We analyze operations by reviewing financial information regarding our primary products that are aggregated in Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes our wealth management business, various support operations, corporate capital and other product lines that are not currently underwritten by the Company. We analyze our segment results based on pre-tax adjusted operating income, which excludes the impact of certain items that are included in pre-tax net income. Pre-tax adjusted operating income is the same basis used for segment reporting under U.S. generally accepted accounting principles (GAAP). We also analyze operations using adjusted operating income on a post-tax basis, which excludes the initial impact from tax law changes. Adjusted operating income on a post-tax basis is not a measure used in financial statements prepared in accordance with GAAP, but is a common life insurance industry measure of performance. We have included a reconciliation to the comparable GAAP measure herein. See Note 13 to our consolidated
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 applicable, through an “unlocking” process. These assumptions typically consist of withdrawal and lapse rates, rider utilization, 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 typically takes place during the third quarter. See the discussion that follows for further details of the unlocking impact on our results in 2020, 2019 and 2018.
•The amount of spread (excess of net investment income earned over interest credited) we earn on contract holders’ general account balances.
The following are key measures which partially illustrate the impact from COVID-19 on the economy:
•The yield on the 10-year U.S. Treasury Note decreased to 0.93% at December 31, 2020 from 1.92% at December 31, 2019.
The COVID-19 pandemic created several operational challenges during 2020. Our initial focus was to quickly transition to working at home, safeguarding employees and reducing the risk of business interruption. Social distancing impacted our sales process between our agents and client/members. The launch of our accelerated underwriting process during the third quarter 2020, led to some processing delays with a third-party provider, which the vendor attributed to be partially due to COVID-19. We took action to address the delays for our client/members and worked with the vendor to remediate the accelerated underwriting process.
•We incurred death benefits, net of reinsurance and reserves released, with COVID-19 reported as a cause of death totaling $11.2 million during 2020.
•Expense management was a focus, which partially offset the pandemic’s financial impact.
•We conducted tactical sales of investments to reduce exposure to certain industries impacted by the economic downturn.
Lower fixed maturity interest rates driven by lower U.S. Treasury interest rates resulted in an increase in the fair value of our fixed maturity securities during 2020. The increase in fair value of our fixed maturity securities at December 31, 2020, compared with December 31, 2019, resulted in an increase in our book value per common share to $69.24 at December 31, 2020 from $60.12 at December 31, 2019.
Our liquidity position remains strong with cash being generated by operations and financing activities. In addition, a significant portion of our liquid fixed maturity securities are in an unrealized gain position. See the “Investments” and “Liquidity and Capital Resources” discussions that follow.
(2)Amount represents the transaction expenses relating to FBL Financial Group's proposed merger transaction.
(3)Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves and deferred acquisition costs, as well as changes in interest sensitive product reserves and income taxes attributable to these items.
(4)Adjusted operating income is a non-GAAP measure of earnings, see Overview section above for additional information.
(6)Annualized yield is the actual investment earnings during the year divided by average invested assets. Annualized yield is used as a measure of investment performance during the reporting periods.
(7)Amounts represent the estimated effect of market performance of policyholder funds invested in the separate accounts on the value of deferred acquisition costs, deferred sales inducements and unearned revenue reserve, net of tax.
(8)Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions on mortgage and other asset-backed securities.
Net income in 2020, compared to 2019, was negatively impacted by changes in net realized gains/losses from investments, the change in fair value of derivatives and expenses incurred during 2020 related to the proposed Merger. Net income and adjusted operating income decreased in 2020, compared to 2019, due to an increase in death benefits, net of reinsurance and reserves released, primarily due to COVID-19, the impact of unlocking actuarial assumptions and less spread income earned from lower yields on invested assets. These decreases in net income and adjusted operating income were partially offset by an increase in equity income and a reduction in other underwriting expenses and a benefit from an increase in the volume of business in force.
Footnotes applicable to the segment discussion that follows are as follows:
(2)Average invested assets, including applicable investments held as securities and indebtedness of related parties and cash equivalents, is the average of investment balances at the beginning of the reporting period and as of the end of each quarter throughout the reporting period. Average invested assets are used in the calculation of the annualized investment yield.
(3)Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions on mortgage and other asset-backed securities.
(8)Average aggregate interest sensitive life account value is a measure used to monitor business growth in our universal life product lines and is calculated using a simple average of policyholder account values as of the beginning and end of the reporting period.
(10)Average aggregate interest sensitive account value is a measure used to monitor business volume of our variable universal life and variable annuity product lines and is calculated using a simple average of policyholder account values as of the beginning and end of the reporting period.
(11)Amounts represent the estimated effect of market performance of policyholder funds invested in the separate accounts on actual and expected profits and the related impact on the value of deferred acquisition costs, deferred sales inducements and unearned revenue reserve.
The individual annuity withdrawal rate decreased in 2020, compared to 2019, partially due to the suspension of required minimum distributions by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The individual annuity
Amortization of deferred acquisition costs and deferred sales inducements changed in 2020 and 2019, compared to prior periods, due to unlocking actuarial assumptions and changes in actual and expected income earned on the underlying business. Unlocking generally reflects changes in our projected earned spreads, policy lapses and mortality assumptions. The impact of improved persistency also resulted in less amortization during 2020, compared with 2019. Unlocking in 2019 was driven by a change in our withdrawal rate assumptions. The impact of unlocking interest sensitive benefit reserve assumptions during 2020, was due primarily to a revision of our expectation of policyholder utilization of the guaranteed living withdrawal benefit rider on index annuities. No unlocking was considered to be necessary for interest sensitive benefit reserves during 2019 or 2018.
Other underwriting expenses decreased in 2020, compared to 2019, due to various expense management actions including deferral of projects, reduction in the use of consultants and limiting replacement of employees that left the company. In addition, travel expenses were lower due to COVID-related travel restrictions. In 2018, we offered a voluntary early retirement program to certain employees. The impact of the program to the Annuity segment was a $1.9 million increase in other underwriting expenses and a $0.6 million increase in investment expenses, which lowered net investment income.
Death benefits, net of reinsurance and reserves released, vary from year-to-year due to changes in claim counts and average claim size. In 2020, death benefits in the Life Insurance segment include COVID-19 related claims, net of reinsurance and reserves released, totaling $8.8 million.
Amortization of deferred acquisition costs, deferred sales inducements and unearned revenue reserves changed in 2020 and 2019, compared to prior periods, due to unlocking actuarial assumptions and changes in actual and expected profits on the underlying business, which included increased mortality in 2020. Amortization, as well as reserves held on certain interest sensitive products, also changed due to the impact of unlocking. Unlocking generally reflects changes in our projected earned spreads, policy lapses, premium persistency and mortality assumptions. The 2020 unlocking charge was primarily due to updating our assumptions related to spread income, with the expectation of lower market interest rates than previously assumed. During 2019, unlocking also included the extension of the deferred acquisition cost amortization period for our participating whole life insurance business based on an increase in persistency rates.
Other underwriting expenses decreased in 2020, compared to prior periods, due to various expense management actions including deferral of projects, reduction in the use of consultants and limiting replacement of employees that left the company. In addition, travel expenses were lower due to COVID-related travel restrictions. 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. Excluding the impact of the voluntary early retirement program in 2018, other underwriting expenses increased in 2019, compared to 2018, due to expenses associated with system enhancements and various other general expense increases associated with the growth of our business.
Amortization of deferred acquisition costs increased in 2020, compared to 2019, primarily due to the impact of market performance on our variable business. Amortization of deferred acquisition costs, deferred sales inducements and unearned revenue reserves decreased in 2019, compared to 2018, primarily due to favorable market performance on our variable
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 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.
The level of gains and losses for these entities normally fluctuates from period to period depending on the prevailing economic environment, changes in the value of underlying investments 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. Equity income, net of related taxes was $5.9 million in 2020, $3.5 million in 2019 and $4.4 million in 2018. Equity income included in the Corporate segment in 2020 includes a pre-tax gain of $5.5 million from one transaction in an investment partnership. See Note 2 to our consolidated financial statements included in Item 8 for further information.
The effective tax rate on adjusted operating income was 13.7% for 2020, 13.6% for 2019 and 13.9% for 2018. The effective tax rates differ from the federal statutory rate of 21% primarily due to the impact of low income housing tax credit (LIHTC) investments and tax-exempt investment income. The effective rate for 2019 also differs from the federal statutory rate due to non-recurring tax benefits of $2.5 million resulting from the execution of a tax planning strategy to adjust our tax-basis policy reserves. 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 the timing of investment sales and credit losses, changes in the carrying value of investments held at fair value as well as changes in allowances for credit losses. 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, 2020 and 2019.
We monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certain investment grade securities for which we have concerns regarding credit quality that could potentially require a credit allowance. See additional details regarding write downs and our methodology for evaluating investments for credit allowance in Notes 1 and 2 to our consolidated financial statements included in Item 8.
The change in allowance for credit losses in the finance sector reflects two fixed maturity securities with an allowance established as the difference of the investments’ amortized cost and fair value. The improvement in the mortgage loan allowance for credit losses primarily reflects a reduction in mortgage loan investments since December 31, 2019, as well as improvement in the loss factors used to estimate the allowance. See Note 2 “Investment Operations” to our consolidated financial statements for more detail on the allowance for credit losses.
Fixed maturity other-than-temporary credit losses for 2019 included an asset-backed bond due to a decline in expected cash flows.
The table above summarizes selected information for fixed maturity purchases. The effective annual yield shown is the yield calculated to the “first-call” date. For non-callable bonds, the first-call date is always the maturity date. 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.
(1)Equivalent ratings are based on those provided by nationally recognized rating agencies with some exceptions for certain residential mortgage, commercial mortgage- and asset-backed securities 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.
The commercial mortgage-backed securities (CMBS) are primarily sequential securities. CMBS typically have cash flows that are less subject to refinance risk than residential mortgage-backed securities principally due to prepayment restrictions on many of the underlying commercial mortgage loans.
(1) The CMBS portfolio included government agency-backed securities with a carrying value of $911.4 million at December 31, 2020 and $845.5 million at December 31, 2019. Also included in the CMBS portfolio are military housing bonds totaling $170.0 million at December 31, 2020 and $163.9 million at December 31, 2019. 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.
stress testing has indicated that the weighted average constant default rate (CDR) of our portfolio without suffering loss is 17%.
The CDR is the constant default rate (annually) that a CLO must suffer before our tranche takes its first dollar loss.
Mortgage loans totaled $994.1 million at December 31, 2020 and $1,011.7 million at December 31, 2019. 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 212 at December 31, 2020 and 209 at December 31, 2019. In 2020, new loans ranged from $2.8 million to $15.0 million in size, with an average loan size of $6.1 million, an average loan term of 15 years and an average net yield of 3.37%. 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 2.1% that are interest-only loans at December 31, 2020. At December 31, 2020, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 49.9% and the weighted average debt service coverage ratio was 1.7 based on the results of our 2019 annual study. See Note 2 to our consolidated financial statements included in Item 8 for further discussion regarding our mortgage loans.
Future policy benefits increased at December 31, 2020 compared to the prior year end primarily due to an increase in the volume of life business in force. Deferred income taxes increased during the same period primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments.
Our stockholders’ equity increased at December 31, 2020 compared to the prior year end primarily due to the change in unrealized appreciation of fixed maturity securities during the period and net income, partially offset by dividends paid.
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 11.0 years at December 31, 2020 and 11.3 years at December 31, 2019. 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:
A prolonged period of low interest rates may result in increased downward pressure on average earned yields for the investment portfolios supporting our annuity and universal life business as higher-yielding fixed maturity securities and mortgages are sold, mature or are prepaid and replaced with lower-yielding investments. Lower investment income may cause us to lower crediting rates on our spread-based annuity and life insurance products, which in turn may reduce their attractiveness to potential customers. Failure to lower crediting rates as portfolio investment yields decline, either by choice, to ensure our spread-based
•We earn mortality and expense fee income based on the value of our separate accounts at annual rates ranging from 0% to 1.45% for 2020, 2019 and 2018. As a result, revenues from these sources fluctuate with changes in the fair value of the equity, fixed maturity and other securities held by the separate accounts.
•Our profitability would be impacted if there were little or no gains in the entire series of options purchased over the expected life of an indexed product, as we would incur expenses for credited interest over and above our option costs.
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. Our policyholder obligations are our largest contractual obligations. The differences between contractual obligations and the balance sheet values of our insurance liabilities are primarily the accumulation of interest and death benefits in excess of related policyholder reserves.
We paid regular cash dividends on our common and preferred stock totaling $49.2 million in 2020, $47.5 million in 2019 and $45.8 million in 2018. In addition, we paid a special $1.50 per common share cash dividend in March 2020, March 2019 and March 2018 totaling $37.0 million, $37.0 million, and $37.3 million, respectively. Under the Merger Agreement, the Company is permitted to declare and pay, and has agreed to declare and pay, quarterly cash dividends of $0.52 per share of common stock. We will also pay the quarterly cash dividend of $0.0075 per Series B redeemable preferred share. The common stock dividend rates are analyzed quarterly and are dependent upon our capital and liquidity positions. In addition, alternative uses of excess capital may impact future dividend levels. Assuming these quarterly dividend rates, the common and preferred dividends would total approximately $50.9 million in 2021. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2021. The parent company had available cash and investments totaling $44.2 million at December 31, 2020. 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, which provides additional liquidity for either entity up to $20.0 million. We had no other material commitments for capital expenditures as of December 31, 2020.
Interest payments on our debt totaled $4.9 million in 2020, 2019 and 2018. Interest payments on our debt outstanding at December 31, 2020 are estimated to be $4.9 million in 2021.
We manage the amount of capital held by our insurance subsidiaries to ensure they 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, 2020, Farm Bureau Life’s statutory total adjusted capital was $696.1 million, resulting in an RBC ratio of 528%, based on company action level capital of $131.8 million.
Under the Merger Agreement, described in Part I, Item 1. Business, “Merger Agreement,” we are required to pay a termination fee of up to $18.5 million, if the Merger Agreement is terminated in specified circumstances, and reimburse the out-of-pocket expenses of FBPCIC, Merger Sub and their respective affiliates up to a maximum of $5.3 million, if the Merger Agreement is terminated in specified circumstances.
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred acquisition costs, are capitalized and amortized into expense. We also record an asset, value of insurance in force acquired, for the cost assigned to insurance contracts when an insurance company is acquired. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued. For participating traditional life insurance and interest sensitive products, these costs are generally amortized in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is periodically adjusted or unlocked when we revise key assumptions used in the calculation. For example, deferred acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
Fixed maturities - available for sale Excluding U.S. Government treasury securities, very few of our fixed maturity securities trade on the balance sheet date. For those securities without a trade on the balance sheet date, fair values are determined using valuation processes that require judgment. Fair values are obtained primarily from a variety of independent pricing sources, whose results we evaluate internally. Details regarding valuation techniques and processes are summarized in Notes 1 and 3 to our consolidated financial statements included in Item 8. At December 31, 2020, our fixed maturity securities classified as available for sale had a fair value of $8,283.7 million, with gross unrealized gains totaling $1,123.2 million and gross unrealized losses totaling $14.0 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.
As discussed in Note 2 to our consolidated financial statements included in Item 8, we believe that all credit allowance losses within the portfolio have been recognized.
During periods in which we have deferred tax assets related to unrealized investment losses, we utilize tax planning strategies, including a buy-and-hold investment philosophy for securities experiencing unrealized losses and the sale of appreciated securities to ensure the deductibility of such losses in future periods. At December 31, 2020, we held gross deferred tax assets totaling $45.0 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, 2020, 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, 2020, 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, 2020, 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 24, 2021 expressed an unqualified opinion thereon.
Auditing management’s estimate of the future contract benefits liability related to those products with secondary guarantees involved the use of actuarial specialists and a high degree of subjectivity in evaluating management’s methods and assumptions used to develop those estimates.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the process to estimate the liability balance, including, among others, controls related to the review and approval processes that management has in place for the assumptions used in estimating the secondary guarantee liability. This included testing controls related to management’s evaluation of the need to update assumptions based on the comparison of actual Company experience to previous assumptions
The Company’s deferred acquisition costs totaled $176.1 million at December 31, 2020. The carrying amount of the deferred acquisition costs is the total costs deferred less amortization. As disclosed in Note 1 to the consolidated financial statements, a portion of the deferred acquisition costs are being amortized in proportion to expected gross profits or estimated gross margins of the underlying contracts. There is a significant amount of uncertainty inherent in calculating EGPs as the calculation includes management’s best estimate of assumptions such as expected mortality experience, policyholder lapse rates, premium persistency, and yield of investments. EGMs include similar assumptions as the components of EGPs. Management’s assumptions are adjusted, also known as unlocking, over time for emerging experience and expected trends. The unlocking results in amortization being recalculated, using the new assumptions for EGPs or EGMs that results either in additional or less cumulative amortization expense
Auditing management’s estimate of the deferred acquisition costs involved the use of actuarial specialists and a high degree of subjectivity in evaluating management’s methods and assumptions used to calculate EGPs or EGMs.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the process to estimate the deferred acquisition costs balance, including, among others, controls related to the review and approval processes that management has in place for the assumptions used in estimating the EGPs and EGMs. This included testing controls related to management’s evaluation of the need to update assumptions based on the comparison of actual Company experience to previous assumptions
(1)Other comprehensive income (loss) is recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities.
On January 11, 2021, the Company announced that it reached an agreement with Farm Bureau Property & Casualty Insurance Company (FBPCIC), an Iowa domiciled stock property and casualty insurance company pursuant to which FBPCIC will acquire all of the outstanding Class A common shares, without par value, and Class B common shares, without par value (collectively, the Common Shares), of the Company that are not currently owned or controlled by FBPCIC or IFBF, an Iowa non-profit corporation, pursuant to the terms of the Agreement and Plan of Merger (the Merger Agreement), by and among the Company, FBPCIC, and 5400 Merger Sub, Inc., an Iowa corporation (Merger Sub). IFBF and FBPCIC currently own approximately 61% of the outstanding Common Shares. The Merger Agreement provides for the merger of Merger Sub with and into the Company, with the Company surviving the merger (the Merger).
Consummation of the Merger is subject to certain specified closing conditions, including approval by the Company’s shareholders, expiration or termination of applicable waiting periods, clearance by the Insurance Commissioner of the State of Iowa and approval by the Financial Industry Regulatory Authority as further described in the Merger Agreement.
See Note 9 to our consolidated financial statements for information regarding management and other agreements between the Company, IFBF and FBPCIC.
Description Date of adoption Effect on our consolidated financial statements or other significant matters
In January 2016, the FASB issued guidance that amended certain aspects of the recognition and measurement of financial instruments. The new guidance primarily affected the accounting for equity securities, which are now carried at fair value with valuation changes recognized in the statement of operations rather than as other comprehensive income under the prior guidance. 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 were also revised under the new guidance.
January 1, 2018 Upon adoption using the modified retrospective approach, we reclassified $5.5 million of net unrealized investment gains, net of adjustments to deferred acquisition costs, interest sensitive policy reserves and income taxes, on our equity securities from AOCI to retained earnings as a cumulative effect adjustment.
In February 2016, the FASB issued guidance amending the accounting for leases, which, for most lessees, resulted in a gross-up of the balance sheet. Under the new standard, lessees recognize the leased assets on the balance sheet and a corresponding liability for the present value of lease payments over the lease term. The new standard requires the application of judgment and estimates. The standard allowed accounting policy elections to be made both at transition and for the accounting post-transition, including whether to adopt a short-term lease recognition exemption.
January 1, 2019 Upon adoption using the modified retrospective approach, a cumulative effect adjustment of $0.6 million was recorded to retained earnings, representing the elimination of a deferred gain on a sale-leaseback transaction, and both other assets and other liabilities increased by $7.2 million. We elected the practical expedients provided for under the guidance but did not use hindsight in determining lease term. We have no finance leases and have elected to treat leases with terms of twelve months or less as short-term leases. The impact to earnings per share due to adopting this guidance was ($0.01) per basic and diluted share for the years ended December 31, 2020 and December 31, 2019.
January 1, 2020 Upon adoption using the modified retrospective approach, a cumulative effect adjustment of $2.7 million after offsets was recorded to retained earnings. The cumulative effect adjustment arose from the establishment of an allowance for credit losses on our mortgage loan investments totaling $3.1 million and reinsurance recoverable totaling $0.9 million, before offsets. See the discussion that follows for further information. Due to allowances being released during the year, application of this guidance resulted in an increase to net income of $2.2 million ($0.09 per basic and diluted share) during the year ended December 31, 2020. Prior periods were not restated.
January 1, 2023 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.
Fixed maturities are comprised of bonds and redeemable preferred stock and are designated as “available for sale” (AFS). AFS securities, with the exception of interest-only bonds, are reported at fair value and unrealized gains and losses on these securities are included directly in stockholders’ equity as a component of AOCI. The unrealized gains and losses, included in AOCI, are reduced by a provision for deferred income taxes and adjustments to deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves and policyholder liabilities that would have been required as a charge or credit to income had such amounts been realized. Interest-only bonds are considered to have an embedded derivative feature;
When the fair value of a fixed maturity security is below its amortized cost, it is considered impaired. To the extent we decide to sell the security or are required to sell the security prior to its recovery of fair value, a charge is taken to net realized capital losses as reported within the consolidated statement of operations, and the amortized cost basis of the security is adjusted for the loss. Under the accounting guidance we followed prior to January 1, 2020, to the extent we had no plan or requirement to sell an impaired security, but believed the impairment was other-than-temporary (OTTI), we similarly recorded a charge to other-than-temporary impairment losses as reported within the consolidated statement of operations and the amortized cost basis of the security was adjusted for the loss. Prior to January 1, 2020, after an OTTI write down of fixed maturities with a credit-only impairment, the cost basis was not adjusted for subsequent recoveries in fair value. For fixed maturities for which we could reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, was amortized over the remaining life of the security. Amortization in this instance was computed using the prospective method and the current estimate of the amount and timing of future cash flows.
We monitor the financial condition and operations of the issuers of fixed maturities to determine whether an allowance for credit losses is required or, prior to January 1, 2020, that a credit impairment was an OTTI. We review factors such as:
•level of current market interest rates compared to market interest rates when the security was purchased.
Mortgage loans are reported at cost adjusted for amortization of premiums, accrual of discounts and net of allowance for credit losses. The allowance for credit losses on our mortgage loan investments is based on an estimate of credit losses that may occur over the life of the loans. Prior to January 1, 2020, the allowance was based on incurred losses of individual loans. In determining the allowance, we segregate our mortgage loans with a similar risk profile based on an internal loan rating. Loss factors based on the potential frequency and severity of credit losses at different points in time of the portfolio life are applied to future cash flows to estimate the allowance for credit losses. In determining the loss factors, we consider the potential severity and likelihood of loss based on our historical loan loss experience along with that of other similar organizations as well as economic forecasts. We have elected the policy to exclude accrued interest receivable from our allowance calculation since uncollectible accrued interest will continue to be evaluated for collectability and written off as warranted.
We discontinue the accrual of investment income on invested assets when it is determined that it is probable that we will not collect the income.
temporary impairment losses and non-credit portion in other comprehensive income/loss on the consolidated statement of operations.
The allowance for credit losses on our reinsurance recoverable is based on an estimate of credit losses that may occur over the life of the underlying ceded insurance business, which differs from the accounting guidance we followed prior to January 1, 2020 which was based on an incurred loss model. We develop loss factors that are applied to the amounts due from each reinsurer, which considers the potential severity and likelihood of loss based on the relative risk profile of each reinsurer, our internal loss history and those of other organizations, along with economic forecasts. We also consider other sources of information regarding individual reinsurers, as applicable, including amounts past-due according to the terms of the reinsurance contracts. Reinsurance recoverable assets are reported in our consolidated balance sheets net of the allowance for credit losses. Amounts deemed to be uncollectible are written off against the allowance. Changes in the allowance are reported within the consolidated statement of operations as “Underwriting, acquisition and insurance expenses.”
For business assumed from other companies, reinsurance recoverable includes premium receivable net of our share of benefits and expenses we owe to the ceding company.
For participating traditional life insurance and interest sensitive products, these costs are generally amortized in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is periodically adjusted or unlocked when we revise key assumptions used in the calculation of these costs. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits.
All insurance and investment contract modifications and replacements are reviewed to determine if the internal replacement results in a substantially changed contract. If so, the acquisition costs, sales inducements and unearned revenue associated with the new contract are deferred and amortized over the lifetime of the new contract. In addition, the existing deferred policy acquisition costs, sales inducement costs and unearned revenue balances associated with the replaced contract are written off. If an internal replacement results in a substantially unchanged contract, the acquisition costs, sales inducements and unearned revenue associated with the new contract are immediately recognized in the period incurred. In addition, the existing deferred policy acquisition costs, sales inducement costs or unearned revenue balance associated with the replaced contract is not written off, but instead is carried over to the new contract.
Other assets also include property and equipment, primarily comprised of capitalized software costs and furniture and equipment, which are reported at cost less allowances for depreciation and amortization. We expense costs incurred in the preliminary stages of developing internal-use software as well as costs incurred post-implementation for maintenance. Capitalization of internal-use software costs occurs after management has authorized the project and it is probable that the software will be used as intended. Amortization of software costs begins after the software has been placed in production. Depreciation and amortization expense is computed primarily using the straight-line method over the estimated useful lives of the assets, which range from three to twenty years. Property and equipment had a carrying value of $40.5 million at December 31, 2020 and $42.2 million at December 31, 2019, and accumulated depreciation and amortization of $103.6 million at December 31, 2020 and $91.0 million at December 31, 2019. Depreciation and amortization expense for property and equipment was $12.8 million in 2020, $12.1 million in 2019 and $9.9 million in 2018.
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 2020, 2019 and 2018.
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 2.25% to 6.00%. The average rate of assumed gross investment yields used in estimating
gross margins was 4.94% in 2020, 5.23% in 2019 and 5.48% in 2018. The liability for future policy benefits for nonparticipating 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.
The separate account assets and liabilities reported in our accompanying consolidated balance sheets represent funds that are separately administered for the benefit of certain policyholders that bear the underlying investment risk. The separate account assets are carried at fair value and separate account liabilities represent policy account balances before applicable surrender charges. Revenues and expenses related to the separate account assets and liabilities, to the extent of benefits paid or provided to the separate account policyholders, are excluded from the amounts reported in the accompanying consolidated statements of operations.
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 and index 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 estimated life of the policy.
Share-based compensation programs are also offered to certain employees, subject to specific requirements including vesting.
(1)Non-credit losses reported in AOCI are included with gross unrealized losses, resulting in total gross unrealized losses for AFS fixed maturities being reported in the table.
Fixed maturities in the above tables include 119 securities from 95 issuers at December 31, 2020 and 189 securities from 145 issuers at December 31, 2019. Unrealized losses decreased during the twelve months ended December 31, 2020 primarily due to a decrease in US treasury rates. We do not consider securities’ declines in fair value below amortized cost to be due to a credit loss when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity or spread widening when recovery of all amounts due under the contractual terms of the security is anticipated. Based on our intent not to sell and 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 have a credit loss allowance, and they do not require a loss allowance to be established at December 31, 2020. The following summarizes the more significant unrealized losses on fixed maturity securities by investment category as of December 31, 2020.
Residential mortgage-backed securities: The unrealized losses on residential mortgage-backed securities were primarily due to price declines on legacy and newer issue bonds. The legacy bonds are still at an unrealized gain overall, but some individual securities remain at an unrealized loss. The newer issue residential mortgage-backed securities are comprised of bonds issued during and after 2013 with strong underwriting and collateral characteristics. Primarily, losses were attributable to credit spread widening which led to lower prices on some securities. These securities tend to have higher credit scores with higher credit enhancement and lower loan-to-value ratios which position them favorably against default during economic disruptions such as those caused by COVID-19.
The unrealized losses on collateralized loan obligations (CLO) are due to concerns regarding COVID-19 and the resulting impact on leveraged loans. The CLO market is also benefiting from the programs that the U.S. Federal Reserve Bank is providing to the market. Our CLO portfolio is of high quality, with more than 98% of the securities rated NAIC-1. Internal
The amount of accrued interest excluded from the cost basis of the mortgage loans and included in accrued investment income on the balance sheet totaled $3.5 million at December 31, 2020. Any loan delinquent on contractual payments is considered non-performing. Mortgage loans are placed on non-accrual status if the loan is over 90 days past due. If the loan is placed on non-accrual status, the prior accrued interest income is reversed through net investment income. Interest income received on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as non-accrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely. At December 31, 2020 and December 31, 2019, there were no non-performing loans over 30 days past due on contractual payments. At December 31, 2020, we had committed to provide additional funding for mortgage loans totaling $3.5 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.
Mortgage loans are rated internally to provide a current qualitative rating of each loan. We review the capital structure, collateral strength, physical occupancy, financial stability of the operating income stream, debt service coverage ratio, outstanding loan balance to estimated value of the collateral, property improvements and the financial strength of the borrower when determining the internal loan rating. Loans of high quality, low risk and with little concern of default or extension risk are rated an A; loans of moderate quality and moderate risk are rated a B; loans of low quality and high risk are rated a C, and loans for which there is concern of credit default are rated a W.
We evaluate our variable interest entity (VIE) investees to determine whether the level of our direct ownership interest, our rights to manage operations or our obligation to provide ongoing financial support are such that we are the primary beneficiary of the entity, and would therefore be required to consolidate it for financial reporting purposes. After determining that we have a variable interest, we review our involvement in the VIE to determine whether we have both the power to direct activities that
We have reviewed the circumstances surrounding our investments in VIEs, which consist of (i) limited partnerships or limited liability companies accounted for under the equity method included in securities and indebtedness of related parties and (ii) LIHTC investments included in other assets. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carrying value and any unfunded commitments that exist for each particular VIE. We also have not provided additional support or other guarantees that were not previously contractually required (financial or otherwise) to any of the VIEs as of December 31, 2020 or December 31, 2019. Based on this analysis, none of our VIEs were required to be consolidated at December 31, 2020 or December 31, 2019.
Our primary derivative exposure relates to purchased call options, which provide an economic hedge against the embedded derivatives in our indexed 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.
•Level 1 - Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2 - Fair values are based on inputs, other than quoted prices from active markets, that are observable for the asset or liability, either directly or indirectly.
Level 3 fixed maturities include corporate, mortgage- and asset-backed and private placement corporate securities for which there is little or no current market data available. We use external pricing sources, or if prices are not available, we will estimate fair value internally. Fair values of private corporate investments in Level 3 are determined by reference to the public market, private transactions or valuations for comparable companies or assets in the relevant asset class when such amounts are available. For other securities for which an exit price based on relevant observable inputs is not obtained, the fair value is determined using a matrix calculation. Fair values estimated using matrix pricing methods rely on an estimate of credit spreads to a risk-free U.S. Treasury yield. Selecting the credit spread requires judgment based on an understanding of the security and may include a market liquidity premium. Our selection of comparable companies as well as the level of spread requires significant judgment. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.
•We evaluate third-party pricing source estimation methodologies to assess whether they will provide a fair value that approximates a market exit price.
(1) A private equity fund with a fair value estimate of $9.3 million at December 31, 2020 and $8.4 million at December 31, 2019 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. This fund invests in senior secured middle market loans and had unfunded commitments totaling $0.8 million at December 31, 2020 and $1.7 million at December 31, 2019. The investment is not currently eligible for redemption.
(1)Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using unobservable inputs. Transfers out of Level 3 include those assets that we are now able to obtain pricing from a third-party pricing vendor that uses observable inputs. The fair values of newly issued securities often require additional estimation until a market is created, which is generally within a few months after issuance. Once a market is created, as was the case for the majority of the security transfers out of the Level 3 category above, Level 2 valuation sources become available.
We recognize the benefits of uncertain tax positions when the benefits are more-likely-than-not to be sustained. Our reserve for uncertain tax positions was $0.6 million at December 31, 2020 and at December 31, 2019. We recognize interest related to uncertain tax positions in interest expense and related penalties in other expenses. We paid no such interest or penalties during 2020, 2019 or 2018. We do not expect any significant changes in the amount of our reserve for uncertain tax positions within the next twelve months. We are generally no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years prior to 2017.
At December 31, 2020, we had non-life net operating loss carryforwards for federal income tax purposes totaling $15.1 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.
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, 2020. See Note 6 for additional information regarding this agreement.
(1) There is no established market for our Class B common stock, although it is convertible upon demand of the holder into Class A common stock on a share-for-share basis.
(2)For descriptions of the underfunded portion of our postretirement benefit plans, see Note 8 - Other Retirement Plans, and for certain other defined benefit plans, see Note 8 - Defined Benefit Pension Plans.
(3)See Note 1 to our consolidated financial statements for further discussion on this one-time adjustment related to an accounting change.
(2)For descriptions of the underfunded portion of our postretirement benefit plans, see Note 8 - Other Retirement Plans, and for certain other defined benefit plans, see Note 8 - Defined Benefit Plans.
The fair value of plan assets of the Multiemployer Plan exceeded the accumulated benefit obligation at December 31, 2020 and December 31, 2019.
Pension settlement charges were recognized after determining the total cash payments exceeded the sum of the service and interest cost for 2018. The special termination benefit represents a voluntary early retirement program offered in the Multiemployer Plan during 2018 that provided an additional two years of service and two years of age benefit enhancement.
amortize. For the Multiemployer Plan it is expected that net periodic pension cost in 2021 will include $14.9 million for amortization of the actuarial loss. For the Other Plans it is expected that net periodic pension cost in 2021, included in accumulated other comprehensive income, will include $1.4 million for amortization of the actuarial loss.
The Multiemployer Plan assets are primarily invested in annuity products and diversified investments including insurance company pooled separate accounts, mutual funds, fixed maturity securities and alternative investments. Certain pension obligations that are fully funded through annuity contracts with Farm Bureau Life, are presented as funded annuity contracts below. For 2020, excluding the funded annuity contracts, the Multiemployer Plan’s long-term investment allocation targets were as follows: 46% in fixed income investments, 30% in equities, 15% in long duration fixed income investments and 9% in alternative investments. At December 31, 2020, the Multiemployer Plan assets were invested approximately 45% in fixed income investments, 32% in equities, 18% in long duration fixed income investments and 5% 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 long duration fixed income investments consist of holdings of corporate bonds, United States government treasuries and cash. The alternative investments consist of interests in limited partnerships that own various liquid and illiquid assets. The investment strategy for the Multiemployer Plan 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, factors such as historical rates of return, expected future risk-free rates of return and anticipated returns given the risk profile of each asset class are analyzed.
•Pooled separate accounts: valued at net asset value, which is based on the fair value of the underlying assets owned by the fund less any liabilities. The net asset value, which is not publicly quoted, is available to current investors via the Multiemployer Plan’s recordkeeper’s website. It is the basis for current transactions and units can be redeemed at net asset value as of the measurement date.
•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. The pricing methodologies include observable inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events.
•Alternative investments: the carrying value of the limited partnership interests reflects the Plan’s proportionate share of the net asset value of those partnerships, which is derived from the fair value of the underlying holdings. There are no redemption frequency or redemption notice period restrictions on the alternative investments.
(6)Pooled separate account investments reported in 2019 were reclassified from Level 2 to Level 1 as daily pricing is available.
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 $3.5 million in 2020, $3.1 million in 2019 and $2.9 million in 2018.
December 31, 2012 Accruing years of service in the Multiemployer Plan 100% Employer Match 50% Employer Match Discretionary Employer Contribution
(1)Represents the difference between the share price and exercise price for each option, excluding options for which the exercise price is above the share price, at December 31, 2020.
We issue new shares to satisfy stock option exercises. Cash received from stock options exercised totaled $0.1 million for 2020 and 2019 and $0.3 million for 2018. The actual tax benefit realized from stock options exercised totaled less than $0.1 million for 2020 and 2019 and $0.1 million for 2018.
We also have an expense allocation agreement with FBPCIC for the use of property and equipment. Expense relating to this agreement totaled $0.3 million in 2020, 2019 and 2018.
We have service agreements with the Farm Bureau-affiliated property-casualty companies operating within our marketing territory, including FBPCIC and another affiliate. Under the service agreements, the property-casualty companies are responsible for development and management of our agency force for a fee. We incurred expenses totaling $8.4 million in 2020, $8.0 million in 2019 and $9.2 million in 2018 relating to these arrangements.
We consider leases with original terms of one year or less to be short-term. We have elected not to carry short-term leases on our consolidated balance sheets. We have no agreements with lease and non-lease components. None of our leases are considered finance leases.
At December 31, 2020, we held ten long-term leases, while at December 31, 2019 we held eight long-term leases, all of which relate to real estate. The net present value of future cash flows for these leases is reported within our consolidated balance sheets in other assets and other liabilities. The carrying value of these leases total $12.1 million at December 31, 2020 and $14.0 million at December 31, 2019. The most significant lease is for our home office facilities, which is owned by a subsidiary of IFBF. All of our leases are based on fixed terms which expire from 2021 through 2026, but allow for renewal. Two of our leases, not including the home office property, contain provisions that allow the lease cost to increase based on a stated step-up schedule or changes in the consumer price index. The incremental borrowing rate used in determining the net present value of the future lease commitments for new leases was 4.25% in 2020 and 4.50% in 2019.
At December 31, 2020, we have unfunded investment commitments to limited partnerships and limited liability companies of $89.2 million and privately placed corporate securities commitments of $4.8 million.
We self-insure our employee health and dental claims. However, claims in excess of our self-insurance limits are fully insured. We previously funded insurance claims through a self-insurance trust, which was dissolved as of December 31, 2019. Expenses equal to our best estimate of claims continue to be reflected in operations. An allowance for incurred but not reported claims is included in other liabilities.
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 2020, 2019 and 2018.
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, 2020, Farm Bureau Life’s net gain from operations of $87.4 million, exceeded 10% of statutory surplus; accordingly, that amount is the maximum available for distribution to FBL Financial Group, Inc. without regulatory approval during 2021. Timing of such dividends during the year is limited based on the timing of dividends paid within the preceding 12 months.
We analyze operations by reviewing financial information regarding our primary products that are aggregated into the Annuity and Life Insurance product segments. Our Corporate and Other segment consists of less significant business activities.
The Corporate and Other segment includes (i) wealth management services; (ii) advisory services for the management of investments for other companies; (iii) a management fee for managing the affiliated property-casualty companies; (iv) marketing and distribution services for the sale of mutual funds and insurance products not issued by us; (v) leasing services with affiliates; (vi) closed blocks of variable annuity, variable life and accident and health products; (vii) interest expense and (viii) investments and related investment income not specifically allocated to our product segments.
Our chief operating decision makers use pre-tax adjusted operating income to evaluate segment performance and allocate resources. Pre-tax adjusted operating income consists of pre-tax net income adjusted to exclude proposed acquisition transaction expenses, realized gains and losses on investments including the change in fair value of equity securities, the change in allowances for credit losses on investments, and the change in fair value of derivatives as the impact of these items can fluctuate greatly from period to period. These fluctuations and nonrecurring proposed acquisition expenses make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income. For example, call options relating to our indexed annuity business are one-year assets while the embedded derivatives in the indexed contracts represent the rights of the contract holder to receive index credits over the entire period the indexed products are expected to be in force. Adjustments to pre-tax net income are net of amortization of unearned revenue reserves and deferred acquisition costs, as well as changes in interest sensitive product reserves. While not applicable for the periods reported herein, in determining pre-tax adjusted operating income we will also remove the impact of settlements or judgments arising from lawsuits, net of any recoveries from third parties, the cumulative effect of changes in accounting principles and discontinued operations.
(1)Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, interest sensitive product reserves and income taxes attributable to these items.
(2)Amounts are net adjustments for assumed changes in deferred acquisition costs and value of insurance in force acquired attributable to these items.