifying collateral. Our total capacity to utilize such advances is impacted by multiple factors including the market value of eligible collateral, level of statutory admitted assets and excess reserves, and our willingness or capacity to hold activity-based FHLB common stock.
We do not have any off-balance sheet arrangements as of December 31, 2011 or 2010.
In addition, contractual obligations totaling $282.6 million relating to dividend accumulations and other policy claims are included in the "Other policy claims and benefits" and "Advance premiums and other deposits" lines on our consolidated balance sheet.
Includes our estimated future contributions to multiemployer defined and postretirement benefit plans. Contributions related to the qualified pension plan are included through 2012. No amounts related to the qualified pension plan are included beyond 2012 as the contribution amounts will be re-evaluated based on actual results.
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred acquisition costs, are capitalized and amortized into expense. We also record an asset, value of insurance in force acquired, for the cost assigned to insurance contracts when an insurance company is acquired. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued. For participating traditional life insurance, interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted (also known as "unlocked") when Farm Bureau Life revises its estimate of current or future gross profits or margins. For example, deferred acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
At December 31, 2011, our fixed maturity securities classified as available for sale had a fair value of $5,570.6 million, with gross unrealized gains totaling $479.9 million and gross unrealized losses totaling $99.3 million. Due to the large number of fixed maturity securities held, the unique attributes of each security and the complexity of valuation methods, it is not practical to estimate a potential range of fair values for different assumptions and methods that could be used in the valuation process.
At December 31, 2011, we had 252 fixed maturity and equity securities with gross unrealized losses totaling $99.9 million. Included in the gross unrealized losses are losses attributable to both movements in market interest rates as well as temporary credit issues. Details regarding these securities are included in the "Financial Condition - Investments" section above.
At December 31, 2011, we held deferred tax assets totaling $87.7 million, none of which related to unrealized losses on fixed maturity and equity securities, and $48.3 million of which relate to realized losses. A significant decline in the value of assets incorporated into our tax planning strategies could lead to the establishment of a valuation allowance on deferred tax assets having an adverse effect on earnings.
We have audited FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Management of FBL Financial Group, Inc. (the Company) is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
In our opinion, FBL Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FBL Financial Group, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, effective July 1, 2010, the Company changed its method of accounting with respect to certain investments with embedded credit derivatives.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2012 expressed an unqualified opinion thereon.
(a) All activity for the periods shown relates to Class A Common Stock.
(b) Comprehensive income attributable to FBL Financial Group, Inc. was $141,003 for 2011, $274,587 for 2010 and $616,504 for 2009.
FBL Financial Group, Inc. (we or the Company) operates predominantly in the life insurance industry through its principal subsidiary, Farm Bureau Life Insurance Company (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.
Effective January 1, 2011, we adopted guidance issued by the FASB which modified the goodwill impairment test. This guidance modified Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity would be required to perform Step 2 of the test if qualitative factors indicate that it is more likely than not that goodwill impairment exists. This guidance had no impact on our consolidated financial statements. In September 2011, the FASB issued further guidance related to the goodwill impairment test. This additional guidance provides for an assessment of qualitative factors to determine if it is more likely than not that a goodwill impairment exists. If it is determined that an impairment is more likely than not, then the two-step impairment test is required. We adopted this guidance during the fourth quarter of 2011. The adoption of this guidance had no impact on our consolidated financial statements.
In June 2011, the FASB issued guidance related to the presentation of comprehensive income. This guidance requires us to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance removes the presentation option allowing comprehensive income disclosures in the statement of changes in stockholders' equity, but does not change the items that must be reported in other comprehensive income. This guidance will be effective January 1, 2012. Other than a presentation change, the adoption of this guidance will not have any impact on our consolidated financial statements.
In October 2010, the FASB issued guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance defines allowable deferred acquisition costs as the incremental direct cost of contract acquisition and certain costs related directly to underwriting, policy issuance and processing. This guidance also allows for the deferral of advertising costs if directly linked to a sale. We will adopt the guidance retrospectively during the first quarter of 2012, and currently estimate that the impact upon adoption will be to reduce stockholders' equity by approximately $75.8 million at December 31, 2011, $101.7 million at December 31, 2010 and $117.1 million at December 31, 2009. Net income from continuing operations is expected to be reduced by $3.1 million ($0.10 per basic and diluted common share) for 2011, $3.3 million ($0.11 per basic and diluted common share) for 2010 and $4.1 million ($0.14 per basic common share and $0.13 per diluted common share) for 2009. Net income (loss) from discontinued operations is expected to increase for 2011 due to a decrease in the loss recognized on the sale of EquiTrust Life by $12.6 million ($0.41 per basic common share and $0.40 per diluted common share). Net income from discontinued operations will decrease $1.7 million ($0.05 per basic and diluted common share) for 2010 and $1.0 million ($0.03 per basic and diluted common share) for 2009.
Equity securities, comprised of mutual funds and common and non-redeemable preferred stocks, are designated as "available for sale" and are reported at fair value. The change in unrealized gains and losses of equity securities is included directly in stockholders' equity, net of any related deferred income taxes, as a component of accumulated other comprehensive income (loss).
Mortgage loans are reported at cost adjusted for amortization of premiums and accrual of discounts. If we determine that the value of any mortgage loan is impaired (i.e., when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement or a loan modification which has been classified as troubled debt restructuring), the carrying value of the mortgage loan is reduced to its fair value, which may be based upon the present value of expected future cash flows from the loan, or the fair value of the underlying collateral. The carrying value of impaired loans is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. Interest
income on impaired loans is recorded 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 to where the collection of interest is considered likely.
Real estate is reported at cost less allowances for depreciation, as applicable. The carrying value of these assets is subject to regular review. For properties not held for sale, if indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying value, an impairment loss is recognized and the property's cost basis is reduced to fair value. If the fair value, less estimated sales costs, of real estate held for sale decreases to an amount lower than its carrying value, the carrying value of the real estate is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. There was one property held for investment with a valuation allowance of less than $0.1 million as of December 31, 2011 and December 31, 2010. There were no properties held for sale with a valuation allowance as of December 31, 2011 or 2010.
Policy loans are reported at unpaid principal balance. Short-term investments, which include investments with remaining maturities of one year or less, but greater than three months at the time of acquisition, are reported at cost adjusted for amortization of premiums and accrual of discounts. Other investments include our ownership interest in aircraft acquired in the troubled debt restructuring with a bond issuer that filed for bankruptcy. The ownership interest in the aircraft is reported at cost, less accumulated depreciation.
We have embedded derivatives associated with modified coinsurance contracts, which are included within reinsurance recoverable, and with a collateralized debt obligation included in fixed maturity securities. These instruments are carried at fair value with changes reflected in other income. See Note 4 for more information regarding our derivative instruments.
length of time the security has been in an unrealized loss position;
for equity securities, our ability and intent to hold the security for a period of time that allows for the recovery
In order to determine the credit and non-credit impairment loss for a fixed maturity security, every quarter we estimate the future cash flows we expect to receive over the remaining life of the instrument as well as review our plans to hold or sell the instrument. Significant assumptions regarding the present value of expected cash flows for each security are used when an other-than-temporary impairment occurs and there is a non-credit portion of the unrealized loss that won't be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities, other asset-backed securities and prior to July 1, 2010, collateralized debt obligations, include collateral pledged, guarantees, vintage, anticipated principal and interest payments, prepayments, default levels, severity assumptions, delinquency rates and the level of nonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturity securities include anticipated principal and interest payments and an estimated recovery value, generally based on a percentage return of the current market value.
Fair values of fixed maturity securities are based on quoted market prices in active markets when available. Fair values of fixed maturity securities that are not actively traded are estimated using valuation models that vary by asset class. Fair values for all securities are reviewed for reasonableness by considering overall market conditions and values for similar securities. Fair values of redeemable preferred stocks, equity securities and derivative investments are based on the latest quoted market prices, or for those items not readily marketable, generally at values which are representative of the fair values of comparable issues. See Note 5 for more information on our fair value policies, including assumptions and the amount of securities priced using the valuation models.
We use reinsurance to manage certain risks associated with our insurance operations. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential risks arising from large claims and provide additional capacity for growth. For business ceded to other companies, reinsurance recoverable includes the reinsurers' share of policyholder liabilities, claims and expenses, net of amounts due the reinsurers for premiums. For business assumed from other companies, reinsurance recoverable includes premium receivable, net of our share of benefits and expenses we owe to the ceding company.
For participating traditional life insurance and interest sensitive products, these costs are being amortized generally in proportion to expected gross profits (after dividends to policyholders, if applicable) from surrender charges and investment, mortality and expense margins. That amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of investment gains and losses) to be realized from a group of products are revised. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits.
Other assets at December 31, 2011 and 2010, also includes goodwill of $9.9 million related to the excess of the amounts paid to acquire companies over the fair value of the net assets acquired. Goodwill is not amortized but is subject to annual impairment testing. We evaluate our goodwill balance by comparing the fair value of our reporting units to the carrying value of the goodwill. We conduct our impairment testing annually as well as when circumstances suggest an impairment may have occurred. Such circumstances include changes in the competitive or overall economic environment or other business condition changes that may negatively impact the value of the underlying business. On a periodic basis, as well as in the event circumstances indicate the value of the business may have declined significantly, we will estimate the value of the business using discounted cash flow techniques. In the event that we were to dispose one of our reporting units, a discounted cash flow approach would be used to estimate the fair value of that reporting unit; therefore we believe this approach better approximates the fair value of our goodwill than a market capitalization approach. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including future premiums, product lapses, investment yields and discount rate. Underlying assumptions are based on historical experience and our best estimates given information available at the time of testing. As a result of our impairment review we have determined our goodwill was not impaired as of December 31, 2011 or 2010.
The liability for future policy benefits for participating traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality and other factors underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 2.00% to 6.00%. The average rate of assumed investment yields used in estimating gross
During 2009, we refined certain reserve calculations resulting in a net after-tax increase to net income of $7.2 million ($0.24 per basic and diluted common share). In 2010, additional refinements were made to the calculation of reserves for certain traditional life contracts. These refinements, along with associated adjustments to deferred acquisition costs and taxes, resulted in an increase to net income of $3.0 million ($0.10 per basic and diluted common share).
We have accrued dividends for participating business that are established for anticipated amounts earned to date that have not been paid. The declaration of future dividends for participating business is at the discretion of the Board of Directors of Farm Bureau Life. Participating business accounted for 38% of receipts from policyholders during 2011 (2010 - 39% and 2009 - 40%) and represented 12% of life insurance in force at December 31, 2011, 2010 and 2009.
Revenues for interest sensitive and variable products consist of policy charges for the cost of insurance, asset charges, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. The timing of revenue recognition as it relates to these charges and fees is determined based on the nature of such charges and fees. Policy charges for the cost of insurance, asset charges and policy administration charges are assessed on a daily or monthly basis and are recognized as revenue when assessed and earned. Certain policy initiation fees that represent compensation for services to be provided in the future are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are determined based upon contractual terms and are recognized upon surrender of a contract. Policy benefits and claims charged to expense include interest amounts credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances during the period. Amortization of deferred acquisition costs is recognized as expenses over the life of the policy.
When a component of our business is sold or expected to be sold, we segregate the assets and liabilities of the component and report them as assets and liabilities of subsidiary held for sale in the consolidated balance sheets. A component is expected to be sold when we have approved or received approval to sell, are committed to a formal plan, the component is available for immediate sale and being actively marketed, the sale is anticipated to occur during the ensuing year and certain other specified criteria are met. Once all criteria are attained, assets and liabilities of the component are restated as held for sale in prior periods at their carrying value.
Unrealized gains and losses on our available-for-sale securities and certain interest rate swaps are included in accumulated other comprehensive income (loss) in stockholders' equity. Comprehensive income excludes net investment gains and losses included in net income which represent transfers from unrealized to realized gains and losses, which totaled $7.0 million in 2011, $13.6 million in 2010 and ($19.9) million in 2009. These amounts, which have been measured through the date of sale, include the EquiTrust Life Business discussed in Note 2 and are net of income taxes and adjustments to deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve totaling ($15.6) million in 2011, ($18.8) million in 2010 and $3.8 million in 2009. Comprehensive income also includes changes in the underfunded status of our single employer health and medical postretirement benefit plans totaling less than ($0.1) million in 2011, $0.3 million in 2010 and less than $0.1 million in 2009.
The 2010 and 2009 consolidated financial statements have been reclassified to conform to the current financial statement presentation.
We sold our wholly-owned subsidiary EquiTrust Life for $465.3 million in an all cash transaction that closed on December 30, 2011. The sales price reflects adjustments to the initial closing price determined on the closing date and is potentially subject to further post closing adjustments based on a final statutory net worth reconciliation. The transaction resulted in an after-tax loss on the sale of $68.5 million, or $2.23 per basic and $2.19 per diluted common share. The loss consists of the sales price less the net book value of the assets and one-time transaction costs and termination benefits totaling $12.5 million, before tax.
As a result of the sale, our consolidated financial statements are presented to reflect the operations of the component sold as discontinued operations for periods prior to the sale. Significant assets and liabilities held for sale at December 31, 2010 were as follows:
Expenses are reduced by approximately $7.6 million in 2011, 2010 and 2009 for corporate overhead we estimate will be absorbed by the Company after the sale. In addition, as described below, the sale of EquiTrust Life requires us to redeem a majority of our senior notes, therefore the related interest expense is allocated to the EquiTrust Life Business.
Gross unrealized losses include non-credit losses on other-than-temporarily impaired corporate securities totaling $5.3 million at December 31, 2011 and $5.9 million at December 31, 2010, other asset-backed securities totaling $12.1 million at December 31, 2011 and $18.6 million at December 31, 2010, and residential mortgage-backed securities totaling $0.9 million at December 31, 2011 and $1.4 million at December 31, 2010.
Military housing fixed maturity securities with a carrying value of $73.2 million at December 31, 2010 have been reclassified from the state, municipal and other category to the commercial mortgage-backed category to conform to the current period presentation. The securities were reclassified as it was determined they have characteristics more similar to commercial mortgage-backed securities.
Corporate securities: The unrealized losses on corporate securities represent 42.9% of our total unrealized losses. The largest losses remain in the finance sector ($205.1 million carrying value and $27.5 million unrealized loss). The largest unrealized losses in the finance sector were in the banking ($124.4 million carrying value and $21.2 million unrealized loss) and the real estate investment trust ($25.0 million carrying value and $1.9 million unrealized loss) sub-sectors. The unrealized losses across the finance sector are primarily attributable to a general widening in spread levels relative to the spreads at which we acquired the securities. Finance sector spreads have narrowed but remain historically wide in comparison to the narrowing experienced in the remaining sectors, contributing to the proportionately larger amount of unrealized losses for this sector.
The other corporate sector containing our largest unrealized loss is utilities ($36.2 million carrying value and $4.8 million unrealized loss). The unrealized loss in this sector is generally due to spread widening among several issuers that continue to experience a challenging operating environment.
Other asset-backed securities: The unrealized losses on other asset-backed securities represent 26.3% of our total unrealized losses, and were caused primarily by concerns regarding defaults on subprime mortgages and home equity loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.
Loan-to-value ratio using most recent appraised value. Appraisals are updated periodically including when there is indication of a possible significant collateral decline or loan modification and refinance requests.
During December 2011, certain commercial mortgage loans were exchanged between EquiTrust Life and Farm Bureau Life prior to the sale of EquiTrust Life. These loans carried an allowance for loan losses of $0.7 million at December 31, 2011.
Included in the net impairment loss recognized in earnings in 2011, is an other than temporary impairment of $4.7 million
The real estate limited partnerships had revenues totaling $4.9 million for 2011, $5.4 million for 2010 and $4.0 million for 2009. We make commitments to fund partnership investments in the normal course of business. We did not have any other commitments to investees designated as VIE's during the years ended December 31, 2011, 2010 or 2009.
At December 31, 2011, affidavits of deposits covering investments with a carrying value totaling $6,022.4 million were on deposit with state agencies to meet regulatory requirements. Fixed maturity securities with a carrying value of $298.3 million were on deposit with the Federal Home Loan Bank as collateral for funding agreements. Also, fixed maturity securities with a carrying value of $1.8 million were on deposit as collateral for an operating lease on software.
As discussed in Note 2, the make-whole redemption feature of our unaffiliated senior notes is an embedded derivative based on U.S. Treasury yields. Due to the EquiTrust Life sale, this derivative liability had a fair value of $33.1 million at December 31, 2011 compared to zero at December 31, 2010. The change in fair value is reported as loss on debt redemption in the Consolidated Statements of Operations.
During prior years we held interest rate swaps to manage the interest rate risk associated with a portion of our flexible premium deferred annuity contracts as well as the variable interest on a line of credit. A $50.0 million notional amount interest rate swap associated with the deferred annuity contracts matured on June 1, 2011. A $46.0 million notional amount interest rate swap associated with the line of credit matured with the expiration of the line of credit on October 7, 2010. At December 31, 2010, we had master netting agreements with counterparties covering cash collateral receivable totaling $1.3 million. We did not have any excess collateral or off-balance sheet collateral at December 31, 2011 or 2010.
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. GAAP also establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of instrument and the characteristics specific to the instrument. Financial instruments with readily available active quoted prices or those for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. For some investments, little market activity may exist and management's determination of fair value is then based on the best information available in the circumstances, and may incorporate management's own assumptions of what a market participant would consider for the fair value, which involves a significant degree of judgment.
Other liabilities: Fair value of the embedded derivative related to the make-whole redemption feature of our unaffiliated senior notes is determined using a discounted cash flow valuation analysis based on applicable U.S. Treasury rates and make-whole spread. Other liabilities also include the embedded derivatives in our modified coinsurance contracts under which we cede business. Fair values of these derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturity securities. The fair value for our interest rate swap is based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral paid. Prices are verified internally using analytical tools. We are not required to estimate fair values for the remainder of the other liabilities balances.
Liabilities related to separate accounts: Fair values are based on cash surrender value, the cost we would incur to extinguish the liability.
Fair values of private investments in Level 3 are determined by reference to 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 an enhanced matrix calculation.
The matrix pricing we and pricing services perform include a discounted cash flow analysis using a spread, including the specific creditors' credit default swap spread (if available), over U.S. Treasury bond yields, adjusted for the maturity/average life differences. Spread adjustments are intended to reflect an illiquidity premium and take into account a variety of factors including but not limited to: senior unsecured versus secured status, par amount outstanding, number of holders, maturity, average life, composition of lending group and debt rating. These valuation methodologies involve a significant degree of judgment.
We evaluate the third party pricing services and brokers to assess whether the vendor applies methodologies that will provide an appropriate value. Monthly we analyze the information obtained from third party services and brokers to assess whether the information is reasonable and produces a reasonable estimate of fair value. We take into consideration both qualitative and quantitative factors as part of this analysis, including but not limited to, an overall analysis of portfolio fair value movement against general movements in interest rates and spreads. We also compare price movement trends, considering the reasons for both significant price movements between periods or a lack of movement where we have become aware of securities that experienced a positive or negative credit or other event that would suggest the price provided has not captured market activity.
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 of the information from which we obtain the information. Transfers in or out of any level are measured as of the beginning of the period.
Approximately 5.0% of the total fixed maturities are included in the Level 3 group at December 31, 2011 and 4.1% at December 31, 2010. The fair value of the assets and liabilities above include the financial instruments' nonperformance risk. Nonperformance risk is the risk that the instrument will not be fulfilled and affects the value at which the instrument could be transferred in an orderly transaction. The nonperformance risk for our assets reported at fair value totaled less than $0.1 million at December 31, 2011 and at December 31, 2010. Our nonperformance risk decreased the fair value of our reported liabilities totaled $0.1 million at December 31, 2011 and December 31, 2010.
Included in the net transfers in (out) line is $42.2 million of securities that were priced using a broker quote at December 31, 2010 that were valued at December 31, 2011 by a pricing service that uses observable market data in the prices and $20.0 million that were transferred into Level 3 that did not have enough observable data to include in Level 2 at December 31, 2011. There were no transfers between Level 1 and Level 2 during 2011.
Included in the net transfers in (out) line is $26.8 million of securities that were priced using a broker quote at December 31, 2009 that were valued at December 31, 2010 by a pricing service that uses observable market data in the prices and $18.5 million that were transferred into Level 3 that did not have enough observable data to include in Level 2 at December 31, 2010. There were no transfers between Level 1 and Level 2 during 2010.
The change in unrealized gains (losses) included in net income relating to positions still held on a collateralized debt obligation was ($1.0) million at December 31, 2011 and ($0.3) million at December 31, 2010.
(1) Includes the change in fair value of the embedded derivative related to the make-whole premium on our unaffiliated senior notes.
Life insurance in force ceded totaled $11,031.5 million (22.2% of life insurance in force) at December 31, 2011 and $10,213.6 million (21.1% of life insurance in force) at December 31, 2010. Insurance premiums and product charges have been reduced by $30.8 million in 2011, $32.0 million in 2010 and $31.2 million in 2009 and insurance benefits have been reduced by $15.5 million in 2011, $15.3 million in 2010 and $16.7 million in 2009 as a result of cession agreements.
We have assumed closed blocks of certain life and annuity business through coinsurance and modified coinsurance agreements. Life insurance in force assumed totaled $588.8 million (1.5% of total life insurance in force) at December 31, 2011 and $92.3 million (0.3% of total life insurance in force) at December 31, 2010. The life insurance in force assumed at December 31, 2011 includes $503.3 million assumed from EquiTrust Life. Premiums and product charges assumed totaled $0.4 million in 2011, $1.6 million in 2010 and $1.4 million in 2009. Insurance benefits assumed totaled less than $0.1 million in 2011 and $0.1 million in 2010. No insurance benefits were assumed in 2009.
Long-term debt includes $97.0 million of our subordinated debt obligation to FBL Financial Group Capital Trust (the Trust). We issued 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes) with a principal amount of $100.0 million
to support $97.0 million of 5% Preferred Securities issued by the Trust. We also have a $3.0 million equity investment in the Trust, which is netted against the Notes on the consolidated balance sheets due to a contractual right of offset. The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes and are owned by American Equity Investment Life Holding Company. As of December 31, 2011 and 2010, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
In November 2008, we issued 9.25% Senior Notes payable to affiliates totaling $100.0 million, which we refinanced in the second quarter of 2011 to $100.0 million of 6.10% Senior Notes, due May 3, 2015 and prepayable anytime at par. One note for $75.0 million was issued to Farm Bureau Property & Casualty and a $25.0 million note was issued to an investment affiliate of the Iowa Farm Bureau Federation (IFBF), our majority stockholder. Interest is payable quarterly on March 31, June 30, September 30 and December 31 of each year. On December 30, 2011, we redeemed $50.0 million of the Senior Notes payable to Farm Bureau Property & Casualty in connection with the EquiTrust Life sale. The mandatory redemption provision that was triggered by the sale has been waived by both affiliates for the remaining $50.0 million of Senior Notes.
In April 2004, we issued $75.0 million of 5.85% Senior Notes due April 15, 2014 (2014 Senior Notes). Interest on the 2014 Senior Notes was payable semi-annually on April 15 and October 15 each year. The 2014 Senior Notes were redeemable in whole or in part at any time at our option at a make-whole redemption price equal to the greater of 100% of their principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semiannual basis at the treasury rate plus 25 basis points. We received net proceeds of approximately $75.5 million from the issuance of the 2014 Senior Notes after underwriting fees, offering expenses, original issue discount and the impact of a rate lock, which were being amortized over the term of the 2014 Senior Notes, using the effective interest method.
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.
We participate with several affiliates and an unaffiliated organization in various multiemployer defined benefit plans (the Plans). The Plans cover substantially all our employees and the employees of the other participating companies who have attained age 21 and one year of service. Benefits are based on years of service and the employee's compensation. One of the plans provides supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan limits imposed by federal law.
Under the multiemployer plan structure, our contributions are commingled with those of the other employers to fund the Plans' benefit obligations. Should a participating employer be unable to provide funding to the Plans the remaining employers would be required to continue funding future obligations. If an employer elects to discontinue participation, prior to departure they will be required to contribute their portion of the unfunded pension obligation associated with their employees. This required contribution will be based on an actuarial estimate of future benefit obligations, which as an estimate may not ultimately be sufficient to fund future actual benefits. None of the participating employers have provided notice that they would be discontinuing participation in the Plans or would otherwise be unable to continue providing their share of required funding as of December 31, 2011.
None of the Plans were subject to collective bargaining agreements, a financial improvement plan or a rehabilitation plan. No surcharges were required to be paid to the Plans during 2011, 2010 or 2009.
We are the primary employer in each of the Plans, providing more than 5 percent of the total contributions during 2011, 2010 and 2009. We expect combined contributions to the Plans for 2012 to be approximately $18.5 million, of which $6.8 million is expected to be contributed by us.
For multiemployer plans, the funded status is not required to be recognized as an asset or liability in the consolidated balance sheets. The combined unrecognized liability for the underfunded status of the Plans totaled $105.1 million at December 31, 2011 and $83.4 million at December 31, 2010.
Net periodic pension cost recorded in our consolidated statements of operations, including amounts related to discontinued operations, totaled $6.8 million in 2011, $6.0 million in 2010 and $8.5 million in 2009.
We estimate the discount rate by projecting and discounting future benefit payments inherent in the projected benefit obligation using a "spot" yield curve known as the Principal Pension Discount yield curve. This curve is constructed by using bid-price data from two Barclays Capital bond indices, Aggregate Index and Short Term Index. In addition, the bonds included must meet the following criteria: corporate issued; fixed coupon; divergence of coupon rate from the current yield not exceeding 500 basis points; a rating of Aa or higher from one of the recognized agencies; a rating of Aa or higher from at least two of the recognized agencies if maturity is less than 1 year; and instruments with options are excluded. As of December 31, 2011 there were changes to the Principal Curve to use the 30-year spot for all periods beyond 30 years. Prior to 2010, we estimated the discount rate by projecting and discounting future benefit payments inherent in the projected benefit obligation using a "spot" yield curve known as the Citigroup Pension Discount Liability Index yield curve. This curve is constructed from the Treasury curve by adding option-adjusted spreads that are drawn from the AA corporate sector of the Salomon Broad Investment-Grade Bond Index. The bonds with excessive call exposure are excluded, as well as securities with abnormal option-adjusted spreads. The final spreads are determined using this call-protected sample of AA corporate bonds.
Our plan assets are primarily invested in annuity products and insurance company pooled separate accounts that invest predominately in equity securities and real estate. We have certain pension obligations that are fully funded though annuity contracts with Farm Bureau Life which are presented as funded annuity contracts below. Excluding the funded annuity contracts, we employ a long-term investment strategy of diversifying the plans' assets with the long-term target allocation being approximately 60% in fixed income securities and 40% in equities. At December 31, 2011, the Plans' assets were invested 60% in fixed income securities and 40% in diversified equities. The fixed income securities consist primarily of the group annuity contract and fixed income securities held in pooled separate accounts. The equity securities are in pooled separate accounts and mutual funds. Our investment strategy is to (1) achieve a long-term return sufficient to satisfy all plan obligations, (2) assume a prudent level of risk and (3) maintain adequate liquidity. The expected return on plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the Plans. In estimating the expected rate of return for each asset class, we take into account factors such as historical rates of return, expected future risk free rates of return and anticipated returns expected given the risk profile of each asset class.
(b) Represents pooled separate account investments and mutual funds with Principal Life Insurance Company.
We participate with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. We contributed cash in an amount equal to 100% of an employee's contributions up to 2% of the annual salary contributed by the employee and an amount equal to 50% of an employee's contributions between 2% and 4% of the annual salary contributed by the employee. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Expense related to the plan totaled $0.9 million in 2011 and $0.8 million in 2010 and 2009.
Represents the difference between the share price and exercise price for each option, excluding options where the exercise price is above the share price, at December 31, 2011.
We issue new shares to satisfy stock option exercises. We do not have a policy of repurchasing shares on the open market to satisfy share-based payment arrangements. Cash received from stock options exercised totaled $7.5 million for 2011, $3.7 million for 2010 and $1.2 million for 2009. The actual tax benefit realized from stock options exercised totaled $1.1 million for 2011, $0.5 million for 2010 and $0.1 million for 2009.
We also granted nonvested Class A common shares to certain executives. The restrictions on these shares lapse and the shares vest if we meet or exceed operating goals, such as earnings per share, book value and expense targets, within or during a three year period. Depending on performance, the actual amount of shares issued could range from zero to 100% of the granted amount. The value of the awards is based on the grant date fair value of the nonvested stock adjusted for expected forfeitures and an estimate of the number of shares expected to vest. The estimate for the number of shares to vest is reviewed each period and the impact of any changes in the estimate on expense is recorded in the current period. These awards are charged to expense using the straight-line method over the required service period. Dividends on the restricted stock during the restriction period are contingent upon vesting.
While ultimately beneficial to the Company, the EquiTrust Life sale reduced our 2011 operating results, making achievement of the performance goals related to the 2011 nonvested shares significantly more difficult. In recognition of the increased difficulty in achieving the goals, the 2011 nonvested shares were modified. The modification canceled the 2011 nonvested shares on December 30, 2011 for those participants still employed by the Company. Four executives will receive cash payments for the value of their restricted stock as of December 15, 2011. In 2012, the remaining executives will be granted cash settled restricted stock units equal to 82.75% of the 2011 nonvested shares granted. In addition, nonvested shares granted to the chief executive officer during 2011 and 2010, had restrictions lapsing in 2014 based on book value targets that were also significantly more difficult to achieve with the EquiTrust Life sale. As a result, those nonvested shares were canceled in exchange for an agreed upon cash payout. A portion of the agreed upon amount will be distributed annually subject to the limits set forth in the Internal Revenue Code 162(m).
Unrecognized compensation expense related to unvested share-based compensation granted under the nonvested stock arrangement totaled $1.0 million at December 31, 2011. This expense is expected to be recognized over a weighted-average period of 0.7 years. The tax benefit realized from nonvested stock released to employees was less than $0.1 million in 2011, $0.7 million in 2010 and $0.4 million in 2009. We have a policy of withholding shares to cover estimated future tax payments.
Directors were awarded nonrestricted Class A common shares totaling 24,806 during 2011 and 31,160 during 2010. The value of the stock was based on the fair value on the date of the grant. The tax benefit realized from the shares awarded to directors was $0.3 million in 2011 and 2010 and $0.1 million in 2009.
We have a Director Compensation Plan under which non-employee directors on our Board may elect to receive a portion of their compensation in the form of cash, Class A common shares or deferred stock units. Under this plan, we have deferred stock units outstanding totaling 110,545 at December 31, 2011 and 102,980 at December 31, 2010. At December 31, 2011, there were 123,882 shares of Class A common stock available for future issuance under the Director Compensation Plan. We also have an Executive Salary and Bonus Deferred Compensation Plan under which officers of the Company, who are required to meet certain stated common stock ownership guidelines, are allowed to use their base salary and annual cash bonus to purchase deferred stock units. Under this plan, we have deferred stock units outstanding totaling 92,736 at December 31, 2011 and 91,757 at December 31, 2010. At December 31, 2011, shares of Class A common stock available for future issuance under this plan totaled 124,397. We also have an Executive Excess 401(k) Plan under which officers of the Company who meet salary guidelines and 401(k) contribution guidelines are allowed to purchase unregistered deferred stock units. Under this plan, we have deferred stock units outstanding totaling 4,071 at December 31, 2011 and 6,372 at December 31, 2010.
We share certain office facilities and services with the IFBF and its affiliated companies. These expenses are allocated on the basis of cost and time studies that are updated annually and primarily consist of rent, salaries and related expenses, travel and other operating costs. We also have an expense allocation agreement with Farm Bureau Property & Casualty for the use of property and equipment. Expense relating to this agreement totaled $1.0 million in 2011, $1.3 million in 2010 and $1.0 million in 2009.
From time to time, assessments are levied on our insurance subsidiaries by guaranty associations in most states in which the subsidiaries are licensed. These assessments, which are accrued for, are to cover losses of policyholders of insolvent or rehabilitated companies. In some states, these assessments can be partially recovered through a reduction in future premium taxes. Recoveries (expenses) for guaranty fund assessments, net of related premium tax offsets, totaled $0.1 million in 2011, less than ($0.1) million in 2010 and ($0.2) million in 2009.
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. At December 31, 2011, Farm Bureau Life exceeded the minimum RBC requirements.
Farm Bureau Life's ability to pay dividends to the parent company is restricted by the Iowa Insurance Holding Company Act to earned surplus arising from its business. In addition, prior approval of the Iowa Insurance Commissioner is required for a dividend distribution of cash or other property whose fair value, together with that of other dividends made within the preceding 12 months, exceeds the greater of (i) 10% of adjusted policyholders' surplus as of the preceding year end, or (ii) the statutory net gain from operations of the insurer for the preceding calendar year. During 2012, the maximum amount legally available for distribution to FBL Financial Group, Inc. from Farm Bureau Life without further regulatory approval is $87.8 million.
We analyze our segment results based on pre-tax operating income (loss). Accordingly, income taxes are not allocated to the segments. In addition, operating results are reported net of transactions between the segments. Operating income (loss) for the three years ended December 31, 2011 represents net income excluding, as applicable, the impact of:
Depreciation and amortization related to property and equipment are allocated to the product segments while the related property, equipment and capitalized software are allocated to the Corporate and Other segment. Depreciation and amortization for the Corporate and Other segment include $1.8 million for 2011, $2.2 million for 2010 and $2.9 million for 2009 relating to leases with affiliates. In the consolidated statements of operations, we record these depreciation amounts net of related lease income from affiliates.
Our investment in equity method investees, the related equity income and interest expense are attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significant during the periods presented above. Goodwill was allocated to the Annuity ($3.9 million) and Life Insurance ($6.1 million) segments at December 31, 2011 and 2010.
Premiums collected, which is not a measure used in financial statements prepared according to GAAP, include premiums received on life insurance policies and deposits on annuities and universal life-type products. Net premiums collected totaled $678.9 million in 2011, $634.5 million in 2010 and $611.7 million in 2009.
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.