Certain amounts from 2009 through 2011 have been restated due to the retroactive adoption of guidance issued by the Financial Accounting Standards Board (FASB) related to accounting for costs associated with acquiring or renewing insurance contracts as discussed in Note 1 to our consolidated financial statements.
We also include within our analysis “premiums collected” which is not a measure used in financial statements prepared in accordance with GAAP, but is a common industry measure of agent productivity. See Note 15 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.
The amount of spread (excess of net investment income earned over interest credited) we earn on contract holders' general account balances.
Actual experience and changes in assumptions for expected surrender and withdrawal rates, mortality and spreads used in the amortization of deferred acquisition costs.
Fixed maturity security yields generally finished lower for 2012 as both credit spreads and U.S. Treasury yields declined over the period. The yield curve remained moderately steep at year end, but low overall interest rates create a challenging environment for sales of new money fixed annuity products. Strong liquidity and favorable corporate profitability continue to support fundamental credit quality. In the securitized markets, yields for asset-backed securities generally declined for the year given continued strong investor demand and improving consumer fundamentals. Yields for residential mortgage-backed securities and high quality commercial mortgage-backed securities also declined during the year.
Net income attributable to FBL Financial Group increased in 2012 and decreased in 2011 primarily due to the impact of discontinued operations and operating income adjustments. Operating income increased in 2012 and 2011 due primarily to the impact of an increase in the volume of business in force and increased spreads. These increases were partially offset by increases in the amortization of deferred acquisition costs and the value of insurance in force in 2012 compared to 2011 and an increase in mortality in 2011 compared to 2010. Both 2011 and 2010 earnings benefitted from the impact of refining actuarial estimates that reduced the value of insurance in force and deferred acquisition costs by $7.4 million in 2011 and decreased reserves by $4.9 million in 2010.
Earnings per share from continuing operations and operating income per common share benefited from the repurchase of 5.5 million Class A common shares during the twelve months ended December 31, 2012. Details regarding the share repurchases are included in Note 9 to the consolidated financial statements. If the repurchase activity would have been completed on January 1, 2012, the earnings per share amounts, assuming dilution, would have been $0.23 higher for net income and $0.25 higher for operating income.
Includes prepayment fee income and net discount of accretion on mortgage and asset-backed securities resulting from changing payment speed assumptions at the end of the period.
The average aggregate account value for individual annuity contracts in force increased in 2012 and 2011 due to continued sales. Premiums collected were lower in 2012 as sales of certain New Money products were suspended in the third quarter of 2011 due to the extremely low interest rate environment. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rate and perceived security of our products compared to those of competing products.
Also included within our policy liabilities are advances on our funding agreements with the Federal Home Loan Bank (FHLB). Outstanding funding agreements totaled $328.5 million at December 31, 2012, $268.0 million at December 31, 2011 and $268.5 million at December 30, 2010.
The weighted average yield on cash and invested assets for individual annuities decreased in 2012 primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. The 2012 decrease was partially offset by continued higher investment fee income. The 2011 weighted average yield was slightly higher than 2010 average yields due to higher investment fee income and a lower cost of an interest rate swap we held during a portion of 2011, offsetting the impact of relative lower yields on new investment acquisitions. See the "Financial Condition" section which follows for additional information regarding the yields obtained on
Certain reserve refinements made in 2012, including the impact of updates to mortality tables and lapse assumptions, increased life insurance reserves $1.8 million. The impact of refining methods and assumptions relating to the value of insurance in force, deferred acquisition costs and certain traditional life insurance reserves decreased benefits and expenses $7.4 million in 2011 and $4.9 million in 2010.
The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in 2012 and 2011 due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by an increase in investment fee income in 2012. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. The changes in the weighted average interest crediting rates on our interest sensitive life insurance products are due to crediting rate actions taken on various products in 2012, 2011 and 2010 in response to the declining portfolio yield.
Pre-tax operating income increased in 2012, compared to the prior period, primarily due to a reduction in underwriting expenses allocated to the segment, the impact of market performance and profits on amortization of deferred acquisition costs on our variable business and an increase in net investment income, partially offset by a decrease in pre-tax equity income. The decrease in 2011 was primarily due to an increase in mortality experience and a decrease in pre-tax equity income, partially offset by a decrease in other underwriting expenses allocated to the segment and increases in net investment income and other income.
Amortization of deferred acquisition costs and unearned revenue reserves changed over the three year period primarily due to the impact of market performance in the separate accounts. During 2012, 2011 and 2010, amortization was impacted by unlocking deferred acquisition costs and unearned revenue reserves to reflect changes in our projected withdrawal rates, policy lapses and mortality assumptions as well as projected spreads and fee revenues on our variable business. During 2012, we incurred additional amortization through unlocking as a result of our analysis of the impact of a continued low interest rate environment.
The level of realized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. See "Financial Condition - Investments" and Note 3 to our consolidated financial statements for details regarding our unrealized gains and losses on available-for-sale securities at December 31, 2012 and 2011.
Fixed maturity other-than-temporary credit impairment losses for 2012 were incurred within the energy sector due to deteriorating operating results of a geothermal operation and an oil tanker carrier. The transportation sector loss related to a global energy transportation company that reported a financial irregularity and filed for bankruptcy protection during the fourth quarter. Losses were also incurred within our residential and other asset-backed securities due to weakness in underlying collateral values, reduced reliance on insurance credit support and anticipated interest shortfalls we are likely not to recover. Fixed maturity other-than-temporary credit impairment losses for 2011 were incurred within several industry sectors. The energy sector loss related to an oil carrier with credit concerns, including a rating agency downgrade. The manufacturing sector and finance sector losses are related to companies restructuring their debt obligations due to financial difficulties. Losses were also incurred within our residential and other asset-backed securities, generally due to concerns over potential defaults and weakness in underlying collateral values. Furthermore, during 2011 we recognized an other-than-temporary impairment loss of $4.7 million on an equity method investment with an uncertain future financial condition due to current class action litigation. Fixed maturity other-than-temporary credit impairment losses for 2010 were incurred within the finance sector due to deferred interest coupons on hybrid financial instruments which likely will not be recovered. Losses were also incurred within our other asset-backed securities, generally due to concerns over potential defaults and weakness in underlying collateral values.
As a result of the sale of EquiTrust Life, the operations of the component sold and the related loss on sale are reflected as discontinued operations for all periods presented. See Note 2 to our consolidated financial statements for additional details on income (loss) from discontinued operations.
Our investment portfolio increased 11.9% to $7,160.7 million at December 31, 2012 compared to $6,397.2 million at December 31, 2011. While the portfolio increased due to positive cash flows from operating and financing activities, a significant driver was a $247.6 million increase in the fair market value of fixed maturities during 2012 to a net unrealized gain of $628.1 million at December 31, 2012. U.S. Treasury yields were flat and credit spreads declined during 2012. Moderately wide credit spreads in certain sectors continue to impact our investment portfolio. Additional details regarding securities in an unrealized loss position at December 31, 2012 are included in the discussion that follows and in Note 3 to our consolidated financial statements included in Item 8. Details regarding investment impairments are discussed above in the "Realized Gains (Losses) on Investments" section under "Results of Operations."
We manage the investment portfolio to optimize risk-adjusted yield within the context of prudent asset-liability management. We evaluate multiple cash flow testing scenarios as part of this process. The Company's investment policy calls for investing primarily in high quality fixed maturity securities and commercial mortgage loans.
The table above summarizes selected information for fixed maturity purchases related to continuing operations. The effective annual yield shown is the yield calculated to the "worst-call date." For noncallable 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 maturity is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average maturity is equal to the stated maturity date.
(NAIC designations 3 through 6). As of December 31, 2012, no single non-investment grade holding exceeded 0.2% of total investments.
Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans. We also have a partnership interest in two funds at December 31, 2012 and one fund at December 31, 2011, that own securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The funds are reported as securities and indebtedness of related parties in our consolidated
The AAA, AA and A rated commercial mortgage-backed securities are broken down into categories based on subordination levels. Rating agencies disclose subordination levels, which measure the amount of credit support that the bonds (or tranches) have from subordinated bonds (or tranches). Generic is a term used for securities issued prior to 2005. The super senior securities have subordination levels greater than 27%, the mezzanine securities have subordination levels in the 17% to 27% range and the junior securities have subordination levels in the 9% to 16% range. Also included in the commercial mortgage- backed securities are military housing bonds totaling $95.1 million at December 31, 2012 and $87.2 million at December 31,
State, municipal and other government securities totaled $1.2 billion, or 19.9% of our portfolio and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. Our municipal bond exposure has an average rating of AA and is trading at 112.6% of amortized cost.
Equity securities totaled $86.3 million at December 31, 2012 and $57.4 million at December 31, 2011. Gross unrealized gains totaled $4.8 million and gross unrealized losses totaled $0.7 million at December 31, 2012. At December 31, 2011, gross unrealized gains totaled $2.3 million and gross unrealized losses totaled $0.5 million on these securities. The unrealized losses are primarily attributable to non-redeemable perpetual preferred securities from issuers in the finance sector. See Note 3 to our consolidated financial statements for further discussion regarding our analysis of unrealized losses related to these securities.
FBL Financial Group, Inc. stockholders' equity increased 0.8% to $1,212.2 million at December 31, 2012, compared to $1,202.3 million at December 31, 2011, primarily due to comprehensive income, partially offset by the repurchase of 5.5 million shares of our Class A common stock for $181.9 million during 2012, as discussed in Note 9 to our consolidated financial statements.
At December 31, 2012, FBL's common stockholders' equity was $1,209.2 million, or $47.47 per share, compared to $1,199.3 million, or $39.13 per share at December 31, 2011. Included in stockholders' equity per common share is $11.38 at December 31, 2012 and $5.80 at December 31, 2011 attributable to accumulated other comprehensive income, which has increased due to an increase in the fair value of our available for sale fixed maturity securities.
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 insurance products are competitive within the market place, or for contractual reasons in the case of products earning guaranteed rates, will result in lower earnings.
without incorporation of new business. We estimate that this scenario would decrease average investment yields supporting our annuity business by 0.15% to 0.20% annually over the near term; and decrease average investment yields supporting our universal life business by 0.05% to 0.10% annually over the near term. In addition to not incorporating the impact of new business, this hypothetical illustration does not reflect the potential impact of policyholder behavior. An increase in net cash flows from that modeled will accelerate the pace at which the portfolio yield will decrease and a decrease in the net cash flows from that modeled will slow down the pace at which the portfolio yield will decrease. Accordingly, actual investment yields could differ materially from those presented. Furthermore, the impact of a decline in portfolio yield on net income is dependent on our ability and willingness to adjust crediting rates.
Non-discretionary products primarily represent funding agreements, guaranteed investment contracts and supplemental contracts involving life contingencies where we do not have the ability to adjust crediting rates.
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% for every one-to-two years the contract is in force.
Our exposure to interest rate risk stems largely from our annuity products as the cash flows of these products can vary significantly with changes in interest rates. We have holdings in fixed maturity and mortgage loan portfolios to offset the interest rate risk of our annuity products. We actively manage the projected cash flows and duration of these assets and liabilities by minimizing the difference between the two. While it can be difficult to maintain asset and liability durations that are perfectly matched in a dynamic environment, we have identified various strategies that can be implemented if duration mismatches exceed acceptable tolerances. The effective duration of the fixed maturity and mortgage loan portfolios backing our annuity products was 5.5 at December 31, 2012 and 5.3 at 2011. The effective duration of our annuity liabilities was approximately 6.5 at December 31, 2012 and 6.3 at December 31, 2011.
If interest rates were to increase 10% from levels at December 31, 2012 and 2011, the fair value of our fixed maturity securities and short-term investments would decrease approximately $75.8 million at December 31, 2012 and $70.2 million at December 31, 2011. 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 were to decrease 10% from levels at December 31, 2012 and 2011 the fair value of our debt would increase $2.4 million at December 31, 2012, and $1.6 million at December 31, 2011 excluding the short-term debt redeemed on January 30, 2012.
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 2012, 2011 and 2010. As a result, revenues from these sources do fluctuate with changes in the fair value of the equity, fixed maturity and other securities held by the separate accounts.
During 2012, our operating activities generated cash flows totaling $206.5 million consisting of net income of $79.9 million adjusted for non-cash revenues and expenses netting to $126.6 million. We used cash of $548.7 million in our investing activities during 2012. The primary uses were $1,277.1 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $773.8 million in sales, maturities and repayment of investments. Our financing activities provided cash of $124.0 million during 2012. The primary financing source was $629.7 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $361.2 million for return of policyholder account balances on interest sensitive products. Also, funds of $173.3 million were used for the net repurchase and issuance of common stock. In addition, funds of $211.6 million from restricted debt defeasance trust were used to pay off $174.3 million of short-term debt and the related make-whole premium liability.
Parent company cash inflows from operations consist primarily of (i) fees that it charges the various subsidiaries and affiliates for management of their operations, (ii) expense reimbursements and tax settlements from subsidiaries and affiliates, (iii) proceeds from the exercise of employee stock options, (iv) proceeds from borrowings, (v) investment income and (vi) dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during 2012 included management fees from subsidiaries and affiliates of $4.2 million. Cash outflows are principally for salaries, taxes and other expenses related to providing these management services, dividends on outstanding stock, stock repurchases, interest and principal repayments on our parent company debt and capital contributions to subsidiaries.
As discussed in Note 2 to our consolidated financial statements, in connection with the EquiTrust Life sale, we redeemed $175.0 million of Senior Notes with non-affiliates in January 2012. On December 30, 2011, we exercised the provisions of the trust indentures and deposited $211.6 million into two irrevocable debt defeasance trusts for the principal, accrued interest and estimated make-whole premium on the Senior Notes with non-affiliates. Funds of $210.9 million from the trusts were used to pay-off the Senior Notes with non-affiliates on January 30, 2012 and the remaining balance in the trusts of $0.7 million was returned to us. Interest payments on all debt totaled $11.4 million in 2012, $22.3 million in 2011 and $24.4 million in 2010. The 2012 interest payments include $3.5 million from the debt defeasance trusts for the Senior Notes redeemed in 2012. Interest payments on our debt outstanding at December 31, 2012 are estimated to be $7.9 million in 2013.
Farm Bureau Life's cash inflows primarily consist of premium income, deposits to policyholder account balances, income from investments, sales, maturities and calls of investments and repayments of investment principal. Farm Bureau Life's cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, dividends and current operating expenses and dividends. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. Continuing operations and financing activities from Farm Bureau Life relating to interest sensitive products provided funds totaling $476.2 million in 2012, $434.0 million in 2011 and $565.0 million in 2010.
On a consolidated basis, we anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. Our investment portfolio at December 31, 2012, included $74.5 million of short-term investments, $78.1 million of cash and $573.4 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value. Farm Bureau Life is also a member of the FHLB, which provides a source for additional liquidity if needed. This membership allows us to utilize fixed or floating rate advances offered by the FHLB and secured by qualifying collateral. Our total capacity to utilize such advances is impacted by multiple factors including the market value of eligible collateral, level of statutory admitted assets and excess reserves, and our willingness or capacity to hold activity-based FHLB common stock.
In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments which 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, 2012:
Amounts shown in this table are projected payments through the year 2062 which we are contractually obligated to pay to our life insurance and annuity contract holders. The payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency when applicable. These assumptions are based on our historical experience. The total of the contractual obligations relating to insurance contracts noted above differs from the liability balance on our consolidated balance sheet as follows:
In addition, contractual obligations totaling $265.0 million relating to dividend accumulations and other policy claims are included in the "Other policy claims and benefits" and "Advance premiums and other deposits" lines on our consolidated balance sheet.
Includes our estimated future contributions to defined and postretirement benefit plans. Contributions related to the qualified pension plan are included through 2013. No amounts related to the qualified pension plan are included beyond 2013 as the contribution amounts will be re-evaluated based on actual results.
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred acquisition costs, are capitalized and amortized into expense. We also record an asset, value of insurance in force acquired, for the cost assigned to insurance contracts when an insurance company is acquired. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued. For participating traditional life insurance and interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted (also known as "unlocked") when Farm Bureau Life revises its estimate of current or future gross profits or margins. For example, deferred acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
Pension assets and liabilities are affected by the estimated market value of plan assets, estimates of the expected return on plan assets and/or discount rates. Actual changes in the fair market 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, 2012 pension obligation was computed based on an average 4.18% 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 increase our net pension liability. Our net pension liability could increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the discount rate.
See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements that have been implemented during 2012 and those that have been issued and will be implemented 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 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.
We have audited FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Management of FBL Financial Group, Inc. (the Company) is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2012 of FBL Financial Group, Inc. and our report dated February 14, 2013 expressed an unqualified opinion thereon.
(1) Amounts for the periods shown relate to Class A Common Stock.
Effective January 1, 2012, we adopted guidance issued by the FASB related to the presentation of comprehensive income. This guidance requires us to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance removes the presentation option allowing comprehensive income disclosures in the statement of changes in stockholders' equity, but does not change the items that must be reported in other comprehensive income. We have elected to present a separate statement of comprehensive income immediately following our consolidated statements of operations for annual periods. Other than this presentation change, the adoption of this guidance did not have any impact on our consolidated financial statements.
Fixed maturities, comprised of bonds, redeemable preferred stock and certain non-redeemable preferred stock, which may be sold, are designated as "available for sale." Available-for-sale securities are reported at fair value and unrealized gains and losses on these securities, with the exception of unrealized gains and losses relating to the synthetic collateralized debt obligation in 2010 (see Note 1), are included directly in stockholders' equity as a component of accumulated other comprehensive income. Beginning July 1, 2010, unrealized gains and losses relating to the synthetic collateralized debt obligation were recorded as a component of net investment income in the consolidated statements of operations. 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 and unearned revenue reserve that would have been required as a charge or credit to income had such amounts been realized.
Real estate is reported at cost less allowances for depreciation, as applicable. The carrying value of these assets is subject to regular review. For properties not held for sale, if indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying value, an impairment loss is recognized and the property's cost basis is reduced to fair value. If the fair value, less estimated sales costs, of real estate held for sale decreases to an amount lower than its carrying value, the carrying value of the real estate is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. There was one property held for investment with a valuation allowance of less than $0.1 million as of December 31, 2012 and December 31, 2011. There were no properties held for sale with a valuation allowance as of December 31, 2012 or 2011.
We have embedded derivatives associated with modified coinsurance contracts, which are included within reinsurance recoverable, and at December 31, 2011, with a collateralized debt obligation included in fixed maturities. These instruments are carried at fair value with changes reflected in net investment income. See Note 4 for more information regarding our derivative instruments.
We monitor the financial condition and operations of the issuers of fixed maturities and equity securities that could potentially have a credit impairment that is other-than-temporary. In determining whether or not an unrealized loss is other-than-temporary, we review factors such as:
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 other-than-temporary impairment occurs and there is a non-credit portion of the unrealized loss that won't be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities 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.
Fair values of fixed maturities are based on quoted market prices in active markets when available. Fair values of fixed maturities that are not actively traded are estimated using valuation models that vary by asset class. Fair values for all securities are reviewed for reasonableness by considering overall market conditions and values for similar securities. Fair values of redeemable preferred stocks, equity securities and derivative investments are based on the latest quoted market prices, or for those items not readily marketable, generally at values which are representative of the fair values of comparable issues. See Note 5 for more information on our fair value policies, including assumptions and the amount of securities priced using the valuation models.
Fair values for the embedded derivatives in our modified coinsurance contracts are based on the difference between the fair value and the cost basis of the underlying investments. See Note 4 for more information regarding derivatives and Note 6 for additional details on our reinsurance agreements.
Deferred acquisition costs include certain costs of acquiring new insurance business, including commissions and other expenses related to the production of new business, to the extent recoverable from future policy revenues and gross profits. Also included are premium bonuses and bonus interest credited to contracts during the first contract year only. The value of insurance in force acquired represents the cost assigned to insurance contracts when an insurance company is acquired. The initial value is determined by an actuarial study using expected future gross profits as a measurement of the net present value of the insurance acquired. Interest accrued on the unamortized balance at a weighted average rate of 4.70% in 2012, 4.72% in 2011 and 4.69% in 2010.
As discussed above, we adopted accounting guidance in 2012 impacting deferred acquisition costs. In addition, during 2011, refinements were made to the methods and assumptions used to calculate the amortization of value of insurance in force and deferred acquisition costs, which increased net income from continuing operations $4.8 million ($0.15 per basic and diluted common share).
Other assets at December 31, 2012 and 2011, also includes goodwill of $9.9 million related to the excess of the amounts paid to acquire companies over the fair value of the net assets acquired. Goodwill is not amortized but is subject to annual impairment testing. We evaluate our goodwill balance by comparing the fair value of our reporting units to the carrying value of the
We have accrued dividends for participating business that are established for anticipated amounts earned to date that have not been paid. The declaration of future dividends for participating business is at the discretion of the Board of Directors of Farm Bureau Life. Participating business accounted for 35% of receipts from policyholders during 2012 (2011 - 38% and 2010 - 39%) and represented 12% of life insurance in force at December 31, 2012, 2011 and 2010.
extent of benefits paid or provided to the separate account policyholders, are excluded from the amounts reported in the accompanying consolidated statements of operations.
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 $2.4 million in 2012, $1.8 million in 2011 and $2.0 million in 2010. Investment advisory fee income from affiliates totaled $1.5 million in 2012 and $1.2 million in 2011 and 2010. In addition, Farm Bureau Life has certain items reported as other income and other expense, which netted to $3.3 million in 2012, $3.2 million in 2011 and $2.1 million in 2010. During 2012, we also received fees of $3.5 million from the acquirer of EquiTrust Life to provide administrative support and transition services. We expense legal costs associated with a loss contingency as incurred.
Debt required to be redeemed due to selling a significant component of our business remains a liability until we have been legally released from the entire obligation and all conditions for extinguishment have been met. In addition, any gain or loss on the extinguishment is recognized when we are relieved of the entire obligation. Changes in fair value of embedded derivatives related to make-whole redemption provisions are reported as loss on debt redemption in the Consolidated Statements of Operations.
If the debt is not specific to the disposed component, the liability is not classified as held for sale and any related gain or loss is reported as part of continuing operations. However, interest on any debt required to be redeemed as a result of the disposal transaction is reported in income from discontinued operations for current and prior periods commencing in the period in which the business is either disposed of or accounted for as a disposal group.
We participate with several affiliates in several defined benefit pension plans, including a multiemployer plan. We employ a long-term investment strategy of maintaining diversified plan assets in equity securities and a group annuity contract. The expected return on plan assets is set at the long-term rate expected to be earned based on the long term investment strategy of the plans for assets at the end of the reporting period.
We also have three share-based payment arrangements under our Class A Common Stock Compensation Plan and a Cash-Based Restricted Stock Unit Plan. We recognize compensation expense for all share-based payments granted, modified or settled. The stock option non-performance related stock-based expense is recognized over the shorter of our five-year vesting schedule or the period ending when the employee becomes eligible for retirement using the straight-line method. The restricted stock unit non-performance related stock-based expense is recognized over our five-year vesting schedule using the straight-line method. The performance related stock-based expense is based on the number of shares expected to vest and is recognized over the required service period. The impact of forfeitures is estimated and compensation expense is recognized only for those stock-based instruments expected to vest. We report tax deductions related to stock-based instruments in excess of recognized compensation expense as a financing cash flow.
We also offer cash-based restricted stock units to certain executives beginning in 2012, which will vest over five-years. The amount payable per unit awarded is equal to the price per share of the Company's common stock at settlement of the award, and as such, we measure the value of the award each reporting period based on the current stock price. The effects of changes in the stock price during the service period are recognized as compensation cost over the service period.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. For example, significant estimates and assumptions are utilized in the valuation of investments, determination of other-than-temporary impairments of investments, amortization of deferred acquisition costs, calculation of policyholder liabilities and accruals and determination of pension expense. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the consolidated financial statements.
The sale allowed us to exit the annuity business sold through the independent distribution channel, which represented a majority of EquiTrust Life's operations, focus on our core Farm Bureau Life operations and undertake certain capital management initiatives. While EquiTrust Life was sold in its entirety, Farm Bureau Life assumed a limited portion of the EquiTrust Life business related to variable universal life and variable annuity products distributed through various unaffiliated third parties, as well as a small amount of fixed life and annuity products. The business component sold is described herein as “the EquiTrust Life Business.”
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairments are included in the gross unrealized gains and losses column above.
Corporate securities include hybrid preferred securities with a carrying value of $99.6 million at December 31, 2012 and $116.7 million at December 31, 2011. Corporate securities also include redeemable preferred stock with a carrying value of $5.6 million at December 31, 2012 and $5.5 million at December 31, 2011.
Included in fixed maturities in the above table are 140 securities from 116 issuers at December 31, 2012 and 249 securities from 204 issuers at December 31, 2011. The unrealized losses in fixed maturities are generally due to wider spreads between the risk-free and corporate and other bond yields relative to the spreads when the securities were purchased. We do not intend to sell or believe we will be required to sell any of our impaired fixed maturities before recovery of their amortized cost basis. The following summarizes the more significant unrealized losses of fixed maturities and equity securities by investment category as of December 31, 2012.
Corporate securities: The largest unrealized losses are in the finance sector ($101.9 million carrying value and $6.9 million unrealized loss). The largest unrealized losses in the finance sector were in the banking ($56.2 million carrying value and $5.1 million unrealized loss) and the insurance ($35.9 million carrying value and $1.1 million unrealized loss) sub-sectors. Although finance sector spreads declined during 2012, spreads remain wide for several issuers within this sector due to credit concerns with the underlying issuers.
Commercial mortgage-backed securities: The unrealized losses on commercial mortgage-backed securities were primarily due to spread widening and industry concerns regarding the potential for future commercial mortgage defaults. The contractual cash flows of these investments are based on mortgages backing the securities. Unrealized losses on military housing bonds were mainly attributed to a limited number of investors and negative publicity regarding this sector. Insured military housing bonds have also been impacted by the removal of their ratings following downgrades of the insurance providers.
Other asset-backed securities: The unrealized losses on other asset-backed securities were primarily due to concerns regarding defaults on subprime mortgages and home equity loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.
Equity securities: Our gross unrealized losses were on investment grade non-redeemable perpetual preferred securities within the finance sector. These securities provide periodic cash flows, contain call features and are similarly rated and priced like other long-term callable bonds and are evaluated for other-than-temporary impairment similar to fixed maturities. The decline in fair value is primarily due to market concerns regarding the sector. We have evaluated the near-term prospects of our equity securities in relation to the severity and duration of their impairment and based on that evaluation have the ability and intent to hold these investments until recovery of fair value.
Included in the net impairment loss recognized in earnings in 2011, is an other than temporary impairment of $4.7 million related to an equity method investment held as Securities and Indebtedness of related parties, which is undergoing financial difficulties as a result of class action litigation.
The following table sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which a portion of the other-than-temporary impairment was recognized in other comprehensive income and corresponding changes in such amounts.
The real estate limited partnerships had revenues totaling $4.1 million for 2012, $4.9 million for 2011 and $5.4 million for 2010. We make commitments to fund partnership investments in the normal course of business. We did not have any other commitments to investees designated as VIE's during the years ended December 31, 2012, 2011 or 2010.
At December 31, 2012, we had committed to provide additional funds for investments in limited partnerships. The amounts of these unfunded commitments totaled $33.9 million.
As discussed in Note 2, the make-whole redemption feature of our unaffiliated senior notes was an embedded derivative based on U.S. Treasury yields at December 31, 2011. This derivative liability had a fair value of $33.1 million at December 31, 2011 and zero at December 31, 2012 due to the repayment of debt during January 2012. The derivative liability was reported in other liabilities in the consolidated balance sheet. The change in fair value is included in the loss on debt redemption line in the consolidated statements of operations.
We are not significantly involved in hedging activities and have limited exposure to derivatives. We do not apply hedge accounting to any of our derivative positions. Derivative assets, which are primarily reported in reinsurance recoverable and other investments, totaled $5.6 million at December 31, 2012 and $3.7 million at December 31, 2011. Our derivative assets consist of derivatives embedded within our modified coinsurance agreements and call options which provide an economic hedge for a small block of index annuity contracts, and, through December 31, 2011, a collateralized debt obligation. Derivative liabilities, excluding the make-whole redemption feature, totaled $0.5 million at December 31, 2012 and $0.4 million at December 31, 2011 and include derivatives embedded within our index annuity contracts and derivatives embedded within our modified coinsurance agreements. The net gain (loss) recognized on these derivatives was $1.6 million in 2012, ($0.5) million in 2011 and $0.5 million in 2010.
Level 3 fixed maturities include private placements as well as corporate, mortgage and other asset-backed and state and municipal securities for which there is little or no current market data available. We use external pricing sources, or if prices are not available will estimate fair value internally. Fair values of private investments in Level 3 are determined by reference to public market, private transactions or valuations for comparable companies or assets in the relevant asset class when such amounts are available. For other securities where an exit price based on relevant observable inputs is not obtained, the fair value is determined using a matrix calculation. Fair values estimated through 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.
Perform an overall analysis of portfolio fair value movement against general movements in interest rates and spreads.
Meet monthly with our Investment Committee, the group that oversees our valuation process, to discuss valuation practices and observations during the pricing process.
Level 1 restricted debt defeasance trust assets consist of cash and listed mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value.
Short-term and long-term debt are not measured at fair value on a recurring basis. Short-term and long-term debt are a Level 3 measurement. The fair value of our outstanding debt excluding our short-term debt at December 31, 2011, is estimated using a discounted cash flow method based on the market's assessment or our current incremental borrowing rate for similar types of borrowing arrangements adjusted, as needed, to reflect our credit risk. Fair value of the short-term debt in 2011 was equal to the par value as the related fair value for the make-whole redemption price is reflected as an embedded derivative in other liabilities. Our selection of the credit spread requires significant judgment. A decrease in the spread will increase the estimated fair value of the outstanding debt.
Level 3 Financial Instruments Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate which have been deemed to be impaired as of the end of the reporting period. During 2012, one mortgage loan was impaired to a fair value totaling $1.6 million which resulted in an impairment of $0.3 million. There were no assets carried at fair value on a nonrecurring basis at December 31, 2011.
We participate in a reinsurance pool with various unaffiliated life insurance companies to mitigate the impact of a catastrophic event on our financial position and results of operations. Members of the pool share in the eligible catastrophic losses based on their size and contribution to the pool. The maximum loss we could incur as a result of losses assumed from other pool members is $7.4 million per event. As of the date of this filing, there have been no claims on the reinsurance pool.
Reinsurance contracts do not relieve us of our obligations to policyholders. To the extent that reinsuring companies are later unable to meet 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 periodically revise key assumptions used in the calculation of the value of insurance in force acquired through an “unlocking” process, which increased amortization $2.6 million in 2012. In addition, as described in Note 1, during 2011, refinements were made to the methods and assumptions used to calculate the amortization of value of insurance in force acquired, resulting in a $6.9 million reduction in amortization. Net amortization, based on expected future gross profits/margins, for the next five years is expected to be as follows: 2013 - $2.8 million; 2014 - $2.6 million; 2015 - $2.8 million; 2016 - $2.5 million; and 2017 - $2.4 million.
We file a consolidated federal income tax return with Farm Bureau Life and FBL Financial Services, Inc. and certain of their subsidiaries. The companies included in the consolidated federal income tax return each report current income tax expense as allocated under a consolidated tax allocation agreement. This allocation typically results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing a benefit to the extent their losses contribute to reduce consolidated taxes.
The consolidated statements of changes in stockholders' equity also include a tax reclassification of $2.5 million in 2010 related to the reclassification of an embedded credit derivative loss.
We recognize the benefits of uncertain tax positions in accordance with the provisions of the FASB interpretation on accounting for uncertainty in income taxes. At December 31, 2012 and 2011, we have recorded an insignificant reserve for uncertain tax positions. Unrecognized tax benefits included in our reserve, if recognized, would impact our effective tax rate, although we do not expect these impacts to be material. We recognized interest related to unrecognized tax benefits in interest expense and related penalties in other expenses.
Long-term debt includes $97.0 million of our subordinated debt obligation to FBL Financial Group Capital Trust (the Trust). We issued 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes) with a principal amount of $100.0 million to support $97.0 million of 5% Preferred Securities issued by the Trust. We also have a $3.0 million equity investment in the Trust, which is netted against the Notes on the consolidated balance sheets due to a contractual right of offset. The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes. As of December 31, 2012 and 2011, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
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 72% of our voting stock as of December 31, 2012, 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.
Net periodic pension cost of the Multiemployer Plan is allocated between participating employers on a basis of time incurred by the respective employees for each employer. Such allocations are reviewed annually. This Multiemployer Plan was not subject to collective bargaining agreements, a financial improvement plan or a rehabilitation plan. No surcharges were required to be paid to the Multiemployer Plan during 2012, 2011 or 2010. We are the primary employer in the Multiemployer Plan, providing more than 5 percent of the total contributions during 2012, 2011 or 2010.
We expect contributions to be paid to the Multiemployer Plan by us and affiliates for 2013 to be approximately $22.5 million, of which $7.4 million is expected to be contributed by us. We expect contributions to be paid to the Other Plans by us and affiliates for 2013 to be approximately $3.8 million, of which $2.0 million is expected to be contributed by us. Expected benefits to be paid under the Multiemployer Plan are as follows: 2013 - $20.3 million, 2014 - $22.8 million, 2015 - $24.7
Our expected long-term return on plan assets represents the rate of earnings expected in the funds invested to provide for anticipated benefit payments. We have analyzed the expected rates of return on assets and determined that a long-term return of 7.00% is reasonable based on the current and expected asset allocations and on the Multiemployer Plan's historical investment performance and best estimates for future investment performance.
The Multiemployer Plan assets are primarily invested in annuity products and insurance company pooled separate accounts that invest predominately in equity securities and real estate. We have certain pension obligations that are fully funded though annuity contracts with Farm Bureau Life which are presented as funded annuity contracts below. For 2012, excluding the funded annuity contracts, we employed a long-term investment strategy of diversifying the Multiemployer Plan assets with 60% in fixed income investments and 40% in equities. At December 31, 2012, the Multiemployer Plan assets were invested approximately 60% in fixed income investments and 40% in diversified equities. 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. Our investment strategy is to (1) achieve a long-term return sufficient to satisfy all Multiemployer Plan obligations, (2) assume a prudent level of risk and (3) maintain adequate liquidity. During 2013, while our overall investment strategy remains relatively the same, we have a new asset strategy whereby approximately 55% of Multiemployer Plan assets will be invested in fixed income securities, 40% in diversified equities and 5% in alternative investments. The expected return on Multiemployer Plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the Multiemployer Plan. In estimating the expected rate of return for each asset class, we take into account factors such as historical rates of return, expected future risk free rates of return and anticipated returns expected given the risk profile of each asset class.
There were no transfers into or out of Level 3 or between Level 1 and Level 2 during 2012.
We participate with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. We contributed cash in an amount equal to 100% of an employee's contributions up to 2% of the annual salary contributed by the employee and an amount equal to 50% of an employee's contributions between 2% and 4% of the annual salary contributed by the employee. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Expense related to the plan totaled $0.9 million in 2012 and 2011 and $0.8 million in 2010. Beginning in 2013, new employees and current employees who had not attained age 40 and 10 years of service as of January 1, 2013 will receive a larger matching contribution as well as a discretionary company contribution.
In addition to benefits offered under the aforementioned benefit plans, we and several other affiliates sponsor a plan that provides group term life insurance benefits to retirees who have worked full-time for ten years and attained age 55 while in service. Postretirement benefit expense for this plan is allocated in a manner consistent with pension expense discussed above. We also have two single employer plans that provide health and medical benefits to a small group of retirees. Postretirement benefit expense aggregated $0.1 million in 2012, 2011 and 2010. Changes in the underfunded status of these plans, reported in other comprehensive income, aggregated ($0.1) million in 2012, less than ($0.1) million in 2011 and $0.5 million in 2010.
In 2011, we introduced a Cash-Based Restricted Stock Unit Plan. Compensation expense for arrangements under this plan totaled $0.2 million for 2012 and $0.6 million for 2011. The income tax benefit recognized in the statements of operations for this arrangement totaled $0.1 million in 2012 and $0.3 million in 2011.
Represents the difference between the share price and exercise price for each option, excluding options where the exercise price is above the share price, at December 31, 2012.
We no longer grant nonvested Class A common stock beginning in 2012. In 2011 and prior years, we granted nonvested Class A common shares to certain executives. The restrictions on these shares lapse and the shares vest if we meet or exceed operating goals, such as earnings per share, book value and expense targets, within or during a three year period. Depending on performance, the actual amount of shares issued could range from zero to 100% of the granted amount. The value of the awards is based on the grant date fair value of the nonvested stock adjusted for expected forfeitures and an estimate of the number of shares expected to vest. The estimate for the number of shares to vest is reviewed each period and the impact of any changes in the estimate on expense is recorded in the current period. These awards are charged to expense using the straight-line method over the required service period. Dividends on the restricted stock during the restriction period are contingent upon vesting.
The expense related to the unvested share-based compensation granted under the nonvested stock arrangement has been fully recognized at December 31, 2012. The tax benefit realized from nonvested stock released to employees was $1.6 million in 2012, less than $0.1 million in 2011 and $0.7 million in 2010. We have a policy of withholding shares to cover estimated future tax payments.
Directors received a cash payment instead of stock awards during 2012. Directors were awarded nonrestricted Class A common shares totaling 24,806 during 2011 and 31,160 during 2010. The value of the stock was based on the fair value on the date of the grant. The tax benefit realized from the shares awarded to directors was $0.3 million in 2011 and 2010.
We also issued performance cash-based restricted stock units to an executive. Vesting of these units was dependent upon meeting or exceeding earnings per share and book value operating goals as well as continued employment with the Company. These restricted stock units were canceled in 2012 because the continued employment requirement was not met.
We share certain office facilities and services with the IFBF and its affiliated companies. These expenses are allocated on the basis of cost and time studies that are updated annually and primarily consist of rent, salaries and related expenses, travel and other operating costs. We also have an expense allocation agreement with Farm Bureau Property & Casualty for the use of property and equipment. Expense relating to this agreement totaled $1.1 million in 2012, $1.0 million in 2011 and $1.3 million in 2010.
We have management agreements, which include Farm Bureau Property & Casualty and other affiliates, under which we provide general business, administrative and management services. Fee income for these services totaled $1.9 million in 2012, $3.7 million in 2011 and $3.4 million in 2010. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the IFBF, provides certain management services to us under a separate arrangement. We incurred related expenses totaling $1.0 million in 2012, 2011 and 2010.
We have service agreements with the Farm Bureau-affiliated property-casualty companies operating within our marketing territory, including Farm Bureau Property & Casualty 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 expense totaling $10.0 million in 2012, $9.7 million in 2011 and $8.7 million in 2010 relating to these arrangements.
We are licensed by the IFBF to use the "Farm Bureau" and "FB" designations in Iowa. In connection with this license, we incurred royalty expense totaling $0.5 million in 2012, 2011 and 2010. We have similar arrangements with other state Farm Bureau organizations in our market territory. Total royalty expense to Farm Bureau organizations other than the IFBF totaled $1.4 million in 2012 and $1.5 million in 2011 and 2010. The royalty agreement with the IFBF provides them an option to terminate the agreement when the quarterly common stock dividend is below $0.10 per share.
In the normal course of business, we may be involved in litigation where damages are alleged that are substantially in excess of contractual policy benefits or certain other agreements. In recent years, companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We are not aware of any such matters threatened or pending against FBL Financial Group or any of its subsidiaries.
From time to time, assessments are levied on our insurance subsidiaries by guaranty associations in most states in which the subsidiaries are licensed. These assessments, which are accrued for, are to cover losses of policyholders of insolvent or rehabilitated companies. In some states, these assessments can be partially recovered through a reduction in future premium taxes. Recoveries (expenses) for guaranty fund assessments, net of related premium tax offsets, totaled less than $0.1 million in 2012, $0.1 million in 2011 and less than ($0.1) million in 2010.
State laws specify regulatory actions if an insurer's risk-based capital (RBC) ratio, a measure of solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. At December 31, 2012, Farm Bureau Life exceeded the minimum RBC requirements.
Farm Bureau Life's ability to pay dividends to the parent company is restricted by the Iowa Insurance Holding Company Act to earned surplus arising from its business. In addition, prior approval of the Iowa Insurance Commissioner is required for a dividend distribution of cash or other property whose fair value, together with that of other dividends made within the preceding 12 months, exceeds the greater of (i) 10% of adjusted policyholders' surplus as of the preceding year end, or (ii) the statutory net gain from operations of the insurer for the preceding calendar year. During 2013, the maximum amount legally available for distribution to FBL Financial Group, Inc. from Farm Bureau Life without further regulatory approval is $93.0 million.
The Annuity segment primarily consists of fixed rate annuities and supplementary contracts (some of which involve life contingencies). Fixed rate annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest. Fixed rate annuities primarily consist of flexible premium deferred annuities, but also include single premium deferred and immediate contracts. With fixed rate annuities, we bear the underlying investment risk and credit interest to the contracts at rates we determine, subject to interest rate guarantees.
closed blocks of variable annuity, variable universal life insurance and accident and health insurance products,
We analyze our segment results based on pre-tax operating income. Accordingly, income taxes are not allocated to the segments. In addition, operating results are reported net of transactions between the segments. Operating income for the three years ended December 31, 2012 represents net income excluding, as applicable, the impact of:
Premiums collected, which is not a measure used in financial statements prepared according to GAAP, include premiums received on life insurance policies and deposits on annuities and universal life-type products. Net premiums collected totaled $646.3 million in 2012, $678.9 million in 2011 and $634.5 million in 2010.