Amounts are impacted by accumulated other comprehensive income totaling $91.3 million in 2018, $285.0 million in 2017, $149.6 million in 2016, $114.5 million in 2015 and $258.4 million in 2014. These amounts are net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, unearned revenue reserve, value of insurance in force acquired and policyholder liabilities.
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 insurance subsidiaries Farm Bureau Life Insurance Company (Farm Bureau Life) and Greenfields Life Insurance Company (Greenfields Life).
The amount of spread (excess of net investment income earned over interest credited) we earn on contract holders’ general account balances.
The U.S. 10-year Treasury yield increased during 2018 from 2.40% at December 31, 2017 to 2.69% at December 31, 2018.
The long-term impact of the enactment of the Tax Act during December 2017 on the general U.S. economy, business initiatives and consumer demand for our insurance products.
Beginning in 2018, amount includes changes in fair value of equity securities as discussed in Note 1 to our consolidated financial statements included in Item 8.
Our net income decreased in 2018, compared to 2017, primarily due to the adjustment made in 2017 for the initial impact of the Tax Act. Net income and non-GAAP operating income were positively impacted by reduced income tax rates related to changes under the Tax Act and increased earnings from an increase in the volume of business in force. These increases in income were partially offset by an increase in interest sensitive product benefits, an increase in expenses, lower other investment-related income and an increase in amortization of deferred acquisition costs from the impact of market performance on our variable business. Net income was also negatively impacted by net unrealized losses from investments and changes in fair value of derivatives.
The average aggregate account value for individual annuity contracts in force increased in 2018 and 2017, compared to the prior periods, due to continued sales, advances on our funding agreements with the Federal Home Loan Bank of Des Moines (FHLB) and the crediting of interest. Continued growth in our business in force contributes to the increase in revenues, benefits and expenses. Premiums collected increased in 2018 compared to 2017 due to increased sales of our indexed annuity products, partially offset by decreased sales of our fixed rate deferred annuity products. Premiums collected decreased in 2017 compared to 2016 due to decreased sales of our fixed rate deferred and indexed annuity products. Individual fixed rate deferred annuity collected premiums were $139.0 million in 2018, $167.7 million in 2017 and $213.3 million in 2016. Indexed annuity collected premiums were $137.6 million in 2018, $110.6 million in 2017 and $125.5 million in 2016. Outstanding funding agreements with FHLB totaled $446.0 million at December 31, 2018, $415.1 million at December 31, 2017 and $437.4 million at December 31, 2016.
The individual annuity withdrawal rate increased in 2018, compared to 2017, due to certain policies reaching the end of their interest rate guarantee period and the competitiveness of our current crediting rates relative to other financial institutions.
Pre-tax operating income is a non-GAAP measure of earnings, see Note 13 to our consolidated financial statements included in Item 8.
The weighted average yield on cash and invested assets for individual annuities decreased in 2018 and 2017, compared to the prior periods, 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 and lower other investment-related income. See the “Financial Condition” section that follows 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 2018, 2017 and 2016 in response to the declining portfolio yield and a change in the underlying product mix.
Pre-tax non-GAAP operating income for the Life Insurance segment decreased in 2018, compared to 2017, primarily due to lower other investment-related income, an increase in interest sensitive death benefits and other underwriting expenses and higher interest sensitive benefits due to a change in estimate of the impact of a prior period immaterial error. These decreases were partially offset by the impact of increases in the volume of business in force. Pre-tax non-GAAP operating income decreased in 2017, compared to 2016, primarily due to increases in death benefits and the correction of an immaterial error, partially offset by the impact of increases in the volume of business in force and other investment-related income.
Results for 2018 and 2017 were unfavorably impacted by the correction of an immaterial error related to a closed block of interest sensitive whole life business. The immaterial error arose and accumulated over several years, with no prior year materially impacted. Remediation required an adjustment to existing inforce business account values as well as adjustment to benefit payments for terminated business. During 2017, pre-tax earnings were negatively impacted by $3.2 million lower interest sensitive product charges as a result of this correction, along with $0.4 million in accrued interest included in interest sensitive product benefits. During 2018 we revised our estimate of the immaterial error as individual policy level analysis of past benefit payments was completed. The estimate refinement resulted in a pre-tax charge of $5.5 million, consisting of $3.5 million related to delayed benefit payments and $2.0 million of accrued interest. The change in estimate and accrued interest resulted in an increase to 2018 interest sensitive product benefits interest credited of $2.0 million, interest sensitive death benefits of $3.3 million and traditional life future policy benefits of $0.2 million.
In 2018, we offered a voluntary early retirement program to certain employees. The impact of the program to the Life Insurance segment was a $3.6 million increase in other underwriting expenses and a $0.4 million increase in investment expenses, which lowered net investment income. The increase in other underwriting expenses also included increased expenses associated with salaries, including a one-time employee bonus in the first quarter of 2018 related to the enactment of the Tax Act, and additional expenses associated with system enhancements.
Prior period amounts have been adjusted to reflect the accounting change for LIHTC investments. See Note 1 to our consolidated financial statements included in Item 8 for additional information.
Death benefits, net of reinsurance and reserves released, decreased in 2018, compared to 2017, primarily due to a decrease in the number of claims reported. Death benefits, net of reinsurance and reserves released, increased in 2017, compared to 2016, due to increases in the number of claims reported, partially offset by lower average size of claims.
As discussed in Note 1 to our consolidated financial statements included in Item 8, our LIHTC investments are no longer included in equity income and prior period amounts have been adjusted to reflect the accounting change. Equity income, net of related taxes, was $4.4 million in 2018, $2.6 million in 2017 and $2.3 million in 2016.
The effective tax rate on non-GAAP operating income was 13.9% for 2018, 28.7% for 2017 and 29.2% for 2016. The 2018 effective tax rate differs from the 2017 and 2016 rates due to the decrease in the federal corporate income tax rate from 35% to 21% under the Tax Act, effective for 2018. As discussed in Note 13 to our consolidated financial statements included in Item 8, the impact related to the initial enactment of the Tax Act is excluded from non-GAAP operating income. The effective tax rates differ from the federal statutory rate of 21% in 2018 and 35% in 2017 and 2016 primarily due to the impact of LIHTC investments and tax-exempt investment income. See Note 5 to our consolidated financial statements included in Item 8 for additional information on income taxes.
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 the realized gains and losses, as well as the timing of other than temporary impairment charges. See “Financial Condition - Investments” and Note 2 to our consolidated financial statements included in Item 8 for details regarding our unrealized gains and losses on available-for-sale securities at December 31, 2018 and 2017.
Our investment portfolio decreased 2.4% to $8,414.1 million at December 31, 2018, compared to $8,620.2 million at December 31, 2017. The portfolio decrease is due to a decline of $357.9 million of net unrealized appreciation of fixed maturities, partially offset by positive cash flows from operating activities during 2018. Additional details regarding securities in an unrealized gain or loss position at December 31, 2018 are included in the discussion that follows and in Note 2 to our consolidated financial statements included in Item 8. Details regarding investment impairments are discussed above in the “Realized Gains (Losses) on Investments” section under “Results of Operations.”
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 life is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average life is equal to the stated maturity date.
As of December 31, 2018, 97.6% (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 December 31, 2018, no single non-investment grade holding exceeded 0.2% of total investments.
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 that 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.
At December 31, 2018, our largest unrealized loss is in the consumer non-cyclical sector. Within this sector, two companies represent 17.2% of the unrealized loss. One company is a grocery store chain representing $2.4 million of the unrealized loss while the other company is a food and beverage company representing $2.7 million of the unrealized loss.
The CMBS portfolio included government agency-backed securities with a carrying value of $693.3 million at December 31, 2018 and $515.7 million at December 31, 2017. Also included in the CMBS portfolio are military housing bonds totaling $156.7 million at December 31, 2018 and $161.1 million at December 31, 2017. 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.
Equity securities totaled $92.9 million at December 31, 2018 and $104.1 million at December 31, 2017. Due to the adoption of new accounting guidance during 2018, changes in fair value are recognized in net income rather than other comprehensive income. See Note 1 to our consolidated financial statements included in Item 8 for further information regarding the impact of the new guidance on the reporting of equity securities. At December 31, 2017, gross unrealized gains totaled $7.7 million and gross unrealized losses totaled $0.3 million on these securities. The unrealized losses were attributable to non-redeemable perpetual preferred securities from issuers in the financial sector.
Mortgage loans totaled $1,039.8 million at December 31, 2018 and $971.8 million at December 31, 2017. 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 208 at December 31, 2018 and 190 at December 31, 2017. In 2018, new loans ranged from $1.4 million to $10.5 million in size, with an average loan size of $5.0 million, an average loan term of 15 years and an average net yield of 4.72%. 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 1.3% that are interest-only loans at December 31, 2018. At December 31, 2018, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 53.2% and the weighted average debt service coverage ratio was 1.6 based on the results of our 2017 annual study. See Note 2 to our consolidated financial statements included in Item 8 for further discussion regarding our mortgage loans.
Assets held in separate accounts and the related liabilities decreased 13.9% to $561.3 million primarily due to market performance on the underlying investment portfolio. Other assets decreased 8.0% to $163.5 million primarily due to amortization of LIHTC investments. Cash and cash equivalents decreased 63.9% to $19.0 million primarily due to normal fluctuations in timing of payments made and received. Deferred acquisition costs increased 38.4% to $418.8 million at December 31, 2018, primarily due the impact of the change in net unrealized appreciation on fixed maturity securities during the period.
Future policy benefits increased 2.2% to $7,205.5 million at December 31, 2018 primarily due to an increase in the volume of annuity and life insurance business in force. Other liabilities decreased 15.8% to $93.5 million primarily due to a decrease in our liabilities for unsettled security trades. Deferred income taxes decreased 42.2% to $75.4 million at December 31, 2018, primarily due to the tax-related impact of the change in unrealized appreciation on investments.
As discussed in Note 7 to our consolidated financial statements included in Item 8, stockholders’ equity was impacted by capital deployment actions during 2018. We paid a special cash dividend of $1.50 per share on common stock and increased our regular quarterly common stock dividend by 4.5% to $0.46 per share.
During 2018, our operating activities generated cash flows totaling $239.2 million, consisting of net income of $93.8 million adjusted for non-cash operating revenues and expenses netting to $145.4 million. We used cash of $211.9 million in our investing activities during 2018. The primary uses were $935.7 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $735.0 million in sales, maturities and repayments of investments. Our financing activities used cash of $60.9 million during 2018. The primary financing source was $668.5 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $631.2 million for return of policyholder account balances on interest sensitive products and $83.1 million for dividends paid to stockholders.
We paid regular cash dividends on our common and preferred stock totaling $45.8 million in 2018, $44.0 million in 2017 and $41.9 million in 2016. In addition, we paid a special $1.50 per common share cash dividend in March 2018 and March 2017 totaling $37.3 million and $37.4 million, respectively, and a special $2.00 per common share cash dividend in March 2016 totaling $49.7 million. It is anticipated that quarterly cash dividend requirements for 2019 will be $0.0075 per Series B redeemable preferred share and $0.48 per common share. In addition, we expect to pay a special dividend of $1.50 per common share in the first quarter of 2019. 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 and special dividend, the common and preferred dividends would total approximately $84.5 million in 2019. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2019. The parent company had available cash and investments totaling $48.6 million at December 31, 2018. 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, interest payments on its debt and to fund any capital initiatives such as stock repurchases. In addition, our parent company and Farm Bureau Life have entered into a reciprocal line of credit arrangement,
Interest payments on our debt totaled $4.9 million in 2018, 2017 and 2016. Interest payments on our debt outstanding at December 31, 2018 are estimated to be $4.9 million in 2019.
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 and payment of policy acquisition costs, policyholder benefits, income taxes, current operating expenses and dividends. Life insurance companies generally produce a positive cash flow that 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 $268.9 million in 2018, $325.2 million in 2017 and $490.9 million in 2016.
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, 2018, Farm Bureau Life’s statutory unassigned surplus was $503.7 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. During 2019, the maximum amount legally available for distribution to the parent company without further regulatory approval is $100.8 million. Timing of such dividends during the year is limited based on the timing of dividends paid within the preceding 12 months.
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.
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. The following table summarizes such obligations as of December 31, 2018:
Reserves for supplementary contracts and similar instruments are computed as the present value of future cash payments while the table above includes cash payments without the impact of discounting.
Other insurance liabilities include dividend accumulations, other deposits and other policy claims included in the “Other policy claims and benefits” and “Advance premiums and other deposits” lines on our consolidated balance sheet.
Pension assets and liabilities are affected by the estimated fair value of plan assets, estimates of the expected return on plan assets and/or discount rates. Actual changes in the fair value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. The December 31, 2018 pension obligation was computed based on an average 4.24% discount rate, which was based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. The long-term return on plan assets is based on current and projected asset allocations. Declines in comparable bond and equity yields would decrease our net pension asset.
We are required to exercise judgment to determine when a decline in the value of a security is other than temporary. Whether a realized loss needs to be recognized in earnings and the amount of the loss primarily depends on whether (1) a decline in fair value is other than temporary, (2) the extent to which a decline is related to credit versus non-credit related factors, (3) our intent to sell the security and (4) whether or not we could be required to sell prior to recovery. The previous amortized cost is adjusted by the loss reported in earnings to provide a new cost basis for fixed maturity securities.
At December 31, 2018, we had 709 fixed maturity securities with gross unrealized losses totaling $128.9 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.
Estimates used in the calculation of amortization of deferred acquisition costs, which are revised at least annually, are based on historical results and our best estimate of future experience.
Amortization of deferred acquisition costs for participating life insurance and interest sensitive products is expected to total approximately $24.5 million for 2019, excluding the impact of new production in 2019.
The determination of net periodic pension cost and related accrued/prepaid pension expense requires the use of estimates as to the expected return on plan assets, discount rate on plan liabilities and other accrual assumptions. Pension expense for 2018 totaled $11.6 million.
The long-term rate of return may fluctuate over time based on asset mix and if investment returns over a long period of time significantly differ from historical returns. The discount rate changes annually as it is based on current yields for high-quality corporate bonds with a maturity approximating the duration of our pension obligations. As fluctuations in the expected long-term rate of return and discount rate have been historically moderate and we have no current plans to change our investment strategy significantly, we believe a change of up to 100 basis points is reasonably likely. A 100 basis point decrease in the expected return on assets would result in a $1.0 million increase in pension expense and a 100 basis point increase would result in a $1.0 million decrease to pension expense. A 100 basis point decrease in the assumed discount rate would result in a $2.3 million increase in pension expense while a 100 basis point increase would result in a $2.1 million decrease to pension expense. The information above is for illustrative purposes only and does not reflect our expectations regarding future changes in the long-term rate of return or discount rates.
At December 31, 2018, we held gross deferred tax assets totaling $34.4 million, primarily related to future policy benefits, employee benefits and loss carryforwards. Utilization of these deferred tax assets is dependent on our future earnings. No valuation allowance has been established for these deferred tax assets, as we believe future earnings will be sufficient to ensure their utilization. If future earnings are no longer expected to be sufficient, a valuation allowance will need to be established. Given the number of variables that impact the level of future earnings, it is not practicable to estimate a range of possible outcomes to the valuation of the deferred tax assets. Future changes in tax rates and other tax laws may also impact the utilization of deferred tax assets.
During 2018, we voluntarily changed our accounting policy for LIHTC investments from the equity method to the proportional amortization method. Other accounting pronouncements adopted during the year did not have a material impact on our
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a - 15(f). Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.
We have audited FBL Financial Group, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, FBL Financial Group, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2019 expressed an unqualified opinion thereon.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for equity securities, other than those equity securities that are consolidated or accounted for under the equity method, to measure equity securities at fair value with changes in fair value recognized in the consolidated statement of operations in the period ended December 31, 2018 due to the adoption of ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.
As discussed in Note 1 to the consolidated financial statements, the Company has elected to change its method of accounting for low income housing tax credit (LIHTC) investments from the equity method to the proportional amortization method in each of the three years in the period ended December 31, 2018.
FBL Financial Group, Inc. (we or the Company), majority owned by the Iowa Farm Bureau Federation (IFBF), 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. Greenfields Life Insurance Company (Greenfields), a subsidiary of Farm Bureau Life, offers life and annuity products in the state of Colorado. 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.
During 2018, we voluntarily changed our accounting policy for low income housing tax credit (LIHTC) investments from the equity method to the proportional amortization method. We believe the proportional amortization method is preferable because it better reflects the economics of an investment that is made for the primary purpose of receiving tax credits and other tax benefits and is consistent with the accounting method used by most life insurance companies who have disclosed their accounting policies for LIHTC investments. In addition to a change in the timing of the recognition of income or loss on LIHTC investments, there are also differences in how these investments are reported within our consolidated financial statements. The unamortized cost of the LIHTC investments is now reflected in the "Other asset" line instead of the "Securities and indebtedness of related parties" line on the consolidated balance sheets and income/expense from LIHTC investments is now reflected in the "Income taxes" line instead of the "Equity income" line on the consolidated statements of operations.
As a result of this accounting policy change, the opening balance as of January 1, 2016 of retained earnings was reduced by $0.3 million, as shown on the consolidated statements of changes in stockholders’ equity. In addition, the following presents the effect of the change on financial statement line items for prior periods that were retrospectively adjusted:
Net income would have been $0.8 million lower ($0.03 per basic and diluted share) for the year ended December 31, 2018 if the company had continued to record LIHTC investments using the equity method.
The new guidance was effective for 2018, with early adoption permitted for public companies during periods for which financial statements have not been issued. We adopted the new guidance in 2017, and have reported the reclassification in our Consolidated Statement of Stockholders’ Equity. The adjustment does not impact earnings, but rather is a reclassification of amounts between stockholders’ equity accounts.
In May 2014, the FASB issued guidance that outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Insurance contract and investment related revenue, which make up the majority of our earnings, were specifically excluded from the scope of this guidance. The new guidance was 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 required 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. We had the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard.
Our revenues that fall under the scope of the new guidance primarily consist of the net commissions on insurance and investment products we broker for others. We have evaluated those contracts and concluded that there was no change in timing or measurement of revenues, as the historical accounting is consistent with the new guidance. Accordingly, there was no impact from adoption.
We are currently evaluating the impact of this new guidance on our consolidated financial statements. We believe the most significant impact upon adoption will be the establishment of an additional valuation allowance for our mortgage loan investments. We will apply this guidance using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption.
In August 2018, the FASB issued guidance that will change the accounting for long-duration insurance contracts. The new guidance impacts several facets of the accounting for such contracts including the accounting for future policy benefits associated with traditional non-participating and limited payment insurance contracts as well as for guaranteed minimum benefits and the amortization model used for deferred acquisition costs. Disclosures as well as presentation of financial results will also change under the new guidance.
We are currently evaluating the impact of this guidance on our consolidated financial statements, but expect the impact to the timing of profit emergence for the impacted insurance contracts to be significant. Adoption of certain portions of the guidance may be applied on a modified retrospective basis and others on a full retrospective basis. Early adoption is allowed.
In addition to reclassifications related to LIHTC investments discussed above, in 2018 we began reporting our holdings of Federal Home Loan Bank of Des Moines (FHLB) common stock, which we are required to hold as a member of the FHLB system, as other investments rather than equity securities as the stock is restricted in nature. The 2017 consolidated financial statements have been reclassified to conform to the current financial statement presentation.
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 common stock issued by the FHLB carried at the current redemption value; call options carried at fair value; a promissory note acquired in a sale of a partnership interest carried at the remaining basis of the partnership; and our ownership interest in aircraft acquired in a troubled debt restructuring carried at cost less accumulated depreciation.
Realized gains and losses on sales of investments are determined on the basis of specific identification. The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. When our review indicates a decline in fair value for a fixed maturity security is an other-than-temporary impairment (OTTI) and we do not intend to sell or believe we will be required to sell the security before recovery of our amortized cost, a specific write down is charged to earnings for the credit loss and a specific charge is recognized in AOCI for the non-credit loss component. If we intend to sell or believe we will be required to sell a fixed maturity security before its recovery, the full amount of the impairment write down to fair value is charged to earnings.
We monitor the financial condition and operations of the issuers of fixed maturities that could potentially have a credit impairment that is OTTI. In determining whether or not an unrealized loss is OTTI, we review factors such as:
level of current market interest rates compared to market interest rates when the security was purchased; and
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. We monitor the financial condition of these reinsurers, establishing an allowance for uncollectible reinsurance recoverables as necessary. We have concluded that no such allowance was required at December 31, 2018 or 2017. 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.
Fair values for the embedded derivatives in our modified coinsurance contracts are based on the difference between the fair value and the cost basis of the underlying investments. See Note 2 for more information regarding derivatives and Note 4 for additional details on our reinsurance agreements.
Other assets at December 31, 2018 and 2017, 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 a qualitative impairment review at least annually as well as when indicators suggest an impairment may have occurred to determine if indicators of deterioration in the business would suggest its value has declined below the carrying value of goodwill. 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. We believe this approach better approximates the fair value of our goodwill than a
Future policy benefit reserves for interest sensitive products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. We also have additional benefit reserves that are established for annuity or universal life-type contracts that provide benefit guarantees, or for contracts that are expected to produce profits followed by losses. The liabilities are accrued in relation to estimated contract assessments. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for our interest sensitive products ranged from 1.00% to 5.50% in 2018, 2017 and 2016.
The liability for future policy benefits for direct 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 margins was 5.48% in 2018, 5.47% in 2017 and 5.51% in 2016. The liability for future policy benefits for non-participating traditional life insurance is computed using a net level method, including assumptions as to mortality, persistency and interest and includes provisions for possible unfavorable deviations.
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 28% of receipts from policyholders during 2018 (2017 - 29% and 2016 - 32%) and represented 10% of life insurance in force at December 31, 2018 and 2017 and 11% at December 31, 2016.
We have a Cash-Based Restricted Stock Unit Plan. Performance and non-performance units are awarded under this plan. In addition to meeting the performance goals, the performance units are subject to a five-year vesting schedule. The non-performance units awarded under this plan vest over five years. The amount payable per unit awarded is equal to the price per share of the Company’s common stock at settlement of the award, and as such, we measure the value of the award each reporting period based on the current stock price. The expense related to the performance units is based on the number of units expected to vest and is recognized over the required service period. The expense related to the non-performance units is recognized over the five-year vesting schedule. The impact of forfeitures is estimated and compensation expense is recognized only for those units expected to vest.
Non-credit losses subsequent to the initial impairment measurement date on 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 December 31, 2018 and December 31, 2017 were in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
The changes in 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.
Our commercial mortgage loan portfolio can include 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 2018 or 2017.
See Note 1 to our consolidated financial statements for discussion of change in accounting policy for equity securities during 2018.
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).
Proceeds from sales of fixed maturities were $82.9 million in 2018, $58.7 million in 2017 and $109.5 million in 2016.
LIHTC investments take the form of limited partnerships or limited liability companies, which in turn invest in a number of low income housing projects. We use the proportional amortization method of accounting for these investments. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized along with the tax benefit as a component of federal income tax expense on our consolidated statements of operations. The net benefits reflected in federal income tax expense related to LIHTC investments were $3.8 million at December 31, 2018, $1.2 million at December 31, 2017 and $4.7 million at December 31, 2016. See Note 1 to our consolidated financial statements for discussion of a change in accounting method applied to these investments.
At December 31, 2018, 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 $47.6 million, including $1.6 million for LIHTC investment commitments, which are summarized by year in the following table.
Derivative income (loss) is reported in net investment income except for the change in fair value of the embedded derivatives on our indexed products, which is reported in interest sensitive product benefits.
At December 31, 2018, affidavits of deposits covering investments with a carrying value totaling $7,819.0 million were on deposit with state agencies to meet regulatory requirements. Fixed maturities with a carrying value of $484.3 million were on deposit with the FHLB as collateral for funding agreements.
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.
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.
Level 3 equity securities consist of non-redeemable preferred stock for which fair value estimates are based on the value of comparable securities that are actively traded. Increases in spreads 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 that 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.
Level 2 other investments measured at fair value include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral received.
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. During 2018, one mortgage loan was impaired to a fair value totaling $11.1 million which resulted in an impairment charge of $2.8 million. There were no mortgage loans or real estate impaired to fair value during 2017.
The separate account assets are primarily comprised of stock and bond mutual funds. The net amount at risk for these contracts is based on the amount by which GMDB, IDB or GMIB exceeds account value. The reserve for GMDBs, IDBs or GMIBs, determined using modeling techniques and industry mortality assumptions, that is included in future policy benefits, totaled $7.7 million at December 31, 2018 and $6.9 million at December 31, 2017. The weighted average age of the contract holders with GMDB, IDB or GMIB rider exposure was 58 years at December 31, 2018 and 66 years at December 31, 2017. This average age fluctuates due to the small pool of participants that move in and out of exposure dependent upon market performance and terminations. Benefits paid for GMDBs, IDBs and GMIBs totaled $0.2 million for 2018, $0.8 million for 2017 and $0.5 million for 2016.
Deferred income taxes have been established based upon the temporary differences between the financial statement and income tax bases of assets and liabilities. The reversal of the temporary differences will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Based on the available positive and negative evidence regarding future sources of taxable income, we have determined that the establishment of a valuation allowance was not necessary at December 31, 2018 and 2017.
The Tax Act made broad changes to the U.S. tax code impacting our companies, including reducing the federal corporate tax rate from 35% to 21% and numerous base-broadening provisions. At December 31, 2017, we recorded a provisional estimate of the impact of the Tax Act, which resulted in a reduction of net deferred tax liabilities of $84.8 million, which includes $48.2 million related to deferred taxes previously recognized in accumulated other comprehensive income. At December 31, 2018, the accounting for the Tax Act is complete, as the provisional estimates used have been finalized by filing the 2017 income tax return. This resulted in no significant impact to earnings. Additional estimates have been adjusted, resulting only in reclassification between deferred tax items, such as the deferred tax asset on future policy benefits. In these cases, the overall impact of the Tax Act did not change from 2017.
Beginning in 2017, accounting guidance requires tax benefits of equity-based compensation to be recorded through net income rather than directly to stockholders’ equity. Accordingly, we do not expect to have a provision for taxes on Class A and B common stock for years after 2016. See Note 1 to our consolidated financial statements for further discussion of this accounting change.
At December 31, 2018, we had non-life net operating loss carryforwards for federal income tax purposes totaling $12.7 million, which begin to expire after 2032. We also had non-life net operating loss carryforwards in several state jurisdictions, with varying expiration dates. State deferred taxes are not generally provided on any temporary differences or carryforwards, as state taxes have historically been insignificant.
Holders of the Class A common stock and Series B preferred stock vote together to elect Class A Directors (four to ten). Holders of the Class B common stock elect the Class B Directors (five to seven). Voting for the Directors is noncumulative. All of the holders of our Class B common stock are parties to a Stockholders’ Agreement. The IFBF’s ownership in the three classes of stock results in IFBF owning 71% of our voting stock as of December 31, 2018, and having the ability to control the Company. Holders of Class A common stock and Class B common stock receive equal per-share cash dividends.
See Note 1 to our consolidated financial statements for further discussion on this one-time adjustment related to an accounting change.
The fair value of plan assets of the Multiemployer Plan exceeded the accumulated benefit obligation at December 31, 2018 and December 31, 2017.
Pension settlement charges were recognized after determining the total cash payments exceeded the sum of the service and interest cost for 2018. For years in which settlement charges occur, benefits paid as lump sum distributions are included with settlements. The special termination benefit represents a voluntary early retirement window offered in the Multiemployer Plan during 2018 that provided an additional two years of service and two years of age benefit enhancement.
Fixed maturities: the fair value of U.S. Treasuries is estimated using quoted market prices available in active markets. The fair value of corporate securities is obtained from third party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and confirm they are utilizing observable market information.
Represents interests in several limited partnerships. As of December 31, 2018, a limited partnership with a fair value estimate of $0.6 million using net asset value per share as a practical expedient has not been classified in the fair value hierarchy above in accordance with fair value reporting guidance.
We participate with affiliated and unaffiliated employers in a 401(k) defined contribution plan, which covers substantially all employees. We match employee contributions and provide an additional discretionary contribution as summarized in the table below. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Our expense related to this plan totaled $2.9 million in 2018, $2.6 million in 2017 and $2.4 million in 2016.
In addition to benefits offered under the aforementioned benefit plans, we participate with affiliated and unaffiliated employers in a plan that provides group term life insurance benefits to retirees. We froze our portion of the plan on December 31, 2016 such that no new participants will enter the plan. During 2016, we recognized $0.2 million in curtailment gain related to freezing the group term life benefits to retirees. We also have two single-employer plans, frozen to new participants, that provide health and medical benefits to a small group of retirees. Postretirement benefit (income)/expense for this plan is allocated in a manner consistent with pension expense discussed above and totaled less than ($0.1) million in 2018 and ($0.1) million in 2017 and 2016. Changes in the underfunded portion of these plans, reported in other comprehensive income, aggregated less than ($0.1) million in 2018, ($0.1) million in 2017 and less than ($0.1) million in 2016. During 2018, our
We also have a Cash-Based Restricted Stock Unit Plan. We allocate a portion of the expense for these arrangements to affiliates; expense amounts below represent our share of these expenses. Compensation expense for arrangements under this plan totaled $1.7 million for 2018, $1.9 million for 2017 and $2.3 million for 2016. The income tax benefit recognized in the statements of operations for this arrangement totaled $0.6 million in 2018, $1.0 million in 2017 and $1.2 million in 2016.
The weighted average grant-date fair value per common share of restricted stock units granted was $71.20 in 2018, $69.10 in 2017 and $60.34 in 2016. Unrecognized compensation expense related to unvested restricted stock units based on the stock price at December 31, 2018 totaled $2.0 million. This expense is expected to be recognized over a weighted-average period of 1.89 years. Dividends are paid on restricted stock units upon vesting. Cash payments including dividends for restricted stock units totaled $3.3 million in 2018 and 2017 and 2.7 million in 2016.
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 or deferred cash-based stock units. Cash-based stock units outstanding under this plan totaled 25,016 at December 31, 2018 and 25,243 at December 31, 2017. Prior to 2012, deferred stock units were used instead of deferred cash-based stock units. Under this plan, we have deferred stock units outstanding totaling 50,194 at December 31, 2018 and 53,254 at December 31, 2017. At December 31, 2018, there were 105,687 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 certain officers of the Company were allowed to use their base salary and annual cash bonus to purchase deferred cash-based stock units. Cash-based stock units outstanding under this plan totaled 10,743 at December 31, 2018 and 11,661 at December 31, 2017. Prior to 2012, deferred stock units were used instead of deferred cash-based stock units. Under this plan, we have deferred stock units outstanding totaling 48,312 at December 31, 2018 and 50,208 at December 31, 2017. At December 31, 2018, shares of Class A common stock available for future issuance under this plan totaled 95,304. This plan was frozen to future deferrals on December 31, 2013.
We also have an Executive Excess 401(k) Plan under which officers of the Company who met salary guidelines and 401(k) contribution guidelines were allowed to purchase unregistered deferred stock units. Under this plan, we have deferred stock units outstanding totaling 3,327 at December 31, 2018 and 3,175 at December 31, 2017. This plan was frozen to future deferrals on December 31, 2013.
We also have an expense allocation agreement with Farm Bureau Property & Casualty Insurance Company for the use of property and equipment. Expense relating to this agreement totaled $0.3 million in 2018, 2017 and 2016.
We lease our home office properties under a 10-year operating lease, which expires in 2021, from a wholly-owned subsidiary of the IFBF. Future remaining minimum lease payments under this lease, as of December 31, 2018, are as follows: 2019 - $2.2 million, 2020 - $2.2 million and 2021 - $2.2 million. Rent expense for the lease totaled $4.3 million in 2018 and $4.1 million in 2017 and 2016. These amounts are net of $0.2 million in 2018, 2017 and 2016 in amortization of a deferred gain on the exchange of our home office properties for common stock in 1998. The remaining unamortized deferred gain totaled $0.5 million at December 31, 2018 and $0.7 million at December 31, 2017.
From time to time, assessments are levied on our insurance subsidiaries by life and health 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. Expenses for guaranty fund assessments, net of related premium tax offsets, totaled less than $0.1 million in 2018, 2017 and 2016.
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 as of the date the dividend is paid. 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 policyholders’ surplus as of the preceding year end, or (ii) the statutory net gain from operations of the insurer for the preceding calendar year. As shown in the tables above, at December 31, 2018, Farm Bureau Life’s net gain from operations of $100.8 million, exceeded 10% of statutory surplus; accordingly, that amount is the maximum available for distribution to FBL Financial Group, Inc. without regulatory approval during 2019. Timing of such dividends during the year is limited based on the timing of dividends paid within the preceding 12 months.
Amount represents a change in our deferred tax assets and liabilities due to the enactment of the Tax Act. See Note 5 to our consolidated financial statements for additional information.
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 December 31, 2018 and 2017 was allocated to the segments as follows: Annuity ($3.9 million) and Life Insurance ($6.1 million).
Net income and earnings per share for the quarter ended December 31, 2017 reflect the initial impact of the Tax Act. See Note 1 and Note 5 for more details. During 2018, we voluntarily changed our accounting policy for low income housing tax credit (LIHTC) investments from the equity method to the proportional amortization method, see Note 1 for more details. Prior periods have been adjusted.