Our principal operations are conducted from property leased from a subsidiary of the Iowa Farm Bureau Federation under a 10 year operating lease that expires in 2021, with automatic five-year extensions unless terminated by one of the parties at least six months prior to the expiration date. Currently, the property leased primarily consists of approximately 138,000 square feet of a 400,000 square foot office building in West Des Moines, Iowa. In addition to our home office building, we lease additional space in West Des Moines, Iowa, to meet our business needs.
When reading the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, please refer to our consolidated financial statements and related notes included in Item 8, “Financial Statements and Supplementary Data,” of this report. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its insurance subsidiaries Farm Bureau Life Insurance Company (Farm Bureau Life) and Greenfields Life Insurance Company.
•We then describe the business environment in which we operate including factors that affect operating results.
•We highlight significant events that are important to understanding our results of operations and financial condition.
•We then review the results of operations beginning with an overview of the total Company results, followed by a more detailed review of those results by operating segment.
As discussed in “Part I, Item 1. Business, Merger Agreement,” on January 11, 2021, the Company announced that it entered into the Merger Agreement. Subject to the terms and conditions of the Merger Agreement, which has been unanimously approved by our board of directors, FBPCIC will acquire all of the outstanding Common Shares that are not currently owned or controlled by FBPCIC or IFBF, for $56.00 per Common Share in cash, without interest and less any required withholding taxes. Consummation of the Merger is subject to certain specified closing conditions, including approval by the Company’s shareholders as described in Part I, Item 1, expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, clearance by the Insurance Commissioner of the State of Iowa and approval by the Financial Industry Regulatory Authority. The obtaining of financing is not a condition to the obligations of FBPCIC or Merger Sub to effect the Merger.
financial statements included in Item 8 for further information regarding how we define our segments and pre-tax adjusted operating income.
•The volume of our life insurance and annuity business in force, which is driven by the level of our sales and the persistency of the business written.
•Our ability to price our life insurance products to earn acceptable margins over the cost of providing benefits and the expenses of acquiring and administering the products. Competitive conditions, mortality experience, persistency, benefit utilization, investment results and our ability to maintain expenses in accordance with pricing assumptions drive our margins on the life products. On many products, we have the ability to mitigate adverse experience through adjustments to credited interest rates, policyholder dividends or cost of insurance charges.
•Actual experience and changes in assumptions for expected surrender and withdrawal rates, mortality and spreads used in the amortization of deferred acquisition costs.
The COVID-19 pandemic had a significant impact on the U.S. economy during 2020. Beginning late in the first quarter of 2020 the United States experienced significant economic disruption as businesses closed and consumer access to goods and services became limited due to regulated or voluntary quarantine measures. As a result, the financial markets reacted negatively, impacting corporate liquidity and market interest rates. After the initial shock, the U.S. economy improved with the aid of significant economic stimulus measures, resulting in the stabilization of financial markets.
•U.S. gross domestic product decreased at an annual rate of 3.5% during 2020, compared to an increase of 2.2% during 2019 based on estimates.
•U.S. unemployment increased to 6.7% at December 31, 2020 based on estimates, compared to 3.5% at December 31, 2019.
We believe COVID-19 and the impact it had on our economy contributed to the following financial results during 2020:
•As the economic downturn and lack of consumer mobility put strain on certain issuers, net realized capital losses and the change in allowance for credit losses totaled $16.3 million during 2020 compared to net realized capital gains including other-than-temporary impairment losses of $7.6 million during 2019. The majority of these losses were incurred during the first quarter 2020.
•We incurred a pre-tax unlocking charge of $6.7 million during 2020, driven largely by a $13.1 million pre-tax charge associated with an expectation of lower future investment portfolio interest rates.
Our capital position remains strong, with Farm Bureau Life’s company action level risk-based capital ratio was 528% at December 31, 2020.
Results of Operations for the Three Years Ended December 31, 2020
(1)Amount represents a change in our deferred tax assets and liabilities due to the initial impact of the 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.
(5)Average invested assets, including investments held as securities and indebtedness of related parties and cash equivalents, is the average of investment balances at the beginning of the reporting period and as of the end of each quarter throughout the reporting period. Average invested assets are used in the calculation of the annualized investment yield.
Net income increased in 2019, compared to 2018, primarily due to changes in net realized gains/losses from investments and changes in fair value of derivatives. Net income and adjusted operating income increased in 2019, compared to 2018, due to the impact of unlocking actuarial assumptions, a decrease in amortization of deferred acquisition costs from the impact of market performance on our variable business and increased earnings from an increase in the volume of business in force. These increases in net income and adjusted operating income were partially offset by increases in death benefits and less spread income earned from lower yields on invested assets.
(1)Premiums collected is a non-GAAP measure of sales production, see Note 13 to our consolidated financial statements included in Item 8 for additional information.
(4)Annualized yield is the actual investment earnings during the year divided by average invested assets. Annualized yield is used as a measure of investment performance during the reporting periods.
(7)Individual annuity withdrawal rate represents withdrawal benefits incurred during the reporting period, excluding internal exchanges, as a percent of the simple average of related policy reserves at the beginning and end of the reporting period. The individual annuity withdrawal rate is a measure customer retention.
The average aggregate account value for individual annuity contracts in force decreased slightly in 2020, compared to 2019, as withdrawals and surrenders exceeded annuity premiums. The average aggregate account value for individual annuity contracts in force increased in 2019, compared to 2018, due to continued sales and the crediting of interest. Growth in our indexed annuity business in force continues to drive increases in interest sensitive product charges. Premiums collected decreased in 2020 and 2019, compared to prior periods, due to decreased sales of our fixed rate deferred and indexed annuity products, as sales were negatively impacted by crediting and cap rate reductions in response to declining portfolio yields. Individual fixed rate deferred annuity collected premiums were $82.8 million in 2020, $118.6 million in 2019 and $139.0 million in 2018. Indexed annuity collected premiums were $93.2 million in 2020, $128.2 million in 2019 and $137.6 million in 2018. To increase spread income given lower fixed and indexed annuity sales, we increased the issuance of funding agreements with the Federal Home Loan Bank of Des Moines (FHLB) during 2020. Outstanding funding agreements with FHLB, which are included in policyholder liabilities, totaled $585.2 million at December 31, 2020, $488.4 million at December 31, 2019 and $446.0 million at December 31, 2018.
withdrawal rate increased in 2019, compared to 2018, due to certain policies reaching the end of their interest rate guarantee period and the competitiveness of our current crediting rates relative to other financial products.
The annualized yield on average invested assets for individual annuities decreased in 2020 and 2019, compared to the prior periods, primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. The decrease in 2020, compared to 2019, was partially offset by higher other investment-related income while we recognized a decrease in other investment-related income in 2019 compared to 2018. See the “Financial Condition” section that follows for additional information regarding the yields obtained on investment acquisitions. Annualized average crediting rates on our individual annuity products decreased in 2020, compared to 2019, due to crediting and cap rate actions taken in 2020 in response to a declining portfolio yield and a change in our mix of business in force, partially offset by increased amortization of call option costs supporting our index annuity products. Annualized average crediting rates on our individual annuity products increased in 2019, compared to 2018, primarily due to increased amortization of call option costs.
Pre-tax adjusted operating income for the Life Insurance segment decreased in 2020, compared to 2019, primarily due to increases in death benefits, net of reinsurance and reserves released, and the impact of unlocking actuarial assumptions, partially offset by reduced other underwriting expenses and a benefit from the impact of an increase in the volume of business
in force. Pre-tax adjusted operating income for the Life Insurance segment increased in 2019, compared to 2018, primarily due to the impact of unlocking actuarial assumptions and the impact from an increase in the volume of business in force.
Results for 2018 were unfavorably impacted by the correction of an immaterial error related to a closed block of interest sensitive whole life business. The immaterial error arose and accumulated over several years, with none of those previous years being materially impacted. Remediation required an adjustment to existing in force business account values as well as adjustment to benefit payments for terminated business. The correction resulted in a pre-tax charge of $5.5 million, consisting of $3.5 million related to delayed benefit payments and $2.0 million of accrued interest. The change in estimate and accrued interest resulted in an increase to 2018 interest sensitive product benefits interest credited of $2.0 million, interest sensitive death benefits of $3.3 million and traditional life future policy benefits of $0.2 million.
The annualized yield on average invested assets for interest sensitive life insurance products decreased in 2020 and 2019, compared to prior periods, due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield and lower other investment-related income. See the “Financial Condition” section that follows for additional information regarding the yields obtained on investment acquisitions. Annualized average crediting rates on our interest sensitive life insurance products increased in 2020 and 2019, compared to prior periods, primarily due to increased amortization of call option costs supporting our indexed universal life products and a change in the mix of business.
Pre-tax adjusted operating income for the Corporate and Other segment decreased in 2020, compared to 2019, primarily due to increases in expenses and amortization of deferred acquisition costs driven by the impact of market performance on our variable business and a decrease in net investment income, partially offset by an increase in equity income. Pre-tax adjusted operating income for the Corporate and Other segment decreased in 2019, compared to 2018, primarily due to a decrease in amortization of deferred acquisition costs driven by the impact of market performance on our variable business, partially offset by the impact of unlocking actuarial assumptions and increases in expenses and death benefits.
business, partially offset by the impact of unlocking. Unlocking generally reflects changes in projected earned spreads, separate account performance and withdrawal and mortality assumptions.
(1)Amount represents a change in our deferred tax assets and liabilities and other items impacted by the enactment of the Tax Act. See Note 5 to our consolidated financial statements included in Item 8 for additional information.
Income taxes on adjustments to net income have been recorded at 21% in 2019 and 2018 as there are no permanent differences between book and taxable income relating to these adjustments. In 2020, there is no income tax offset attributable to the proposed acquisition transaction expenses, as they are not deductible for income tax purposes. Also in 2020, the income tax offset attributable to realized gains (losses) includes an additional tax benefit of $0.3 million related to capital losses expected to be carried back to 2017 when the income tax rate was 35%. Income taxes on all other 2020 adjustments to net income have been recorded at 21%.
Our investment portfolio increased 6.5% to $9,684.0 million at December 31, 2020, compared to $9,091.6 million at December 31, 2019. The portfolio increase is primarily due to a $421.9 million increase in the net unrealized appreciation of fixed maturities. The increase in unrealized appreciation is the result of a decrease in market interest rates driven by a decrease in U.S. Treasury rates. Additional details regarding securities in an unrealized gain or loss position at December 31, 2020 are included in the discussion that follows and in Note 2 to our consolidated financial statements included in Item 8. Details regarding investment allowances/impairments are discussed above in the “Realized Gains (Losses) on Investments” section under “Results of Operations.”
A portion of the securities acquired during 2020 and 2019 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 3.39% in 2020 and 3.84% in 2019.
See Note 2 to our consolidated financial statements included in Item 8 for a summary of fixed maturities by contractual maturity date.
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 one fund at December 31, 2020 and December 31, 2019, that owns securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The fund is reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of $0.8 million at December 31, 2020 and $1.4 million at December 31, 2019. We do not own any direct investments in subprime lenders.
Our CLO portfolio included in other asset-backed securities is high quality, with all of the securities rated NAIC-1. Internal
State and political subdivision securities totaled $1,416.0 million, or 17.1% of total fixed maturities at December 31, 2020, and $1,477.2 million, or 19.2% of total fixed maturities at December 31, 2019, 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 holdings were trading at 115.3% of amortized cost at December 31, 2020. We do not hold any Puerto Rico-related bonds. Exposure to the state of Illinois and municipalities within the state accounted for 1.1% of our total fixed maturities at December 31, 2020. As of December 31, 2020, our Illinois-related portfolio holdings were rated investment grade and were valued at 119.4% of amortized cost.
Cash and cash equivalents decreased at December 31, 2020 compared to the prior year end primarily due to normal fluctuations in timing of payments made and received. Deferred acquisition costs decreased during the same period primarily due to a $120.2 million increase in the impact of the change in net unrealized appreciation on fixed maturity securities during the period. Other assets decreased during the same period primarily due to the impact of amortization of LIHTC investments. Assets and liabilities held in separate accounts increased during the same period due to market performance on the underlying investment portfolios.
(1)Book value per share excluding accumulated other comprehensive income is a non-GAAP financial measure. Since accumulated other comprehensive income fluctuates from quarter to quarter due to unrealized changes in the fair value of investments caused principally by changes in market interest rates, we believe this non-GAAP financial measure provides useful supplemental information.
•The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage- and asset-backed securities accelerate during periods of declining interest rates or decelerate during periods of increasing interest rates.
The table above summarizes cash inflows from the maturity or prepayment of fixed maturity securities and mortgage loans that will be available for benefits or reinvestment. These cash flow estimates are based on our existing investment holdings and do not anticipate the effect of new acquisitions or voluntary sales of these securities. The estimates include assumptions for the timing of paydowns on asset-backed and other securities, and accordingly, may not represent actual amounts that will be received during the periods presented or changes to these assumptions during the year. In a declining or low interest rate environment, prepayments and redemptions affecting our fixed maturity securities and mortgage loan investments may increase as issuers and borrowers seek to refinance at a lower rate.
For a majority of our products, profitability is significantly affected by the spreads between interest yields on investments and interest crediting rates on our insurance liabilities. For index products, profitability on the portion of the policyholders’ account balance allocated to an index option is generally determined as the difference between interest yields on investments and the cost of call options. For variable annuities and variable universal life policies, profitability on the portion of the policyholder’s account balance invested in the fixed general account option, if any, is also affected by the spreads earned. For the variable products, the policyholder assumes essentially all the investment earnings risk for the portion of the account balance invested in the separate accounts.
insurance products are competitive within the marketplace or for contractual reasons in the case of products earning guaranteed rates, will result in lower earnings.
If interest rates had increased 10% from levels at December 31, 2020 and 2019, the fair value of our fixed maturity securities and short-term investments would have decreased approximately $75.9 million at December 31, 2020 and $123.2 million at December 31, 2019. 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.
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, 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.
Equity price risk is limited due to the relatively small equity portfolio held at December 31, 2020. However, we are exposed to equity price risk in the following ways:
•Changes in the fair value of our equity securities are reported in earnings.
•We have equity price risk to the extent we may owe amounts under the guaranteed minimum death benefit and guaranteed minimum income benefit provisions of our variable annuity contracts. See Note 4 to our consolidated financial statements included in Item 8 for additional discussion of these provisions.
During 2020, our operating activities generated cash flows totaling $229.1 million, consisting of net income of $72.3 million adjusted for non-cash operating revenues and expenses netting to $156.8 million. We used cash of $197.7 million in our investing activities during 2020. The primary uses were $914.0 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $778.5 million in sales, maturities and repayments of investments. Our financing activities used cash of $35.9 million during 2020. The primary financing source was $630.5 million in receipts from interest sensitive products credited to policyholder account balances, offset by $570.1 million for return of policyholder account balances on interest sensitive products and $86.2 million for dividends paid to stockholders. Funding agreements with the FHLB represent $264.5 million of receipts from interest sensitive products and $180.0 million of return of policyholder account balances.
On a consolidated basis, we anticipate that funds to meet our short-term and long-term contractual obligations, capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally-generated funds. We manage our investment portfolio to provide cash flows needed for policyholder obligations in the normal course of business as discussed in the Market Risks of Financial Instruments section above. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. Farm Bureau Life is a member of the FHLB, which provides a source for additional liquidity if needed. This membership allows us to utilize fixed or floating rate advances offered by the FHLB and secured by qualifying collateral. Our total capacity to utilize such advances is impacted by multiple factors including the market value of eligible collateral, our level of statutory admitted assets and excess reserves and our willingness or capacity to hold activity-based FHLB common stock.
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 $26.3 million remaining for repurchases at December 31, 2020, 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. Under the Merger Agreement, we have agreed not to repurchase any additional shares of our capital stock from the date of the Merger Agreement through the closing of the Merger, subject to certain exceptions, including pursuant to our equity awards plans. We repurchased 290,144 shares of Class A common stock for $10.0 million in 2020, 66,475 shares of Class A common stock for $4.6 million in 2019 and 232,837 shares of stock Class A common stock for $15.9 million in 2018.
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, 2020, Farm Bureau Life’s statutory unassigned surplus was $494.6 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 2021, the maximum amount legally available for distribution to the parent company without further regulatory approval is $87.4 million. Timing of such dividends during the year is limited based on the timing of dividends paid within the preceding 12 months.
The following is a brief summary of our significant accounting policies and critical accounting estimates. For a complete description of our significant accounting policies, see Note 1 to our consolidated financial statements included in Item 8.
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, 2020 pension obligation was computed based on an average 2.68% discount rate, which was based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. The long-term return on plan assets is based on current and projected asset allocations. Declines in comparable bond and equity yields would decrease our net pension asset.
Balance Sheet Caption Description of Critical Estimate Assumptions / Approach Used Effect if Different
Fixed maturities - available for sale We are required to exercise judgment to determine to what extent an unrealized loss is due to credit and establish an allowance for credit losses on a security. Whether a realized loss needs to be recognized in earnings and the amount of the loss primarily depends on whether (1) a decline in fair value is credit related, (2) our intent to sell the security and (3) whether or not we could be required to sell prior to recovery. The amortized cost is not adjusted by the loss reported in earnings if the decline is credit related and the resulting allowance can increase or decrease between reporting periods. If we have the intent to sell the security or we could be required to sell the security prior to recovery the previous amortized cost is adjusted by the loss reported in earnings to provide a new cost basis for the fixed maturity security. We evaluate the operating results of the underlying issuer, near-term prospects of the issuer, general market conditions, causes for the decline in value, and other key economic measures and our intent to sell and whether or not we would be required to sell prior to recovery. At December 31, 2020, we had $18.8 million of gross unrealized losses, on which we have established an allowance for credit losses of $4.9 million. The allowance for credit losses we have recorded at December 31, 2020 was established at the fair value of the underlying investments, accordingly this would represent the maximum potential loss for those investments. The allowance represents our best estimate of potential losses across the fixed maturity portfolio. Our maximum additional loss exposure would be $13.9 million which represents the total unrealized portfolio losses not subject to an allowance for credit losses. Details regarding these securities are included in the “Financial Condition - Investments” section above.
Deferred acquisition costs Amortization of deferred acquisition costs for participating life insurance and interest sensitive products is dependent upon estimates of future gross profits or margins on this business. Key assumptions used include the following:
- amount of expenses necessary to maintain the policies. Estimates used in the calculation of amortization of deferred acquisition costs, which are revised at least annually, are based on historical results and our best estimate of future experience. Amortization of deferred acquisition costs for participating life insurance and interest sensitive products is expected to total approximately $27.2 million for 2021, excluding the impact of new production in 2021.
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 2021 would result in $2.0 million of additional amortization expense. Correspondingly, a 10% decrease in estimated gross profits would result in a $2.0 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.
Future policy benefits Reserving for future policy benefits for traditional life insurance products requires the use of many assumptions, including the duration of the policies, mortality experience, lapse rates, surrender rates and dividend crediting rates.
These assumptions are made based upon historical experience, industry standards and a best estimate of future results and, for traditional life products, include a provision for adverse deviation. For traditional life insurance, once established for a particular series of products, these assumptions are generally held constant. Due to the number of independent variables inherent in the calculation of traditional life insurance reserves, it is not practical to perform a sensitivity analysis on the impact of reasonable changes in the underlying assumptions. The cost of performing detailed calculations using different assumption scenarios outweighs the benefit that would be derived. We believe our assumptions are realistic and produce reserves that are fairly stated in accordance with GAAP.
Other assets/liabilities 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 2020 totaled $4.1 million.
To determine our net periodic pension costs for 2020, we assumed an expected long-term rate of return on plan assets of 5.85% and a discount rate of 3.37%. Details regarding the method used to determine the discount rate are summarized in Note 8 to our consolidated financial statements included in Item 8. The long-term rate of return may fluctuate over time based on asset mix and if investment returns over a long period of time significantly differ from historical returns. The discount rate changes annually as it is based on current yields for high-quality corporate bonds with a maturity approximating the duration of our pension obligations. As fluctuations in the expected long-term rate of return and discount rate have been historically moderate and we have no current plans to change our investment strategy significantly, we believe a change of up to 100 basis points is reasonably likely. A 100 basis point decrease in the expected return on assets would result in a $1.2 million increase in pension expense and a 100 basis point increase would result in a $1.2 million decrease to pension expense. A 100 basis point decrease in the assumed discount rate would result in a $2.7 million increase in pension expense while a 100 basis point increase would result in a $2.4 million decrease to pension expense. The information above is for illustrative purposes only and does not reflect our expectations regarding future changes in the long-term rate of return or discount rates.
Deferred income taxes The amount of deferred tax assets we hold is dependent on our estimate of the future deductibility of certain items. A valuation allowance against deferred income tax assets is established if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. No valuation allowance was recorded on deferred tax assets at December 31, 2020.
During 2020, the company adopted new accounting guidance for the accounting for credit impairments of certain financial instruments. Under the new guidance, credit losses are required to be estimated using an expected loss model under which an allowance for credit losses is established and reflected as a charge to earnings. This change and other accounting pronouncements recently adopted and not yet adopted are discussed further in Note 1 to our consolidated financial statements included in Item 8.
We engage Ernst & Young LLP as the independent registered public accounting firm to audit our financial statements and internal control over financial reporting and express their opinion thereon. A copy of Ernst & Young LLP’s audit opinions follows.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a) and our report dated February 24, 2021 expressed an unqualified opinion thereon.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
The Company’s future policy benefits totaled $7.6 billion at December 31, 2020, a portion of which represented liabilities for secondary guarantees on universal life- type products. The carrying amount of this product guarantee is based on estimates of how much the Company will need to pay for future benefits and claims in excess of the amount of fees which are expected to be collected from policyholders for the policy feature. As described in Note 1 to the consolidated financial statements, the liabilities are accrued in relation to estimated contract assessments. There is significant uncertainty inherent in estimating this liability because there is a significant amount of management judgment involved in developing certain assumptions that impact the liability balance, including expected mortality experience, policyholder lapse rates, premium persistency, and yield of investments.
In June 2016, the FASB issued guidance amending the accounting for the credit impairment of certain financial instruments. Under the new guidance, credit losses are required to be estimated using an expected loss model under which an allowance for credit losses is established and reflected as a charge to earnings. The allowance is based on the probability of loss over the life of the instrument, considering historical, current and forecast information. The new guidance differs significantly from the incurred loss model used historically and results in the earlier recognition of credit losses. Since changes in the allowance are reflected in earnings, the new guidance may increase the volatility of earnings as the assumptions used in estimating the allowance are revised. Our available-for-sale fixed maturities will continue to apply the incurred loss model; however, such losses are in the form of an allowance for credit losses rather than an adjustment to the cost basis of the security. Improvements in credit loss estimates on fixed maturity available-for-sale securities are immediately recognized through earnings by reducing the allowance.
accordingly, unrealized gains and losses relating to these securities are recorded as a component of net investment income in the consolidated statements of operations.
Beginning in 2020, to the extent an unrealized loss is due to a credit event, an increase in allowance for credit loss is recognized within the consolidated statement of operations. While fixed maturities are reported net of the allowance for credit losses in our consolidated balance sheets, the allowance is not considered an adjustment to the amortized cost of the security. Accordingly, the allowance may increase or decrease over the life of the security based on changes in the assumptions used to determine the allowance, with such changes reported as a change in allowance for credit losses on investments within the consolidated statement of operations. Fixed maturity securities are written-off to realized capital losses if we determine that no additional payments of principal or interest will be received. We have elected the policy to exclude accrued interest receivable from our allowance calculation since uncollectible accrued interest will continue to be evaluated for collectability and written off as warranted.
In order to determine the allowance for credit losses or credit impairment loss for fixed maturities, we estimate the present value of future cash flows that we expect to receive over the remaining life of the instrument, which in some instances could equal fair value, 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 a credit loss or credit impairment that is 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.
Equity securities, comprised of mutual funds and common and non-redeemable preferred stocks, are reported at fair value with changes in fair value included in net realized capital gains (losses) in the consolidated statement of operations.
Our real estate is held for investment and consists of land reported at cost, net of allowance for losses. The carrying value of these assets is subject to regular review. For properties held for investment, if indicators of impairment are present and a property’s expected undiscounted cash flows are not sufficient to recover the property’s carrying value, an impairment loss is recognized and the property’s cost basis is reduced to fair value. No properties were held for investment with impairment charges as of December 31, 2020 or 2019.
Policy loans are reported at unpaid principal balance. Short-term investments, which include investments with remaining maturities of one year or less, but greater than three months at the time of acquisition, are reported at cost adjusted for amortization of premiums and accrual of discounts. Other investments include common stock issued by the Federal Home Loan Bank of Des Moines (FHLB) carried at the current redemption value, call options carried at fair value less collateral received and a promissory note acquired in a sale of a partnership interest carried at the estimated recovery value of the note.
Realized gains and losses on sales of investments are determined on the basis of specific identification and included in net realized capital gains (losses) on the consolidated statement of operations. Change in allowance for credit losses on fixed maturity securities, mortgage loans and other investments are included in the change in allowance for credit losses on investments in the consolidated statement of operations. Prior to 2020, OTTI impairments were included in the other-than-
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.
Deferred acquisition costs include certain costs of successfully acquiring new insurance business, including commissions and other expenses related to the production of new business, to the extent recoverable from future policy revenues, gross margins 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 was determined by an actuarial study using expected future gross profits as a measurement of the net present value of the insurance acquired. Value of insurance in force acquired is being amortized on a fixed amortization schedule.
Other assets include non-guaranteed federal low income housing tax credit (LIHTC) investments. LIHTC investments take the form of limited partnerships or limited liability companies, which in turn invest in a number of low income housing projects. We use the proportional amortization method of accounting for these investments. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized along with the tax benefit as a component of federal income tax expense on our consolidated statements of operations. LIHTC investments had a carrying value of $31.4 million at December 31, 2020 and $42.9 million at December 31, 2019. See discussion on variable interest entities in Note 2 for further information.
Other assets at December 31, 2020 and 2019, also includes goodwill of $9.9 million related to the excess of the amounts paid to acquire companies over the fair value of the net assets acquired. Goodwill is not amortized but is subject to annual impairment testing. We evaluate our goodwill balance by comparing the fair value of our reporting units to the carrying value of the goodwill. We conduct a qualitative impairment review at least annually as well as when indicators suggest an impairment may have occurred to determine if indicators of deterioration in the business would suggest its value has declined below the carrying value of goodwill. Such circumstances include changes in the competitive or overall economic environment or other business condition changes that may negatively impact the value of the underlying business. On a periodic basis, as well as in the event circumstances indicate the value of the business may have declined significantly, we will estimate the value of the business using discounted cash flow techniques. We believe this approach better approximates the fair value of our goodwill than a market capitalization approach. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including future premiums, product lapses, investment yields and discount rate. Underlying assumptions are based on historical experience and our best estimates given information available at the time of testing. As a result of this analysis, we have determined our goodwill was not impaired as of December 31, 2020 or 2019.
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 22% of traditional, universal and variable life insurance premiums collected from policyholders during 2020 (2019 - 25% and 2018 - 28%) and represented 9% of life insurance in force at December 31, 2020 and 2019 and 10% at December 31, 2018.
Lease income from leases with affiliates totaled $5.3 million in 2020 and 2019 and $4.9 million in 2018. Investment advisory fee income from affiliates totaled $3.2 million in 2020, $3.1 million in 2019 and $2.9 million in 2018. In addition, Farm Bureau Life has certain items, including fees earned from brokered products, reported as other income and other expense, which netted to $2.1 million in 2020, $1.7 million in 2019 and $2.7 million in 2018. We expense legal costs associated with a loss contingency as incurred.
We participate with affiliates and an unaffiliated organization in defined benefit pension plans, including a multiemployer plan. The multiemployer plan records an asset or liability based on the difference between contributions made to the plan to date and expense recognized for the plan to date. The obligations for the single employer plans are based on an actuarial valuation of future benefits. For the multiemployer plan, 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. The multiemployer plan employs a long-term investment strategy of maintaining diversified assets. 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 participate in qualified and nonqualified defined contribution plans which include employer matching and discretionary contributions according to certain guidelines, which are charged to expense throughout the year.
Comprehensive income includes net income, as well as other comprehensive income items not recognized through net income. Other comprehensive income includes unrealized gains and losses on our available-for-sale securities as well as the underfunded obligation for certain retirement and postretirement benefit plans. These items are included in accumulated other comprehensive income, net of tax and other offsets, in stockholders’ equity. The changes in unrealized gains and losses reported in our Statement of Comprehensive Income (Loss), excludes net investment gains and losses included in net income that represent transfers from unrealized to realized gains and losses. These transfers are further discussed in Note 7. The components of the underfunded obligation for certain retirement and postretirement benefit plans are provided in Note 8.
Other asset-backed securities: The unrealized losses on asset-backed securities (ABS) were primarily due to concerns regarding COVID-19 and the resulting impact on consumer and commercial loans. Overall, ABS spreads are generally unchanged. However, there are certain sectors, including whole business and auto-related, where spreads have widened. The majority of our ABS have a sequential-pay structure that increases credit support as the pool amortizes. The average life of our ABS is 2.9 years, down from 5.4 years at purchase. Average credit support for the portfolio has increased from 10% at time of purchase to 23% as of December 31, 2020. Our ABS portfolio is rated nearly 73% NAIC-1.
stress testing has indicated that the weighted average constant default rate (CDR) of our portfolio without suffering a loss is 17%. The CDR is the constant default rate (annually) that a CLO must suffer before our tranche takes its first dollar loss.
State, municipal and other governments: The unrealized losses on state, municipal and other government securities were primarily due to general spread widening relative to spreads at which we acquired the bonds, and uncertainty related to pandemic impacts on revenue and taxes.
Our allowance for credit losses at December 31, 2020 includes two financial sector bonds experiencing ongoing weakness in operating performance. The allowance for these bonds was established as the difference between the amortized cost and present value of expected cash flows, which is equal to fair value. Our allowance for credit losses also includes an asset backed security due to the difference between the amortized cost and the present value of the expected cash flows.
We also established an allowance of $0.9 million on a promissory note held in other investments due to the possibility of not collecting the full balance of the note.
As discussed in Note 1, accounting guidance followed prior to 2020 required an allowance for credit losses be established based on an incurred loss model. The allowance for credit losses at December 31, 2019 was as follows below.
Our commercial mortgage loan portfolio can include loans that have been modified. We assess loan modifications on a loan-by-loan basis to evaluate whether a troubled debt restructuring has occurred. Generally, the types of concessions include reduction of the contractual interest rate to a below-market rate, extension of the maturity date and/or a reduction of accrued interest. The amount, timing and extent of the concession granted is considered in determining if an impairment loss is needed for the restructuring. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed lenders to make loan modifications under certain circumstances without triggering troubled debt restructuring status, including extension of the maturity date and payment of interest only. Other than those modifications intended to comply with these provisions of the CARES Act, there were no loan modifications during the years ended December 31, 2020 or December 31, 2019.
Proceeds from sales of fixed maturities totaled $16.9 million in 2020, $34.6 million in 2019 and $82.9 million in 2018.
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.
Affidavits of deposit to meet regulatory requirements of state agencies covered investments that had a carrying value totaling $8,927.0 million at December 31, 2020 and $8,452.8 million at December 31, 2019. Fixed maturities on deposit with the FHLB as collateral for funding agreements had a carrying value of $636.9 million at December 31, 2020 and $535.7 million at December 31, 2019.
The carrying value of investments which have been non-income producing includes real estate totaling $1.0 million for the twelve months ended December 31, 2020 and for the twelve months ended December 31, 2019 included real estate and equity securities totaling $3.0 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, 2020 or December 31, 2019.
Fair value is based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As not all financial instruments are actively traded, various valuation methods may be used to estimate fair value. These methods rely on observable market data or, if observable market data is not available, the best information available. Significant judgment may be required to interpret the data and select the assumptions used in the valuation estimates, particularly when observable market data is not available.
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.
Level 2 fixed maturities consist of corporate, mortgage- and asset-backed, United States Government agencies, state and political subdivisions and private placement corporate securities with observable market data, and in some circumstances recent trade activity. When quoted prices of identical assets in active markets are not available, we obtain prices from third-party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2.
Also included in Level 2 are private placement corporate bonds with no quoted market prices available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread.
•We follow a “pricing waterfall” policy, which establishes the pricing source preference for a particular security or security type. The order of preference is based on our evaluation of the valuation methods used, the source’s knowledge of the instrument and the reliability of the prices we have received from the source in the past. Our valuation policy dictates that fair values are initially sought from third-party pricing services. If our review of the prices received from our preferred source indicates an inaccurate price, we will use an alternative source within the waterfall and document the decision. In the event that fair values are not available from one of our external pricing services or upon review of the fair values provided it is determined that they may not be reflective of market conditions, those securities are submitted to brokers familiar with the security to obtain non-binding price quotes. Broker quotes tend to be used in limited circumstances such as for newly issued, private placement corporate bonds and other instruments that are not widely traded. For those securities for which an externally provided fair value is not available, we use cash flow modeling techniques to estimate fair value.
•We perform an overall analysis of portfolio fair value movement against general movements in interest rates and spreads.
•We compare period-to-period price trends to detect unexpected price fluctuations 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 agree with the valuation.
•We meet at least quarterly with our Investment Committee, the group that oversees our valuation process, to discuss valuation practices and observations during the pricing process.
Level 1 equity securities consist of mutual funds and listed common stocks that are actively traded, allowing us to use current market prices as an estimate of their fair value.
Level 2 other investments measured at fair value include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty, net of cash collateral received.
Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate that have been deemed to be impaired during the reporting period. There were no mortgage loans or real estate impaired to fair value during 2020 or 2019.
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. As discussed in Note 1, accounting guidance adopted in 2020 requires an allowance for credit losses be established for losses that may occur over the life of the reinsurance contract. The allowance established on our reinsurance recoverable assets was as follows as of the date of adoption of this guidance on January 1, 2020 and as of December 31, 2020. No allowance was required as of December 31, 2019 under the incurred loss model required under accounting guidance followed prior to January 1, 2020.
Ceded reinsurance reduces our revenues by the amount that we pay for premium or forego in product charges and reduces our benefits and expenses by reimbursements of claims by our reinsurers. Assumed reinsurance adds to our premiums or product charges and to benefits and expenses related to the business we assume. These impacts are shown in the table below.
We amortize the value of insurance in force based on a fixed amortization schedule. Net amortization for the next five years is expected to be as follows: 2021 - $2.0 million; 2022 - $2.0 million; 2023 - $2.0 million; 2024 - $1.0 million; and 2025 - $1.0 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 all or a portion of 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, 2020 and 2019.
We periodically repurchase our Class A common stock under programs approved by our Board of Directors. These repurchase programs authorize us to make repurchases in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Under these programs, we repurchased 290,144 shares of stock for $10.0 million in 2020, 66,475 shares of stock for $4.6 million in 2019 and 232,837 shares of stock for $15.9 million in 2018. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice. There was $26.3 million remaining available for repurchases at December 31, 2020 under the active repurchase program. Under the Merger Agreement, we have agreed not to repurchase any additional shares of our capital stock from the date of the Merger Agreement through the closing of the Merger, subject to certain exceptions, including pursuant to our equity awards plans.
Special cash dividends paid to our Class A and Class B common shareholders totaled $37.0 million in 2020 and 2019 and $37.3 million in 2018.
The amount of dividends we have available to pay our common shareholders is limited to a certain extent by the amount of dividends our primary operating subsidiary, Farm Bureau Life, is able to pay to its parent, FBL Financial Group, Inc. See Note 12 for discussion of our statutory dividend restrictions.
The IFBF owns all of our outstanding Series B preferred stock. Each share of Series B preferred stock has a liquidation preference of $0.60 and voting rights identical to that of Class A common stock with the exception that each Series B share is entitled to two votes while each Class A share is entitled to one vote. The Series B preferred stock pays cumulative cash dividends and is redeemable by us, at our option, at $0.60 per share plus unpaid dividends if the stock ceases to be beneficially owned by a Farm Bureau organization.
(1)Unrealized net investment gains (losses) relate to available-for-sale securities and include the impact of taxes, deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves and policyholder liabilities. See Note 2 for further information.
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, contributions are made each year and our contributions are commingled with those of the other employers to fund the payment of future 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, 2020.
We expect contributions to be paid to the Multiemployer Plan by us and our affiliated and unaffiliated employers for 2021 to be approximately $15.0 million, of which $4.4 million is expected to be contributed by us. Expected benefits to be paid under the Multiemployer Plan are as follows: 2021 - $20.5 million, 2022 - $21.1 million, 2023 - $23.1 million, 2024 - $22.7 million, 2025 - $25.1 million and 2026 through 2030 - $129.2 million. Since the Other Plans are not funded, contributions are made as benefit obligations become due. Expected benefits to be paid under the Other Plans are as follows: 2021 - $4.0 million, 2022 - $3.9 million, 2023 - $4.8 million, 2024 - $3.6 million, 2025 - $1.4 million and 2026 through 2030 - $7.8 million.
(1)For the 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 the Multiemployer Plan totaled $39.5 million at December 31, 2020 and $18.3 million at December 31, 2019.
The Multiemployer Plan’s expected long-term return on assets represents the rate of earnings expected in the funds invested to provide for anticipated benefit payments, which is analyzed annually and revised as needed.
•Group and funded annuity contracts: contract value approximates fair value, as the interest-crediting rate is declared annually and subject to change when the rate no longer approximates the market rate.
•Mutual funds: valued at quoted prices in an active market which represent net asset value of shares held by the Multiemployer Plan.
•Cash and cash equivalents: due to the short-term nature, the carrying amounts approximate fair value.
Level 3 - Inputs are unobservable and require management’s judgment about the assumptions that market participants would use in pricing the assets.
(1)Represents mutual funds and pooled separate account investments with Principal Life Insurance Company.
(4)Represents interests in several limited partnerships. A limited partnership with a fair value estimate of $1.7 million as of December 31, 2020 and $1.5 million as of December 31, 2019, using net asset value per share as a practical expedient, has not been classified in the fair value hierarchy above in accordance with fair value reporting guidance. In 2020, the Multiemployer Plan entered into one alternative investment with Principal Life Insurance Company.
In addition to benefits offered under the aforementioned benefit plans, we participate with affiliated and unaffiliated employers in a plan that provides group term life insurance benefits to retirees. We froze our portion of the plan on December 31, 2016 such that no new participants will enter the plan. We also have two single-employer plans, frozen to new participants, that provide health and medical benefits to a small group of retirees. Postretirement benefit expenses for these plans are immaterial. The immaterial change in the underfunded portion of these plans is reported in other comprehensive income. During 2018, our allocated expense totaled $0.4 million related to 18 months of medical benefits to be provided to employees who accepted the voluntary early retirement program offered during 2018.
Prior to 2012, we granted stock options for Class A common stock to officers and employees, which have a contractual term of 10 years. The exercise price for all options is equal to the fair value of the common stock on the grant date. Expenses have been fully recognized under this plan.
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 expense over the service period. The impact of forfeitures is estimated and compensation expense is recognized only for those units expected to vest. We allocate a portion of the expense for these arrangements to affiliates; expense amounts below represent our share of these expenses. Compensation expense for arrangements under this plan totaled $0.5 million for 2020, $1.2 million for 2019 and $1.7 million for 2018. The income tax benefit recognized in the statements of operations for this arrangement totaled $0.2 million in 2020, $0.4 million in 2019 and $0.6 million in 2018.
The weighted average grant-date fair value per common share of restricted stock units granted was $53.78 in 2020, $70.88 in 2019 and $71.20 in 2018. Unrecognized compensation expense related to unvested restricted stock units based on the stock price at December 31, 2020 totaled $0.8 million. This expense is expected to be recognized over a weighted-average period of 2.14 years. Dividends are paid on restricted stock units upon vesting. Cash payments including dividends for restricted stock units totaled $1.5 million in 2020, $2.5 million in 2019 and $3.3 million in 2018.
We also have an Executive Salary and Bonus Deferred Compensation Plan under which certain officers of the Company were allowed to use their base salary and annual cash bonus to purchase deferred cash-based stock units. Cash-based stock units outstanding under this plan totaled 3,277 at December 31, 2020 and 8,478 at December 31, 2019. 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 38,621 at December 31, 2020 and 48,740 at December 31, 2019. At December 31, 2020, shares of Class A common stock available for future issuance under this plan totaled 89,087. This plan was frozen to future deferrals on December 31, 2013.
We also have an Executive Excess 401(k) Plan under which officers of the Company who met salary guidelines and 401(k) contribution guidelines were allowed to purchase unregistered deferred stock units. Under this plan, we have deferred stock units outstanding totaling 600 at December 31, 2020 and 3,514 at December 31, 2019. This plan was frozen to future deferrals on December 31, 2013.
Upon the effective time of the Merger contemplated under the Merger Agreement, each deferred or cash-based stock unit in the plans referenced in this section would be cancelled and exchanged for the right of each holder to receive an amount in cash equal to the agreed Merger consideration per share, multiplied by the total number of deferred or cash-based stock units. Payments would be made within the respective plans, under which different investment options may be available.
We have management agreements under which we provide general business, administrative and management services to FBPCIC and other affiliates. Fee income for these services totaled $2.0 million in 2020, 2019 and 2018. In addition, as discussed in Note 1, we provide investment advisory services and lease property and equipment under agreements with FBPCIC, other affiliates and non-affiliates.
We share certain office facilities and services with the IFBF and its affiliated companies. These expenses are allocated based on 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. Related expenses, net of reimbursements for certain services we provide, totaled $1.5 million in 2020, $1.6 million in 2019 and $1.5 million in 2018.
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 $0.6 million in 2020, 2019 and 2018. The royalty agreement with the IFBF provides IFBF an option to terminate the agreement if our quarterly common stock dividend is less than $0.10 per share. We have similar royalty arrangements with other state Farm Bureau organizations in our market territory. Total royalty expense to Farm Bureau organizations other than the IFBF totaled $1.7 million in 2020 and 2019 and $1.8 million in 2018. The loss of the right to use these designations in a state with a high premium concentration could have a material adverse effect on operating results.
Lease expense and the related cash flows totaled $5.8 million in 2020 and $5.4 million in 2019. For our home office building, lease expense totaled $4.3 million in 2018, net of $0.2 million in amortization of a deferred gain on the exchange of our home office properties for common stock in 1998.
Future remaining minimum lease payments for the long-term leases discussed above, as of December 31, 2020, are as follows:
The statutory financial statements of Farm Bureau Life and Greenfields are prepared in accordance with the accounting practices prescribed or permitted by the Insurance Division of the state of Iowa. The insurance division has adopted the accounting guidance contained in the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures manual (NAIC SAP) as the prescribed accounting practice for insurance companies domiciled in Iowa. The insurance division may permit or prescribe accounting practices that differ from those prescribed by NAIC SAP. Farm Bureau Life has adopted such practices related to index products and option accounting. Several differences exist between GAAP and statutory accounting practices. Principally, under statutory accounting, deferred acquisition costs are not capitalized, fixed maturity securities are generally carried at amortized cost, insurance liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted.
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, 2020 and 2019 was allocated to the segments as follows: Annuity ($3.9 million) and Life Insurance ($6.1 million).
Equity income related to securities and indebtedness of related parties is attributable to the Life Insurance and Corporate and Other segments. The following chart provides the related equity income 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 $549.9 million in 2020, $611.1 million in 2019 and $640.1 million in 2018.