Net income and earnings per share in 2017 were positively impacted by the initial impact to deferred income taxes from the change in the federal statutory tax rate totaling $85.8 million ($3.43 and $3.42 basic and diluted earnings per share, respectively).
Dividends in 2017 include a special $1.50 per share cash dividend to Class A and B common shareholders. Dividends in 2016, 2015 and 2013 include a special $2.00 per share cash dividend to Class A and B common shareholders.
Amounts are impacted by accumulated other comprehensive income totaling $285.0 million in 2017, $149.6 million in 2016, $114.5 million in 2015, $258.4 million in 2014 and $119.1 million in 2013. These amounts are net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, unearned revenue reserve, value of insurance in force acquired and policyholder liabilities.
We analyze operations by reviewing financial information regarding our primary products that are aggregated in Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company. We use net income determined using U.S. Generally Accepted Accounting Principles (GAAP), in addition to non-GAAP operating income (a measure of earnings not recognized under GAAP), to measure our performance. Non-GAAP operating income is a common life insurance industry measure of performance. Non-GAAP operating income, for the periods presented, consists of net income adjusted to exclude the impact of realized gains and losses on investments and the change in net unrealized gains and losses on derivatives, which can fluctuate greatly from period to period. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income (loss). Specifically, call options relating to our indexed business are one-year assets while the embedded derivatives in the indexed contracts represent the rights of the contract holder to receive index credits over the entire period the indexed annuities are expected to be in force. During 2017, we revised our non-GAAP operating income definition to remove from net income the initial impact to deferred income taxes from a change in tax laws. Such changes can create an unusual one-time remeasurement of deferred taxes not reflective of normal operations. The revision did not impact 2016 or 2015 non-GAAP operating earnings but did affect 2017, with the recent enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act). See Note 5 to our consolidated financial statements included in item 8 for additional information regarding the Tax Act. A view of our operating performance without the impact of these items enhances the analysis of our results, although it should not be viewed as a substitute for net income as a measure of financial performance. See Note 13 to our consolidated financial statements included in Item 8 for further information regarding how we define our segments and non-GAAP operating income.
Our profitability is also impacted by changes in accounting guidance that impact the timing of profit recognition. See Note 1 to our consolidated financial statements included in Item 8 for details on adopted and pending accounting pronouncements. In addition to guidance that has been adopted, the accounting standards setting bodies are currently working on other projects that could impact the timing of profit emergence including the accounting for insurance contracts. It is uncertain what the outcome of these or other projects will be or when they will be completed.
Economic and other environmental factors that may impact our business include, but are not limited to, the following:
Gross Domestic Product increased at an annual rate of 2.6% during 2017 based on recent estimates.
The enactment of the Tax Act during December 2017 may alter consumer demand for our insurance products.
The low market interest rate environment continues to impact our investment yields as well as the interest we credit on our interest sensitive products. The benchmark 10-year U.S. Treasury yield fluctuated during 2017, reaching a high of 2.62% in March and ultimately ending 2017 at 2.40%, five basis points lower than year-end 2016. Credit spreads continued to tighten during 2017. Low crediting rates pose challenges to maintaining attractive annuity and universal life products, although our rates are comparable to other insurance companies, allowing us to maintain our competitive position within the market. We experienced an increase in the fair value of our fixed maturity security portfolio during 2017 primarily due to a decrease in market yields. See the segment discussion and “Financial Condition” section that follows for additional information regarding the impact of low market interest rates on our business.
Results of Operations for the Three Years Ended December 31, 2017
Our net income increased in 2017, compared to 2016, primarily due to the initial impact of the Tax Act. Net income and non-GAAP operating income were positively impacted by increased earnings from an increase in the volume of business in force and the impact of unlocking, partially offset by increases in death benefits.
typically takes place annually. We incurred additional amortization through unlocking as a result of our analysis of the impact of the low interest rate environment on projected investment and spread income in 2017 in the Life Insurance and Corporate and Other segments and in 2016 in all segments. See the discussion that follows for further details of the unlocking impact to our operating segments.
Pre-tax non-GAAP operating income for the Annuity segment increased in 2017, compared to 2016, primarily due to the impact from an increase in the volume of business in force and a benefit from unlocking, partially offset by lower other investment-related income and higher other underwriting expenses. Pre-tax non-GAAP operating income decreased in 2016, compared to 2015, primarily due to the impact of unlocking and increases in interest sensitive benefits.
The average aggregate account value for individual annuity contracts in force increased in 2017 and 2016, compared to the prior periods, due to continued sales and the crediting of interest. Continued growth in our business in force contributes to the increase in revenues, benefits and expenses. Premiums collected decreased in 2017 compared to 2016 due to decreased sales of our fixed rate deferred and indexed annuity products. The decrease in annuity premium collected in 2017 is consistent with industry experience and believed to be attributable to the impact of low market interest rates and the current regulatory
environment. Premiums collected increased in 2016 compared to 2015 due to increased sales of our indexed annuity product, partially offset by decreased sales of fixed rate deferred annuity products. Individual fixed rate deferred annuity collected premiums were $167.7 million in 2017, $213.3 million in 2016 and $237.6 million in 2015. Indexed annuity collected premiums were $110.6 million in 2017, $125.5 million in 2016 and $90.9 million in 2015.
Amortization of deferred acquisition costs and the value of insurance in force changed in 2017 and 2016, compared to prior periods, due to changes in actual and expected profits on the underlying business. 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 policy lapses and mortality assumptions. Amortization was also impacted in 2016 due to unlocking our projected investment and spread income assumptions. The impact of unlocking on pre-tax non-GAAP operating income was as follows:
Premiums collected is a non-GAAP measure of sales production, see Note 13 to our consolidated financial statements.
Continued growth in our business in force contributes to the increase in revenues, benefits and expenses.
Amortization of deferred acquisition costs, deferred sales inducements, the value of insurance in force and unearned revenue reserves changed in 2017 and 2016, compared to prior periods, due to changes in actual and expected profits on the underlying business. 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 policy lapses, premium persistency and mortality assumptions. Amortization, as well as reserves held on certain interest sensitive products, was also impacted in 2017 and 2016 due to unlocking our projected investment and spread income. The impact of unlocking on pre-tax non-GAAP operating income was as follows:
Death benefits, net of reinsurance and reserves released, increased in 2017, compared to 2016, due to increases in the average size of claims and an increase in the number of claims reported. Death benefits, net of reinsurance and reserves released, decreased in 2016, compared to 2015, due to decreases in the number of claims reported. Other interest sensitive product benefits increased in 2017, compared to 2016, due to an increase in our universal life secondary guarantee reserves from growth in our business in force.
In 2017, we assigned a portion of our investments held in securities and indebtedness of related parties to the Life Insurance segment. These investments include equity interests in limited liability partnerships and corporations, accounted for under the equity method of accounting. Equity income, before tax, consists of our proportionate share of gains and losses attributable to our relative ownership interest in these investments. See the Equity Income discussion that follows for additional information regarding these investments.
lower other investment-related income and lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio. See the "Financial Condition" section that follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our interest sensitive life insurance products increased in 2017, compared to the prior year, due to the immaterial error mentioned above. We incurred decreases in weighted average interest crediting rates in 2017, 2016 and 2015 due to crediting rate actions taken on various products in 2017, 2016 and 2015 in response to the declining portfolio yield.
Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our prepayment speed assumptions.
Death benefits, net of reinsurance and reserves released, increased in 2017, compared to 2016, due to increases in the number of claims reported, partially offset by lower average size of claims. Death benefits, net of reinsurance and reserves released, increased in 2016, compared to 2015, due to increases in the number of claims reported and in the average size of claims.
Amortization of deferred acquisition costs, deferred sales inducements, and unearned revenue reserves changed in 2017 and 2016, compared to prior periods, primarily due to the impact of unlocking and market performance on our variable business. Unlocking generally reflects changes in projected separate account performance and withdrawal and mortality assumptions. Amortization was also impacted in 2017 and 2016 due to unlocking our projected investment and spread income assumptions. The impact of unlocking on pre-tax non-GAAP operating income for the three years was as follows:
The effective tax rate on non-GAAP operating income was 21.2% for 2017, 22.0% for 2016 and 22.2% for 2015. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of low income housing credits from equity method investees and tax-exempt investment income. The effective tax rate decreased in 2017 and 2016, compared to the prior year, primarily due to increases in tax-exempt investment income and tax benefits for equity-based compensation. See Note 5 to our consolidated financial statements included in Item 8 for additional information on income taxes.
During 2017, we revised our non-GAAP operating income definition to remove from net income the initial impact to deferred income taxes from a change in tax laws. Such changes can create an unusual one-time remeasurement of deferred taxes not reflective of normal operations. The revision did not impact 2016 or 2015 non-GAAP operating earnings but did affect 2017, with the recent enactment of the Tax Act. See Note 5 to our consolidated financial statements included in item 8 for additional information regarding the Tax Act.
In 2015, 2016 and 2017, income taxes on adjustments to net income have been recorded at 35% as there are no permanent differences between book and taxable income relating to these adjustments. In 2015, income taxes on these adjustments included 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.
Under the Tax Act, the federal statutory tax rate was changed from 35 percent to 21 percent, effective for 2018. FBL Financial Group estimates that its 2018 effective tax rate for net income will be between 17 and 20 percent. This compares to an effective tax rate of 31.7 percent for 2017, excluding the benefit from the enactment of the Tax Act. See Note 5 to our consolidated financial statements included in item 8 for additional information regarding the Tax Act.
The table above summarizes selected information for fixed maturity purchases. The effective annual yield shown is the yield calculated to the "worst-call date." For non-callable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call or maturity date that produces the lowest yield. The weighted-average life is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average life is equal to the stated maturity date.
A portion of the securities acquired during 2017 and 2016 were acquired with the proceeds from advances on our funding agreements with the FHLB. The securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products, due to the shorter maturity and relatively low interest rate paid on those advances. In addition, certain municipal securities acquired are exempt from federal income taxes, and accordingly have a higher actual return than reflected in the yields stated above. The average yield of the securities acquired, excluding the securities supporting the funding agreements and using a tax-adjusted yield for the municipal securities, was 3.95% in 2017 and 4.39% in 2016.
As of December 31, 2017, 96.5% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 2017, no single non-investment grade holding exceeded 0.2% of total investments.
At December 31, 2017, 83.5% of our energy holdings were investment grade. Our non-investment grade holdings included oil field services with a carrying value of $18.6 million and an unrealized loss of $4.2 million.
The mortgage- and asset-backed securities can be summarized into three broad categories: residential, commercial and other asset-backed securities.
The residential mortgage-backed portfolio includes government agency pass through and collateralized mortgage obligation (CMO) securities. With a government agency pass through security, we receive a pro-rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools or mortgages divided into sections or “tranches” with varying stated maturities that provide sequential retirement of the bonds. While each tranche receives monthly interest payments, a subsequent tranche is not entitled to receive payment of principal until the entire principal of the preceding tranche is paid off. We primarily invest in sequential tranches, which allow us to manage cash flow stability and prepayment risk by the level of tranche in which we invest. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. PAC bonds provide more predictable cash flows within a range of prepayment speeds and provide some protection against prepayment risk. TAC bonds provide protection from a rise in the prepayment rate due to falling interest rates. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to excessive prepayment risk.
The CMBS portfolio included government agency-backed securities with a carrying value of $515.7 million at December 31, 2017 and $387.4 million at December 31, 2016. Also included in the CMBS are military housing bonds totaling $161.1 million at December 31, 2017 and $148.0 million at December 31, 2016. These bonds are used to fund the construction of multi-family homes on United States military bases. The bonds are backed by a first mortgage lien on residential military housing projects.
Mortgage loans totaled $971.8 million at December 31, 2017 and $816.5 million at December 31, 2016. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of commercial mortgage loans outstanding was 190 at December 31, 2017 and 178 at December 31, 2016. In 2017, new loans ranged from $2.5 million to $12.5 million in size, with an average loan size of $8.0 million, an average loan term of 15 years and an average net yield of 4.20%. 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 2.5% that are interest-only loans at December 31, 2017. At December 31, 2017, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 55.0% and the weighted average debt service coverage ratio was 1.6 based on the results of our 2016 annual study. See Note 2 to our consolidated financial statements included in Item 8 for further discussion regarding our mortgage loans.
As discussed in Note 7 to our consolidated financial statements included in Item 8, stockholders' equity was impacted by capital deployment actions during 2017. We paid a special cash dividend of $1.50 per share on Class A common stock and Class B common stock and increased our regular quarterly dividend by 4.8% to $0.44 per share.
We design our products to encourage persistency and manage our investment portfolio in a manner to help ensure targeted spreads are earned. In addition to the ability to change interest crediting rates on our products, certain interest sensitive contracts have surrender and withdrawal penalty provisions. Products such as supplementary contracts with life contingencies are not subject to surrender or discretionary withdrawal. Depending on the product, surrender charge rates on annuity contracts range up to 10.0% and surrender charge periods range up to 10 years and typically decrease 1.0% to 2.0% for every year the contract is in force.
If interest rates had increased 10% from levels at December 31, 2017 and 2016, the fair value of our fixed maturity securities and short-term investments would have decreased approximately $136.0 million at December 31, 2017 and $135.4 million at December 31, 2016. These hypothetical changes in value do not take into account any offsetting change in the value of insurance liabilities for investment contracts since we estimate such value to be the cash surrender value for a portion of the underlying contracts. If interest rates had decreased 10% from levels at December 31, 2017 and 2016, the fair value of our debt would increase $3.1 million at December 31, 2017 and $2.7 million at December 31, 2016.
The models used to estimate the impact of a 10% change in market interest rates utilize many assumptions and estimates that materially impact the fair value calculations. Key assumptions in the models include an immediate and parallel shift in the yield curve and an acceleration of bond calls and principal prepayments on mortgage and other asset-backed securities. The above estimates do not attempt to measure the financial statement impact on the resulting change in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves, policyholder liabilities and income taxes. Due to the subjectivity of these assumptions, the actual impact of a 10% change in rates on the fair values would likely be different from that estimated.
We earn mortality and expense fee income based on the value of our separate accounts at annual rates ranging from 0.00% to 1.45% for 2017, 2016 and 2015. 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.
We have exposure to credit risk as it relates to the uncertainty associated with the continued ability of a given entity to make timely payments of principal and interest. See "Financial Condition - Investments" for additional information about credit risk in our investment portfolio.
Parent company cash inflows from operations consist primarily of fees that it charges various subsidiaries and affiliates for management of their operations, expense reimbursements and tax settlements from subsidiaries and affiliates, proceeds from the exercise of employee stock options, investment income and dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during 2017 included management fees from subsidiaries and affiliates totaling $7.8 million and dividends of $71.5 million. Cash outflows are principally for salaries, taxes and other expenses related to providing management services, dividends on outstanding stock, stock repurchases and interest on our parent company debt.
As discussed in Note 7 to our consolidated financial statements included in Item 8, we have periodically taken advantage of opportunities to repurchase our outstanding Class A common stock through Class A common stock repurchase programs approved by our Board of Directors. There was $49.2 million remaining available for repurchases at December 31, 2017, under the current $50 million Class A common stock repurchase program. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice. We repurchased 3,511 shares of Class A common stock for $0.2 million in 2017, 10,322 shares of Class A common stock for $0.6 million in 2016 and 66,904 shares of stock Class A common stock for $3.7 million in 2015. These transactions were primarily funded with available cash and resources at the parent company, including dividends received from subsidiaries of $71.5 million in 2017, $85.9 million in 2016 and $50.0 million in 2015.
Farm Bureau Life's ability to pay dividends to the parent company is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa. At December 31, 2017, Farm Bureau Life’s statutory unassigned surplus was $482.5 million. There are certain additional limits on the amount of dividends that may be paid within a year without approval of the Insurance Division, Department of Commerce of the State of Iowa (the Iowa Insurance Division) as discussed in Note 7 to our consolidated financial statements included in Item 8. During 2018, the maximum amount legally available for distribution to the parent company without further regulatory approval is $106.1 million. Timing of such dividends during the year is limited based on the timing of dividends paid within the preceding 12 months.
We do not have any off-balance sheet arrangements as of December 31, 2017 or 2016.
In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments that are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2017:
Pension assets and liabilities are affected by the estimated fair value of plan assets, estimates of the expected return on plan assets and/or discount rates. Actual changes in the fair value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. The December 31, 2017 pension obligation was computed based on an average 3.72% discount rate, which was based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. The long-term return on plan assets is based on current and projected asset allocations. Declines in comparable bond and equity yields would decrease our
Amortization of deferred acquisition costs for participating life insurance and interest sensitive products is expected to total approximately $24.5 million for 2018, excluding the impact of new production in 2018.
Based upon a historical analysis of fluctuations in estimated gross profits, we believe it is reasonably likely that a 10% change in estimated gross profits could occur. A 10% increase in estimated gross profits for 2018 would result in $1.8 million of additional amortization expense. Correspondingly, a 10% decrease in estimated gross profits would result in a $1.8 million reduction of amortization expense. The information above is for illustrative purposes only and does not reflect our expectations regarding future changes in estimated gross profits.
The determination of net periodic pension cost and related accrued/prepaid pension expense requires the use of estimates as to the expected return on plan assets, discount rate on plan liabilities and other accrual assumptions. Pension expense for 2017 totaled $5.0 million.
To determine our net periodic pension costs for 2017, we assumed an expected long-term rate of return on plan assets of 6.60% and a discount rate of 4.29%. Details regarding the method used to determine the discount rate are summarized in Note 8 to our consolidated financial statements included in Item 8.
No material accounting pronouncements have been adopted during the year. See Note 1 to our consolidated financial statements included in Item 8 for a discussion of recent accounting pronouncements that may impact us in the future.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a - 15(f). Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
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, 2017, 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 March 1, 2018 expressed an unqualified opinion thereon.
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.
In March 2016, the Financial Accounting Standards Board (FASB) issued guidance that impacted the accounting for share-based compensation, including the accounting for excess tax benefits and deficiencies, classification of excess tax benefits within the consolidated statement of cash flows, and the accounting for forfeitures.
The new guidance is effective for 2018, with early adoption permitted for public companies during periods for which financial statements have not been issued. We adopted the new guidance in 2017, and have reported the reclassification in our Consolidated Statement of Stockholders’ Equity. The adjustment does not impact earnings, but rather is a reclassification of amounts between stockholders’ equity accounts.
We are currently evaluating the impact of this guidance on our consolidated financial statements. Upon adoption we will be required to recognize and measure leases at the beginning of the earliest period presented using the modified retrospective approach.
Fixed maturities are comprised of bonds and redeemable preferred stock and are designated as "available for sale." Available-for-sale 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 accumulated other comprehensive income. The unrealized gains and losses 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. Accordingly, unrealized gains and losses relating to these securities are recorded as a component of net investment income in the consolidated statements of operations.
based upon the present value of expected future cash flows from the loan, or the fair value of the underlying collateral. We evaluate each of our mortgage loans individually and establish a valuation allowance for estimated losses, if needed, for each impaired loan identified. The carrying value of each specific loan is reduced by the estimated loss. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely.
Policy loans are reported at unpaid principal balance. Short-term investments, which include investments with remaining maturities of one year or less, but greater than three months at the time of acquisition, are reported at cost adjusted for amortization of premiums and accrual of discounts. Other investments include call options, which are carried at fair value, a promissory note acquired in a sale of a partnership interest, which is carried at the remaining basis of the partnership, and our ownership interest in aircraft acquired in a troubled debt restructuring with a bond issuer that filed for bankruptcy. The ownership interest in the aircraft is reported at cost, less accumulated depreciation.
Securities and indebtedness of related parties include investments in corporations and partnerships over which we may exercise significant influence and those investments for which we use the equity method of accounting. These corporations and partnerships operate predominately in the investment company, real estate, broker/dealer and insurance industries and include non-guaranteed low income housing tax credit entities (LIHTC). In applying the equity method, we record our share of income or loss reported by the equity investees. In accounting for these investments, 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. For partnerships operating in the investment company industry, this income or loss includes changes in unrealized gains and losses in the partnerships' investment portfolios.
In order to determine the credit and non-credit impairment loss for fixed maturities, every quarter we estimate the future cash flows we expect to receive over the remaining life of the instrument as well as review our plans to hold or sell the instrument. Significant assumptions regarding the present value of expected cash flows for each security are used when an OTTI occurs and there is a non-credit portion of the unrealized loss that will not be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities include collateral pledged, guarantees, vintage, anticipated principal and interest payments, prepayments, default levels, severity assumptions, delinquency rates and the level of nonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturities include anticipated principal and interest payments and an estimated recovery value, generally based on a percentage return of the current fair value.
After an OTTI write down of all equity securities and any fixed maturities with a credit-only impairment, the cost basis is not adjusted for subsequent recoveries in fair value. For fixed maturities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the remaining life of the security. Amortization in this instance is computed using the prospective method and the current estimate of the amount and timing of future cash flows.
We use reinsurance to manage certain risks associated with our insurance operations. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential risks arising from large claims and provide additional capacity for growth. For business ceded to other companies, reinsurance recoverable includes the reinsurers' share of policyholder liabilities, claims and expenses, net of amounts due the reinsurers for premiums. We monitor the financial condition of these reinsurers, establishing an allowance for uncollectible reinsurance recoverables as necessary. We have concluded that no such allowance was required at December 31, 2017 or 2016. 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.
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
The liability for future policy benefits for direct participating traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality and other factors underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 2.00% to 6.00%. The average rate of assumed investment yields used in estimating gross margins was 5.47% in 2017, 5.51% in 2016 and 5.66% in 2015. The liability for future policy benefits for non-participating traditional life insurance is computed using a net level method, including assumptions as to mortality, persistency and interest and includes provisions for possible unfavorable deviations.
Other income and other expenses primarily consist of revenue and expenses generated by our various non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing services. They also include revenues and expenses generated by our parent company for management services. Certain of these activities are performed on behalf of our affiliates. Lease income from leases with affiliates totaled $4.6 million in 2017, $4.8 million in 2016 and $4.9 million in 2015. Investment advisory fee income from affiliates totaled $2.7 million in 2017, $2.5 million in 2016 and $2.3 million in 2015. In addition, Farm Bureau Life has certain items, including fees earned from brokered products, reported as other income and other expense, which netted to $2.5 million in 2017, $3.4 million in 2016 and $3.2 million in 2015. We expense legal costs associated with a loss contingency as incurred.
Non-credit losses subsequent to the initial impairment measurement date on OTTI losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for residential mortgage-backed and other asset-backed securities at December 31, 2017 and for other asset-backed securities at December 31, 2016 were in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
Fixed maturities in the above tables include 247 securities from 154 issuers at December 31, 2017 and 516 securities from 404 issuers at December 31, 2016.
Any loan delinquent on contractual payments is considered non-performing. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as 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, 2017 and December 31, 2016, there were no non-performing loans over 90 days past due on contractual payments. At December 31, 2017, we had committed to provide additional funding for mortgage loans totaling $14.6 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.
The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically when there is indication of a possible significant collateral decline or there are loan modifications or refinance requests.
Proceeds from sales of fixed maturities were $58.7 million in 2017, $109.5 million in 2016 and $108.5 million in 2015.
We evaluate our variable interest entity (VIE) investees to determine whether the level of our direct ownership interest, our rights to manage operations or our obligation to provide ongoing financial support are such that we are the primary beneficiary of the entity, and would therefore be required to consolidate it for financial reporting purposes. After determining that VIE status exists, we review our involvement in the VIE to determine whether we have both the power to direct activities that most significantly impact the economic performance of the VIE, and the obligation to absorb losses or the rights to receive benefits that could be potentially significant to the VIE. This analysis includes a review of the purpose and design of the VIE, as well as the role that we played in the formation of the entity and how that role could impact our ability to control the VIE. We also review the activities and decisions considered significant to the economic performance of the VIE and assess what power we have in directing those activities and decisions. Finally, we review the agreements in place to determine if there are any guarantees that would affect our maximum exposure to loss.
We have reviewed the circumstances surrounding our investments in VIEs, which are classified as securities and indebtedness of related parties, and consist of LIHTC, limited partnerships or limited liability companies accounted for under the equity method. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carrying value and any unfunded commitments that exist for each particular VIE. We also have not provided additional support or other guarantees that were not previously contractually required (financial or otherwise) to any of the VIEs as of December 31, 2017 or December 31, 2016. Based on this analysis, none of our VIEs were required to be consolidated at December 31, 2017 or December 31, 2016.
In addition, we make passive investments in the normal course of business in structured securities issued by VIEs for which we are not the investment manager. These structured securities include all of the residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities included in our fixed maturities. Our maximum exposure to loss on these securities is limited to our carrying value in the investment. We have determined that we are not the
primary beneficiary of these structured securities because we do not have the power to direct the activities that most significantly impact the entities' economic performance.
We are exposed to credit losses in the event of nonperformance of the counterparties. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings (currently rated A or better by nationally recognized statistical rating organizations). We have also entered into credit support agreements with the counterparties requiring them to post collateral when net exposures exceed pre-determined thresholds that vary by counterparty. The net amount of such exposure is essentially the market value less collateral held for such agreements with each counterparty. The call options are supported by securities collateral received of $7.9 million at December 31, 2017, which is held in a separate custodial account. Subject to certain constraints, we are permitted to sell or re-pledge this collateral, but do not have legal rights to the collateral; accordingly, it has not been recorded on our balance sheet. At December 31, 2017, none of the collateral had been sold or re-pledged. As of December 31, 2017 our net exposure to credit losses on derivatives was $6.9 million.
We invest in non-guaranteed federal LIHTC, which are included in securities and indebtedness of related parties in the balance sheet. The carrying value of these investments totaled $82.4 million at December 31, 2017 and $91.3 million at December 31, 2016. There were impairment losses of $2.4 million recorded on these investments during 2017 with no impairments in 2016 or 2015. We use the equity method of accounting for these investments and recorded the following in our consolidated statement of operations.
The carrying value of investments which have been non-income producing for the twelve months preceding December 31, 2017 includes real estate totaling $1.5 million.
No investment in any entity or its affiliates (other than bonds issued by agencies of the United States Government) exceeded 10.0% of stockholders' equity at December 31, 2017.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. From time to time there may be movements between levels as inputs become more or less observable, which may depend on several factors including the activity of the market for the specific security, the activity of the market for similar securities, the level of risk spreads and the source from which we obtain the information. Transfers in or out of any level are measured as of the beginning of the period.
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 through the use of matrix pricing methods rely on an estimate of credit spreads to a risk-free U.S. Treasury yield. Selecting the credit spread requires judgment based on an understanding of the security and may include a market liquidity premium. Our selection of comparable companies as well as the level of spread requires significant judgment. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.
We compare period-to-period price trends to detect unexpected price fluctuation based on our knowledge of the market and the particular instrument. As fluctuations are noted, we will perform further research that may include discussions with the original pricing source or other external sources to ensure we are in agreement with the valuation.
Level 3 equity securities consist of non-redeemable preferred stock for which no active market exists, and fair value estimates for these securities is based on the values of comparable securities that are actively traded. Increases in spreads used in our 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.
Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using non-binding broker quotes. Transfers out of Level 3 include those assets that we are now able to obtain pricing from a third party pricing vendor that uses observable inputs. The fair values of newly issued securities often require additional estimation until a market is created, which is generally within a few months after issuance. Once a market is created, as was the case for the majority of the security transfers out of the Level 3 category above, Level 2 valuation sources become available. There were no transfers between Level 1 and Level 2 during the periods presented above.
Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate that have been deemed to be impaired during the reporting period. There were no mortgage loans or real estate impaired to fair value during 2017 or 2016.
In the normal course of business, we seek to limit our exposure to loss on any single insured or event and to recover a portion of benefits paid by ceding a portion of our exposure to other insurance companies. Our reinsurance coverage for life insurance varies according to the age and risk classification of the insured with current retention limits ranging up to $1.0 million of coverage per individual life. Certain term life products are reinsured on a first dollar quota share basis. We do not use financial or surplus relief reinsurance. We have assumed closed blocks of certain life and annuity business through coinsurance and modified coinsurance agreements.
Farm Bureau Life may cede certain losses under an annual 100% quota share accidental death reinsurance agreement. Coverage includes all acts of terrorism including those of a nuclear, chemical or biological origin. Coverage is subject to an annual aggregate retention of $15.2 million. A maximum occurrence limit of $50.0 million per aircraft applies to policies written on agents of the Company who are participating in company-sponsored incentive trips. Additionally, a $200.0 million occurrence limit applies to employees in the home office building, net of reinsurance on group life policies. All other occurrence catastrophes are unlimited in amount.
Reinsurance contracts do not relieve us of our obligations to policyholders. To the extent that reinsuring companies are later unable to meet their obligations under reinsurance agreements, our insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in losses. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. No allowance for uncollectible amounts has been established against our asset for reinsurance recoverable since none of our receivables are deemed to be uncollectible.
We amortize the value of insurance in force based on a fixed amortization schedule. Net amortization, based on our fixed amortization schedules, for the next five years is expected to be as follows: 2018 - $2.2 million; 2019 - $2.1 million; 2020 - $2.2 million; 2021 - $2.0 million; and 2022 - $2.0 million.
Deferred income taxes have been established based upon the temporary differences between the financial statement and income tax bases of assets and liabilities. The reversal of the temporary differences will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance we considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Based on the available positive and negative evidence regarding future sources of taxable income, we have determined that the establishment of a valuation allowance was not necessary at December 31, 2017 and 2016.
The Tax Act makes broad changes to the U.S. tax code that potentially impact our companies, including 1) reducing the federal statutory tax rate from 35% to 21%, 2) eliminating the corporate alternative minimum tax, 3) further limiting interest expense deductions, 4) changing the rules regarding use of net operating losses, and 5) allowing immediate expensing of capital assets acquired after September 27, 2017. Due to the reduced statutory tax rate, we were required to remeasure our deferred tax assets and liabilities using the lower rate at December 22, 2017, the date of enactment. This remeasurement resulted in a reduction of net deferred tax liabilities of $85.8 million, which includes $48.2 million related to deferred taxes previously recognized in accumulated other comprehensive income. This represents a provisional estimate of the impact of the Tax Act, as it is based on our current understanding of the legislation. As additional guidance is released, the estimate will be updated as necessary during 2018. No other provisions of the Tax Act had a significant impact on our 2017 income tax provisions.
We recognize the benefits of uncertain tax positions when the benefits are more-likely-than-not to be sustained. We had no reserve for uncertain tax positions at December 31, 2017 or 2016. We recognize interest related to uncertain tax positions in interest expense and related penalties in other expenses. We paid no such interest and penalties related to federal income taxes during 2017 or 2016. We do not expect any significant changes in the amount of our reserve for uncertain tax positions within the next twelve months. We are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years prior to 2014.
Short-term debt as of December 31, 2015 consisted of two short-term advances, collateralized by fixed maturity securities, payable to FHLB totaling $15.0 million. The advances included a $10.0 million advance on December 21, 2015, repaid January 11, 2016, at an interest rate of 0.55% and a $5.0 million advance on December 30, 2015, repaid January 6, 2016, at an interest rate of 0.46%.
Holders of the Class A common stock and Series B preferred stock vote together as a group in the election of Class A Directors (four to ten). The Class B common stock votes as a separate class to elect the Class B Directors (five to seven). Voting for the Directors is noncumulative. Ownership aspects of our Class B common stock are governed by a Class B Shareholder Agreement. The IFBF's ownership in the three classes of stock results in IFBF owning 71% of our voting stock as of December 31, 2017, and having the ability to control the Company. Holders of Class A common stock and Class B common stock receive equal per-share common stock dividends.
We participate in various defined benefit pension plans (the Plans), including a multiemployer plan. The multiemployer plan is considered qualified under Internal Revenue Service regulations, and covers our employees and the employees of the other participating companies who had attained age 21, had one year of service and were employed prior to January 1, 2013. We also have a plan that provides supplemental pension benefits to certain highly compensated employees who have salaries and/or pension benefits in excess of the qualified limits imposed by federal law and were employed prior to January 1, 2013. Benefits under these plans are based on years of service and the employee's compensation. The plans are discussed below.
The FBL Financial Group Retirement Plan (the Multiemployer Plan) is considered a multiemployer plan, with the participation of affiliated and unaffiliated employers along with FBL Financial Group, Inc. and its subsidiaries. Under the multiemployer plan structure, our contributions are commingled with those of the other employers to fund the plan benefit obligations. Should a participating employer be unable to provide funding, the remaining employers would be required to continue funding all future obligations. If an employer elects to discontinue participation, prior to departure they will be required to contribute their portion of the underfunded pension obligation associated with their employees. This required contribution will be based on an actuarial estimate of future benefit obligations, which as an estimate may not ultimately be sufficient to fund future actual benefits. None of the participating employers have provided notice that they would be discontinuing participation in the Multiemployer Plan or would otherwise be unable to continue providing their share of required funding as of December 31, 2017.
The fair value of plan assets of the Multiemployer Plan exceeded the accumulated benefit obligation at December 31, 2017, but was less than the accumulated benefit obligation at December 31, 2016.
amortize. For the Multiemployer Plan it is expected that net periodic pension cost in 2018 will include $12.5 million for amortization of the actuarial loss and less than $0.1 million of prior service cost amortization. For the Other Plans it is expected that net periodic pension cost in 2018, included in accumulated other comprehensive income, will include $1.4 million for amortization of the actuarial loss.
We expect contributions to be paid to the Multiemployer Plan by us and our affiliated and unaffiliated employers for 2018 to be approximately $15.0 million, of which $4.6 million is expected to be contributed by us. We expect contributions to be paid to the Other Plans by us and affiliates for 2018 to be approximately $1.6 million, of which $0.7 million is expected to be contributed by us. Expected benefits to be paid under the Multiemployer Plan are as follows: 2018 - $18.6 million, 2019 - $17.9 million, 2020 - $21.3 million, 2021 - $21.7 million, 2022 - $22.7 million and 2023 through 2027 - $123.3 million. Expected benefits to be paid under the Other Plans are as follows: 2018 - $2.3 million, 2019 - $3.6 million, 2020 - $3.0 million, 2021 - $2.8 million, 2022 - $2.1 million and 2023 through 2027 - $14.7 million.
For our Multiemployer Plan, the underfunded portion of the pension benefit obligation is not required to be recognized as a liability in our consolidated balance sheets. The unrecognized liability for the underfunded status of our Multiemployer Plan totaled $30.6 million at December 31, 2017 and $45.4 million at December 31, 2016.
The valuation methodologies used for assets measured at fair value are:
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, 2017.
We issue new shares to satisfy stock option exercises. Cash received from stock options exercised totaled $0.7 million for 2017, $2.5 million for 2016 and $3.7 million for 2015. The actual tax benefit realized from stock options exercised totaled $0.2 million for 2017, $1.0 million for 2016 and $1.4 million for 2015.
We have a Director Compensation Plan under which non-employee directors on our Board may elect to receive a portion of their compensation in the form of cash or deferred cash-based stock units. Cash-based stock units outstanding under this plan totaled 25,243 at December 31, 2017 and 24,923 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 53,254 at December 31, 2017 and 57,876 at December 31, 2016. At December 31, 2017, there were 108,131 shares of Class A common stock available for future issuance under the Director Compensation Plan.
We have management agreements under which we provide general business, administrative and management services to Farm Bureau Property & Casualty Insurance Company and other affiliates. Fee income for these services totaled $2.0 million in 2017, $2.2 million in 2016 and $2.3 million in 2015. In addition, as discussed in Note 1, we provide investment advisory services and lease property and equipment under agreements with Farm Bureau Property & Casualty, other affiliates and non-affiliates.
We share certain office facilities and services with the IFBF and its affiliated companies. These expenses are allocated on the basis of cost and time studies that are updated annually and consist primarily of rent, salaries and related expenses, travel and other operating costs. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the IFBF, provides certain services to us under a separate arrangement. We incurred related expenses totaling $1.1 million in 2017 and $1.0 million in 2016 and 2015.
We have service agreements with the Farm Bureau-affiliated property-casualty companies operating within our marketing territory, including Farm Bureau Property & Casualty Insurance Company 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 $9.1 million in 2017, $8.6 million in 2016 and $9.9 million in 2015 relating to these arrangements.
In the normal course of business, we may be involved in litigation in which damages are alleged that are substantially in excess of contractual policy benefits or certain other agreements. We are not aware of any such claims threatened or pending against FBL Financial Group, Inc. or any of its subsidiaries for which a material loss is reasonably possible.
There were no antidilutive stock options outstanding in any period presented.
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, 2017, Farm Bureau Life’s net gain from operations of $106.1 million, exceeded 10% of statutory surplus; accordingly, that amount is the maximum available for distribution to FBL Financial Group, Inc. without regulatory approval during 2018. Timing of such dividends during the year is limited based on the timing of dividends paid within the preceding 12 months.
We use non-GAAP operating income (a measure of earnings not recognized under GAAP), in addition to net income, to measure our performance. Non-GAAP operating income, for the periods presented, consists of net income adjusted to exclude the impact of changes in federal statutory income tax rates and tax laws, realized gains and losses on investments and the change in net unrealized gains and losses on derivatives, which can fluctuate greatly from period to period. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income (loss). Specifically, call options relating to our indexed business are one-year assets while the embedded derivatives in the indexed contracts represent the rights of the contract holder to receive index credits over the entire period the indexed annuities are expected to be in force. During 2017, we revised our non-GAAP operating income definition to remove from net income the initial impact to deferred income taxes from a change in tax laws. Such changes can create an unusual one-time remeasurement of deferred taxes not reflective of normal operations. The revision did not impact 2016 or 2015 non-GAAP operating earnings but did affect 2017, with the recent enactment of the Tax Act. See Note 5 to our consolidated financial statements included in item 8 for additional information regarding the Tax Act.
Depreciation and amortization related to property and equipment are allocated to the product segments while the related property, equipment and capitalized software are allocated to the Corporate and Other segment. Depreciation and amortization for the Corporate and Other segment include $4.1 million for 2017, $4.4 million for 2016 and $4.1 million for 2015 relating to leases with affiliates. In the consolidated statements of operations, we record these depreciation amounts net of related lease income from affiliates.
Interest expense is attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significant during the periods presented above. Goodwill at December 31, 2017 and 2016 was allocated among the segments as follows: Annuity ($3.9 million) and Life Insurance ($6.1 million).
Prior to 2017, securities and indebtedness of related parties were attributable to the Corporate and Other segment. In 2017, we began to assign a portion of our investments held in securities and indebtedness of related parties to the Life Insurance segment. The following chart provides the related equity income (loss) by segment.
Premiums collected, which is not a measure used in financial statements prepared according to GAAP, include premiums received on life insurance policies and deposits on annuities and universal life-type products. Premiums collected is a common life insurance industry measure of agent productivity. Net premiums collected totaled $631.0 million in 2017, $689.7 million in 2016 and $683.1 million in 2015.