U.S. net farm income is estimated to have increased 2.7% and farm real estate value is estimated to have increased 3.3% during 2017 according to recent U.S. Department of Agriculture estimates.
The U.S. 10-year Treasury yield decreased during 2017 from 2.45% at December 31, 2016 to 2.40% at December 31, 2017.
Continued uncertainty as to actions the United States Congress will take to address the national debt
Average invested assets and annualized yield including, beginning in 2017, investments held as securities and indebtedness of related parties; 2016 and 2015 amounts have been adjusted for comparability.
Our net income decreased in 2016, compared to 2015, primarily due to lower realized investment gains related to higher impairment charges as well as fewer sales of investments in a gain position. Net income and non-GAAP operating income were positively impacted by increased earnings from an increase in the volume of business in force, partially offset by lower other investment related-income and the impact of unlocking. See the discussion that follows for details regarding operating income by segment.
We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired, deferred sales inducements, unearned revenue reserve for participating life insurance and interest sensitive products, as well as certain reserves on interest sensitive products, as applicable, through an “unlocking” process. These assumptions typically consist of withdrawal and lapse rates, earned spreads and mortality with revisions based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process
The Annuity segment also includes advances on our funding agreements with the Federal Home Loan Bank of Des Moines (FHLB). Outstanding funding agreements totaled $415.1 million at December 31, 2017, $437.4 million at December 31, 2016 and $366.4 million at December 31, 2015.
The weighted average yield on cash and invested assets for individual annuities decreased in 2017 and 2016, compared to the prior periods, 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 2017, 2016 and 2015 in response to the declining portfolio yield and a change in the underlying product mix.
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.
Pre-tax non-GAAP operating income for the Life Insurance segment 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. Pre-tax non-GAAP operating income increased in 2016, compared to 2015, primarily due to the impact of an increase in the volume of business in force and a decrease in death benefits, partially offset by the impact of unlocking and lower other investment-related income.
The weighted average yield on cash and invested assets for interest sensitive life insurance products increased in 2017, compared to 2016, due to higher other investment-related income, partially offset by lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. The weighted average yield on cash and invested assets decreased in 2016, compared to 2015, due to
Average invested assets including, beginning in 2017, investments held as securities and indebtedness of related parties; 2016 and 2015 amounts have been adjusted for comparability.
Pre-tax non-GAAP operating income for the Corporate and Other segment increased in 2017, compared to 2016, primarily due to decreases in amortization of deferred acquisition costs from the impact of unlocking and market performance on our variable
business, partially offset by increases in death benefits, expenses and pre-tax losses on equity method investments. Pre-tax non-GAAP operating income increased in 2016, compared to 2015, primarily due to decreases in pre-tax losses on equity method investments and amortization of deferred acquisition costs from the impact of unlocking and market performance on our variable business, partially offset by increases in death benefits.
Other underwriting expenses in 2017 included $0.7 million in expenses associated with our routine five-year state insurance department examination. Other income and other expenses includes fees and expenses from sales of brokered products and operating results of our non-insurance subsidiaries, which include management, advisory, marketing and distribution services and leasing activities. Other expenses also increased $0.7 million in 2017 due to costs associated with expanding our wealth management offerings in the future.
In 2017, we assigned a portion of our investments held in securities and indebtedness of related parties from the Corporate and Other segment to the Life Insurance segment, resulting in a net decrease in pre-tax income in the Corporate and Other segment for 2017, compared to prior periods. These investments include equity interests in limited liability partnerships and corporations, accounted for under the equity method of accounting. Equity loss, before tax, consists of our proportionate share of gains and losses attributable to our relative ownership interest in these investments. See the Equity Income discussion that follows for additional information regarding these investments.
Equity income includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies over which we exhibit some control but have a minority ownership interest. We consistently use the most recent financial information available, which is generally for periods not more than three months prior to the ending date of the period for which we are reporting, to account for equity income. Several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of bond and equity securities held by the investment partnerships, the timing and success of initial public offerings or exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures. Our LIHTC investments geneally generate pre-tax losses and after-tax gains as the related tax credits are realized. The timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and the approval of tax credits.
In 2016, due to changes in product offerings since the last amendment to our policy for calculating non-GAAP operating income, we refined our calculation of non-GAAP operating income to include offsets relating to changes in interest sensitive product reserves. These offsets, net of tax, decreased non-GAAP operating income $0.5 million in 2017 and increased non-GAAP operating income $0.9 million in 2016. These offsets, net of tax, would have increased 2015 non-GAAP operating income by $0.1 million.
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. During 2017, we sold securities to reduce our exposure to a retailer and to the energy sector, resulting in realized losses of $0.9 million. During 2016, we sold securities to decrease our exposure to the energy sector, resulting in realized gains of $3.9 million and realized losses of $8.4 million. See "Financial Condition - Investments" and Note 2 to our consolidated financial statements included in Item 8 for details regarding our unrealized gains and losses on available-for-sale securities at December 31, 2017 and 2016.
Fixed maturity other-than-temporary credit losses for 2017 occurred in the construction sector due to an expected reduction in future revenue and the declining liquidity of an issuer. Impairment charges were also recognized on securities and indebtedness of related parties as the Tax Act resulted in a change in the expected future tax benefits of LIHTC entities.
Our investment portfolio increased 5.5% to $8,620.2 million at December 31, 2017, compared to $8,174.7 million at December 31, 2016. The portfolio increased due to positive cash flows from operating and financing activities as well as an increase of $187.6 million of net unrealized appreciation of fixed maturities during 2017. Additional details regarding securities in an unrealized gain or loss position at December 31, 2017 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."
We manage the investment portfolio to optimize risk-adjusted yield within the context of prudent asset-liability management. We evaluate multiple cash flow testing scenarios as part of this process. The Company's investment policy calls for investing primarily in high-quality fixed maturities and commercial mortgage loans.
State and political subdivision securities totaled $1,523.7 million, or 20.9% of total fixed maturities at December 31, 2017, and $1,499.2 million, or 21.4% of total fixed maturities at December 31, 2016, and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. We do not hold any Puerto Rico-related bonds. Exposure to the state of Illinois and municipalities within the state accounted for 1.5% of our total fixed maturities at December 31, 2017. As of December 31, 2017, our Illinois-related portfolio holdings were rated investment grade, and were trading at 111.0% of amortized cost. Our municipal bond exposure had an average rating of Aa2/AA and our holdings were trading at 110.2% of amortized cost at December 31, 2017.
Equity securities totaled $130.8 million at December 31, 2017 and $133.0 million at December 31, 2016. Gross unrealized gains totaled $7.7 million and gross unrealized losses totaled $0.3 million at December 31, 2017. At December 31, 2016, gross unrealized gains totaled $4.2 million and gross unrealized losses totaled $1.7 million on these securities. The unrealized losses during 2017 were attributable to non-redeemable perpetual preferred securities from issuers in the financial sector. See Note 2 to our consolidated financial statements included in Item 8 for further discussion regarding our analysis of unrealized losses related to these securities.
Assets held in separate accounts increased 9.2% to $652.0 million primarily due to market performance on the underlying investment portfolio. Other assets increased 21.8% to $112.1 million primarily due to increases in prepaid pension assets and property and equipment. Cash and cash equivalents increased 56.9% to $52.7 million primarily due to normal fluctuations in timing of payments made and received. Deferred acquisition costs decreased 8.4% to $302.6 million at December 31, 2017, primarily due to a $51.5 million increase in the impact of the change in net unrealized appreciation on fixed maturity securities during the period.
Future policy benefits increased 3.7% to $7,050.5 million at December 31, 2017 primarily due to an increase in the volume of annuity and life insurance business in force. Liabilities related to separate accounts increased 9.2% to $652.0 million primarily due to market performance on the underlying investment portfolio. Other liabilities increased 36.9% to $111.1 million primarily due to an increase in our liabilities for unsettled security trades. Deferred income taxes decreased 19.3% to $131.9 million at December 31, 2017, primarily due to remeasurement at the lower federal statutory tax rate under the Tax Act. See Note 5 to our consolidated financial statements included in Item 8 for additional discussion of the impact of the Tax Act.
Our stockholders' equity increased 16.9% to $1,388.8 million at December 31, 2017, compared to $1,188.2 million at December 31, 2016, primarily due to net income and the change in unrealized appreciation of fixed maturity securities during the period, partially offset by dividends paid.
At December 31, 2017, FBL's common stockholders' equity was $1,385.8 million, or $55.59 per share, compared to $1,185.2 million, or $47.61 per share at December 31, 2016. Included in stockholders' equity per common share is $11.43 at December 31, 2017 and $6.01 at December 31, 2016 attributable to accumulated other comprehensive income.
A majority of our insurance liabilities are backed by fixed maturity securities and mortgage loans. The weighted average life of the fixed maturity and mortgage loan portfolio, based on fair values, was approximately 10.9 years at December 31, 2017 and 11.0 years at December 31, 2016. Accordingly, the earned rate on the portfolio lags behind changes in market yields. The extent that the portfolio yield lags behind changes in market yields generally depends upon the following factors:
The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage- and asset-backed securities accelerate during periods of declining interest rates or decelerate during periods of increasing interest rates.
The following is a hypothetical illustration of the potential impact to average investment yields of a static 2.00% 10-year U.S. Treasury rate during 2018 and 2019 without any corresponding change in current investment spreads. The level of investments maturing and requiring reinvestment are based on projections of the current investment portfolios supporting these blocks of business without incorporation of new business. We estimate that this scenario would decrease average investment yields supporting our annuity business by 0.10% to 0.15% and our universal life business by 0.05% to 0.10% annually over the near term. In addition to not incorporating the impact of new business, this hypothetical illustration does not reflect the potential impact of policyholder behavior. An increase in net cash flows from that modeled will accelerate the pace at which the portfolio yield will decrease, and a decrease in the net cash flows from that modeled will slow down the pace at which the portfolio yield will decrease. Accordingly, actual investment yields could differ materially from those presented. Furthermore, the impact of a decline in portfolio yield on net income is dependent on our ability and willingness to adjust crediting rates.
Non-discretionary products primarily represent funding agreements, guaranteed investment contracts and supplementary contracts involving life contingencies for which we do not have the ability to adjust crediting rates.
Our exposure to interest rate risk stems largely from our annuity products as the cash flows of these products can vary significantly with changes in interest rates. We have holdings in fixed maturity and mortgage loan portfolios to offset the interest rate risk of our annuity products. We actively manage the projected cash flows and duration of these assets and liabilities by minimizing the difference between the two. While it can be difficult to maintain asset and liability durations that are perfectly matched in a dynamic environment, we have identified various strategies that can be implemented if duration mismatches exceed acceptable tolerances. The effective duration of the fixed maturity and mortgage loan portfolios backing our annuity products was 6.0 years at December 31, 2017 and at December 31, 2016. The effective duration of our annuity liabilities was approximately 7.0 years at December 31, 2017 and 6.3 years at December 31, 2016.
Equity price risk is limited due to the relatively small equity portfolio held at December 31, 2017. However, we are exposed to equity price risk in the following ways:
During 2017, our operating activities generated cash flows totaling $241.7 million, consisting of net income of $194.4 million adjusted for non-cash operating revenues and expenses netting to $47.3 million. We used cash of $235.4 million in our investing activities during 2017. The primary uses were $974.6 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $751.3 million in sales, maturities and repayments of investments. Our financing activities provided cash of $12.8 million during 2017. The primary financing source was $534.4 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $440.6 million for return of policyholder account balances on interest sensitive products and $81.4 million for dividends paid to stockholders.
We paid regular cash dividends on our common and preferred stock totaling $44.0 million in 2017, $41.9 million in 2016 and $39.8 million in 2015. In addition, we paid a special $1.50 per common share cash dividend in March 2017 totaling $37.4 million and a $2.00 per common share cash dividend in March 2016 and 2015 totaling $49.7 million $49.5 million, respectfully. It is anticipated that quarterly cash dividend requirements for 2018 will be $0.0075 per Series B redeemable preferred share and $0.46 per common share. In addition, we expect to pay a special dividend of $1.50 per common share in the first quarter of 2018. The level of common stock dividends will be analyzed quarterly and will be 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 $82.6 million in 2018. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2018. The parent company had available cash and investments totaling $64.2 million at December 31, 2017. FBL Financial Group, Inc. expects to rely on available cash resources, dividends from Farm Bureau Life and management fee income to make dividend payments to its stockholders and interest payments on its debt, as well as fund any capital initiatives such as stock repurchases. As of December 31, 2017, we had no other material commitments for capital expenditures.
Interest payments on debt totaled $4.9 million in 2017, 2016 and 2015. Interest payments on our debt outstanding at December 31, 2017 are estimated to be $4.9 million in 2018.
We manage the amount of capital held by our insurance subsidiaries to ensure we meet regulatory requirements. State laws specify regulatory actions if an insurer's risk-based capital (RBC) ratio, a measure of solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against a statutory "authorized control level" RBC at which point regulators have the option to assume control of the insurance company. The company action level RBC is 200% of the authorized control level and is the first point at which any action would be triggered. As of December 31, 2017, Farm Bureau Life's statutory total adjusted capital was $682.6 million, resulting in a RBC ratio of 552%, based on company action level capital of $123.6 million.
On a consolidated basis, we anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally-generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. Farm Bureau Life is 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, our level of statutory admitted assets and excess reserves and our willingness or capacity to hold activity-based FHLB common stock.
Amounts shown in this table are projected payments through the year 2067 that we are contractually obligated to pay to our life insurance and annuity contract holders. The payments are derived from actuarial models that assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency when applicable. These assumptions are based on our historical experience. The total of the contractual obligations relating to insurance contracts noted above differs from the liability balance on our consolidated balance sheet as follows:
Includes our estimated future contributions to defined and postretirement benefit plans. Contributions related to the qualified pension plan are included through 2018. No amounts related to the qualified pension plan are included beyond 2018 as the contribution amounts will be re-evaluated based on actual results.
The following is a brief summary of our significant accounting policies and a review of our most critical accounting estimates. For a complete description of our significant accounting policies, see Note 1 to our consolidated financial statements included in Item 8.
net pension asset. Our net pension asset could increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the discount rate.
At December 31, 2017, our fixed maturity securities classified as available for sale had a fair value of $7,292.0 million, with gross unrealized gains totaling $561.7 million and gross unrealized losses totaling $27.0 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, 2017, we had 249 fixed maturity and equity securities with gross unrealized losses totaling $27.3 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.
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 $1.1 million increase in pension expense and a 100 basis point increase would result in a $1.1 million decrease to pension expense. A 100 basis point decrease in the assumed discount rate would result in a $2.6 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.
The amount of deferred tax assets we hold is dependent on our estimate of the future deductibility of certain items. A valuation allowance against deferred income tax assets is established if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. No valuation allowance was recorded on deferred tax assets at December 31, 2017.
At December 31, 2017, we held gross deferred tax assets totaling $31.5 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.
We have audited FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2017, 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, 2017, 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 consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedules listed in the Index at Item 15(a) and our report dated March 1, 2018 expressed an unqualified opinion thereon.
The Company’s management 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. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
In February 2018 the FASB issued guidance allowing a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from changes in the federal income tax rate due to enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 2017 (Tax Act). Accounting guidance requires that deferred tax assets and liabilities, including those associated with components of AOCI, be remeasured during the period new tax laws are enacted, with any changes reflected as a component of income tax expense (benefit). Under the previous guidance retained earnings would reflect the full amount of the change and AOCI would not be adjusted for the portion of the change related to its components, leaving the unadjusted change “stranded” in AOCI. The new guidance allows AOCI be adjusted to reclassify these stranded tax effects to retained earnings.
In January 2016, the FASB issued guidance that amends certain aspects of the recognition and measurement of financial instruments. The new guidance primarily affects the accounting for equity investments, the presentation and disclosure requirements for financial instruments and the methodology for assessing the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale fixed maturity securities.
Adoption of the guidance will require us to recognize gains or losses from changes in the fair value of our equity security investments through the consolidated statement of operations rather than as unrealized gains or losses reflected in other comprehensive income. This guidance will be applied using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. Upon adoption, on January 1, 2018, we will reclassify $4.8 million of net unrealized investment gains, net of offsets, on our equity investments, from accumulated other comprehensive income to retained earnings as a cumulative effect adjustment.
In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance, including industry-specific guidance. Although insurance contracts are specifically excluded from the scope of this guidance, almost all entities will be affected to some extent by the increase in required disclosures. The new guidance is based on the principle that an entity should recognize revenue to reflect the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires 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.
The new guidance could have impacted our non-insurance contract revenues, primarily net commissions on products we broker for others ,which are insignificant to our operations. We have evaluated those contracts and concluded that none will be impacted by the new guidance; accordingly, we will not be required to report a cumulative effect adjustment to opening retained earnings on January 1, 2018, under the modified retrospective method of adoption.
In June 2016, the FASB issued guidance amending the accounting for the credit impairment of financial instruments. Under the new guidance, impairment losses are required to be estimated using an expected loss model under which a valuation allowance is established and adjusted over time. The valuation allowance will be based on the probability of loss over the life of the instrument, considering historical, current and forecasted information. The new guidance differs significantly from the incurred loss model used today, and will result in the earlier recognition of impairment losses. The new guidance may also increase the volatility of earnings to the extent actual results differ from the assumptions used in the establishment of the valuation allowance. The financial instruments for which we will be required to use the new model include but are not limited to, mortgage loans, lease receivables and reinsurance recoverables. Our available-for-sale fixed maturities will continue to apply the incurred loss model. However, rather than impairment losses resulting in a permanent reduction of carrying value as they do today, such losses will be in the form of a valuation allowance, which can be increased in the case of future credit losses or decreased should conditions improve.
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. This guidance will be applied using a modified retrospective approach by recording a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption.
Premiums and discounts for all fixed maturity securities are amortized/accreted into investment income over the life of the security using the effective interest method. Amortization/accrual of premiums and discounts on mortgage- and asset-backed securities incorporates prepayment assumptions to estimate the securities' expected lives. Subsequent revisions in assumptions are recorded using the retrospective or prospective method. Under the retrospective method used for mortgage-backed and asset-backed securities of high credit quality (ratings equal to or greater than "AA" or an equivalent rating by a nationally recognized rating agency at the time of acquisition or that are backed by a U.S. agency), amortized cost of the security is adjusted to the amount that would have existed had the revised assumptions been in place at the date of acquisition. The adjustments to amortized cost are recorded as a charge or credit to net investment income. Under the prospective method, which is used for all other mortgage-backed and asset-backed securities, future cash flows are estimated and interest income is recognized going forward using the new internal rate of return.
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), the carrying value of the mortgage loan is reduced to its fair value, which may be
Our real estate is held for investment and reported at cost less allowances for depreciation, as applicable. The carrying value of these assets is subject to regular review. For properties held for investment, 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. No properties were held for investment with impairment charges as of December 31, 2017 or as of December 31, 2016.
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 accumulated other comprehensive income for the non-credit loss component. If we intend to sell or believe we will be required to sell a fixed maturity security before its recovery, the full amount of the impairment write down to fair value is charged to earnings. For all equity securities, the full amount of an OTTI write down is recognized as a realized loss on investments in the consolidated statements of operations and the new cost basis for the security is equal to its fair value.
We monitor the financial condition and operations of the issuers of fixed maturities and equity securities that could potentially have a credit impairment that is OTTI. In determining whether or not an unrealized loss is OTTI, we review factors such as:
Other assets at December 31, 2017 and 2016, 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 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 this analysis, we have determined our goodwill was not impaired as of December 31, 2017 or 2016.
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 29% of receipts from policyholders during 2017 (2016 - 32% and 2015 - 31%) and represented 10% of life insurance in force at December 31, 2017 and 11% at December 31, 2016 and 2015.
Deferred income tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted tax rates expected to be in effect when the assets or liabilities are recovered or settled. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. A valuation allowance against deferred income tax assets is established if it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
Revenues for interest sensitive and variable products consist of policy charges for the cost of insurance and product guarantees, 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 expense over the life of the policy.
Comprehensive income includes net income, as well as other comprehensive income items not recognized through net income. Other comprehensive income includes unrealized gains and losses on our available-for-sale securities as well as the underfunded obligation for certain retirement and postretirement benefit plans. These items are included in accumulated other comprehensive income, net of tax and other offsets, in stockholders' equity. The changes in unrealized gains and losses reported in our Statement of Comprehensive Income (Loss), excludes net investment gains and losses included in net income that represent transfers from unrealized to realized gains and losses. These transfers are further discussed in Note 7. The components of the underfunded obligation for certain retirement and postretirement benefit plans are provided in Note 8.
Corporate securities include hybrid preferred securities with a fair value of $17.5 million at December 31, 2017 and $23.3 million at December 31, 2016. Corporate securities also include redeemable preferred stock with a fair value of $21.7 million at December 31, 2017 and $24.5 million at December 31, 2016.
Unrealized losses decreased during 2017 primarily due to a decrease in treasury rates as well as a general decrease in credit spreads. We do not consider securities to be OTTI when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality when recovery of all amounts due under the contractual terms of the security is anticipated. Based on our intent not to sell or our belief that we will not be required to sell these securities before recovery of their amortized cost basis, we do not consider these investments to be OTTI at December 31, 2017. We will continue to monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified.
Our largest unrealized loss was from a retailer and totaled $2.6 million at December 31, 2017.
Our mortgage loan portfolio consists of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to-value ratio that provides sufficient collateral to absorb losses should we be required to foreclose and take possession of the collateral. In order to identify impairment losses, management maintains and regularly reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and establish an estimated loss, if needed, for each impaired loan identified. An estimated loss is needed for loans for which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements.
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 2017 or 2016.
The following table sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which the non-credit portion of the OTTI was recognized in other comprehensive income (loss) and corresponding
changes in such amounts. Credit loss impairments with no portion of the loss recognized in other comprehensive income, such as securities for which OTTI were measured at fair value, are excluded from the table.
Our primary derivative exposure relates to purchased call options, which provide an economic hedge to the embedded derivatives in our indexed annuity and universal life insurance products. We also have embedded derivatives within our modified coinsurance agreements as well as an interest-only fixed maturity investment. We do not apply hedge accounting to any of our derivative positions, and they are held at fair value.
Derivative income (loss) is reported in net investment income except for the change in fair value of the embedded derivatives on our indexed annuity and universal life products, which is reported in interest sensitive product benefits.
Level 2 fixed maturities consist of corporate, mortgage- and asset-backed, United States Government agencies, state and political subdivisions and private placement corporate securities with observable market data, and in some circumstances recent trade activity. When quoted prices of identical assets in active markets are not available, our first priority is to obtain prices from third party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2.
We follow a “pricing waterfall” policy, which establishes the pricing source preference for a particular security or security type. The order of preference is based on our evaluation of the valuation methods used, the source's knowledge of the instrument and the reliability of the prices we have received from the source in the past. Our valuation policy dictates that fair values are initially sought from third party pricing services. If our review of the prices received from our preferred source indicates an inaccurate price, we will use an alternative source within the waterfall and document the decision. In the event that fair values are not available from one of our external pricing services or upon review of the fair values provided it is determined that they may not be reflective of market conditions, those securities are submitted to brokers familiar with the security to obtain non-binding price quotes. Broker quotes tend to be used in limited circumstances such as for newly issued, private placement corporate bonds and other instruments that are not widely traded. For those securities for which an externally provided fair value is not available we use cash flow modeling techniques to estimate fair value.
Level 2 equity securities consist of common stock issued by the Federal Home Loan Bank of Des Moines (FHLB), with estimated fair value based on the current redemption value of the shares and non-redeemable preferred stock. Estimated fair value for the non-redeemable preferred stock is obtained from external pricing sources using a matrix pricing approach.
Policy loans are not measured at fair value on a recurring basis. Policy loans are a Level 3 measurement as there is no current market since they are specifically tied to the underlying insurance policy. The loans are relatively risk free as they cannot exceed the cash surrender value of the insurance policy. Fair values are estimated by discounting expected cash flows using a risk-free interest rate based on the U.S. Treasury curve. An increase in the risk-free interest rate would result in a decrease in discounted cash flows used, and accordingly the fair value of the loan.
Level 2 other investments measured at fair value on a recurring basis include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral received. Level 3 other investments, which are not measured at fair value on a recurring basis, include a promissory note that is priced internally using a discounted cash flow based on our assessment of the credit risk of the borrower.
The tables above exclude certain securities with fair value based on non-binding broker quotes for which we could not reasonably obtain the quantitative unobservable inputs.
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 $6.9 million at December 31, 2017 and $5.8 million at December 31, 2016. The weighted average age of the contract holders with GMDB, IDB or GMIB rider exposure was 66 years at December 31, 2017 and 62 years at December 31, 2016. Benefits paid for GMDBs, IDBs and GMIBs totaled $0.8 million for 2017, $0.5 million for 2016 and $0.4 million for 2015.
In 2015, the other items affecting the effective tax rate include a $1.8 million tax benefit resulting from the disposition of an equity method investment, for which the carrying value consisted solely of nondeductible goodwill. In 2017, the other items affecting the effective tax rate include $0.6 million in tax benefits from equity-based compensation deductions. Prior to 2017, these tax benefits were recorded to stockholders equity, so they did not impact the effective tax rate.
Deferred tax assets and liabilities at December 31, 2016 are recorded at a 35% tax rate, the enacted tax rate at that time. Deferred taxes at December 31, 2017 are recorded at a 21% tax rate, as under the Tax Act this is the enacted rate that will be in effect when the temporary differences are expected to reverse.
At December 31, 2017, we had non-life net operating loss carryforwards for federal income tax purposes totaling $15.5 million, which expire beginning in 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.
We invest in LIHTC, which generate pre-tax losses but after-tax gains as the related tax credits are realized. The timing of the realization of tax credits is subject to fluctuation from period to period due to the timing of housing project completions and the approval of tax credits. These tax credits, which are reported in equity income, totaled $14.2 million in 2017, $14.1 million in 2016 and $13.5 million in 2015.
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. As of December 31, 2017 and 2016, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
We periodically repurchase our Class A common stock under programs approved by our Board of Directors. These repurchase programs authorize us to make repurchases in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Under these programs, we repurchased 3,511 shares of stock for $0.2 million in 2017, 10,322 shares of stock for $0.6 million in 2016 and 66,904 shares of stock for $3.7 million in 2015. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice. There was $49.2 million remaining available for repurchases at December 31, 2017 under the active repurchase program.
We have agreed that we will not pay dividends on the Class A or Class B Common Stock, nor on the Series B Preferred Stock, if we are in default of the Subordinated Deferrable Interest Note Agreement dated May 30, 1997 with FBL Financial Group Capital Trust. We are compliant with all terms of this agreement at December 31, 2017. See Note 6 for additional information regarding this agreement.
Reclassification of the initial impact of the remeasurement of deferred tax assets and liabilities upon enactment of the Tax Act. See discussion of this accounting change as discussed in Note 1.
Net periodic pension cost of the Multiemployer Plan is allocated between participating employers on a basis of time incurred by the respective employees for each employer. Such allocations are reviewed annually. The Multiemployer Plan is not subject to collective bargaining agreements, a financial improvement plan or a rehabilitation plan. No surcharges were required to be paid to the Multiemployer Plan during 2017, 2016 or 2015. We are the primary employer in the Multiemployer Plan, providing more than 5 percent of the total contributions during 2017, 2016 and 2015.
Pension settlement charges were recognized after determining the total cash payments exceeded the sum of the service and interest cost for 2015.
The Plans' prior service costs are amortized using a straight-line amortization method over the average remaining service period or life expectancy of the employees, depending upon who is covered under each plan. For actuarial gains and losses, we use a corridor (10% of the greater of the projected benefit obligation or the market value of plan assets) to determine the amounts to
Our expected long-term return on plan assets represents the rate of earnings expected in the funds invested to provide for anticipated benefit payments. We have analyzed the expected rates of return and determined that the long-term return assumption should be revised downward in 2017 to 6.60%. On September 30, 2015, the plan incurred a remeasurement due to settlement accounting. This resulted in a discount rate of 4.05% being used for the nine months ended September 30, 2015 and 4.52% for the three months ended December 31, 2015. We also completed an actuarial study of our assumptions during 2015. At the remeasurement, this resulted in reducing the expected long-term return on plan assets from 7.00% to 6.75% and increasing assumed annual salary increases from 3.00% to 3.31%.
The Multiemployer 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 through annuity contracts with Farm Bureau Life, which are presented as funded annuity contracts below. For 2017, excluding the funded annuity contracts, we employed a long-term investment strategy of diversifying the Multiemployer Plan assets with 55% in fixed income investments, 40% in equities and 5% in alternative investments. At December 31, 2017, the Multiemployer Plan assets were invested approximately 59% in fixed income investments, 38% in diversified equities and 3% in alternative investments. The fixed income investments 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. The alternative investments consist of interests in limited partnerships that own various liquid and illiquid assets. Our investment strategy is to (1) achieve a long-term return sufficient to satisfy all Multiemployer Plan obligations, (2) assume a prudent level of risk and (3) maintain adequate liquidity. The expected return on Multiemployer Plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the Multiemployer Plan. 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.
Group and funded annuity contracts: contract value is equivalent to fair value, as the interest-crediting rates are periodically reset to align with market rates at the discretion of the issuer.
million in 2015. Changes in the underfunded portion of these plans, reported in other comprehensive income, aggregated ($0.1) million in 2017 and less than ($0.1) million in 2016 and 2015.
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 $1.9 million for 2017, $2.3 million for 2016 and $1.7 million for 2015. The income tax benefit recognized in the statements of operations for this arrangement totaled $1.0 million in 2017, $1.2 million in 2016 and $0.9 million in 2015.
The intrinsic value of options exercised during the year totaled $0.8 million for 2017, $3.2 million for 2016 and $4.5 million for 2015.
The weighted average grant-date fair value per common share of restricted stock units granted was $69.10 in 2017, $60.34 in 2016 and $52.19 in 2015. Unrecognized compensation expense related to unvested restricted stock units based on the stock price at December 31, 2017 totaled $2.9 million. This expense is expected to be recognized over a weighted-average period of 1.79 years. Dividends are paid on restricted stock units upon vesting. Cash payments including dividends for restricted stock units totaled $3.3 million in 2017 and $2.7 million in 2016 and 2015.
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 11,661 at December 31, 2017 and 16,323 at December 31, 2016. 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 50,208 at December 31, 2017 and 63,909 at December 31, 2016. At December 31, 2017, shares of Class A common stock available for future issuance under this plan totaled 97,533. 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 2017 and 2016 and $0.7 million in 2015.
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 2017, 2016 and 2015.
We analyze our segment results based on pre-tax non-GAAP operating income. Accordingly, income taxes are not allocated to the segments. In addition, non-GAAP operating results are reported net of transactions between the segments. Adjustments to net income are net of amortization of unearned revenue reserves, deferred acquisition costs and value of insurance in force acquired, as well as changes in interest sensitive product reserves and income taxes attributable to these items. While not applicable for the periods reported herein, our non-GAAP operating income policy also calls for adjustments to net income relating to the following:
In 2016, due to changes in product offerings since the last amendment to our policy for calculating non-GAAP operating income, we refined our calculation of non-GAAP operating income to include offsets relating to changes in interest sensitive product reserves. These offsets, net of tax, decreased non-GAAP operating income $0.5 million in 2017 and increased non-GAAP operating income $0.9 million in 2016. These offsets, net of tax, not taken into account in the computation of non-GAAP operating income for 2015 would have increased non-GAAP operating income $0.1 million.
Cost of insurance charges in the Life Insurance segment decreased in 2017, compared to 2016, due to a $3.2 million correction of fees charged during prior periods on a closed block of business.
Changes in amortization of policy initiation fees, compared to the prior year periods, is primarily due to the impact of unlocking assumptions used in the calculation of unearned revenue reserves.
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.