Economic environmental factors which may impact our business include, but are not limited to, the following:
U.S. net farm income is forecast to decrease 24.6% and farm real estate value is forecast to increase 2.9% during 2014.
Our operating income increased in 2014, compared to 2013, primarily due to the impact of an increase in the volume of business in force, higher investment fee income and lower expenses, partially offset by the impact of unlocking assumptions used in the calculation of amortization of deferred acquisition costs and the value of insurance in force. Operating income increased in 2013, compared to 2012, primarily due to the impact of an increase in the volume of business in force, higher corporate segment net investment income and the impact of unlocking. These increases were partially offset by an increase in death benefits in 2013.
Net income increased in 2014, compared to 2013, primarily due to the increase in operating income and was largely offset by a decrease in net realized gains from investment sales. Net income increased in 2013, compared to 2012, due to increases in operating income and realized gains from investment sales, and a reduction in losses from discontinued operations. See the discussion that follows for details regarding operating income by segment.
We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve for participating life insurance, variable and interest sensitive products, as applicable, through an “unlocking” process. These assumptions typically consist of withdrawal and lapse rates, earned spreads and mortality with revisions based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually. See the discussion that follows for further details of the unlocking impact to our operating segments.
Amortization of deferred acquisition costs and the value of insurance in force changed over the three-year period due to changes in actual profits on the underlying business and the impact of unlocking. Unlocking, for each period, represented changes in our projected earned spread, withdrawal and mortality assumptions. During 2014 and 2012, we incurred additional amortization through unlocking as a result of our analysis of the impact of the low interest rate environment on projected investment and spread income.
The average aggregate account value for individual annuity contracts in force increased in 2014 and 2013, compared to the prior periods, due to continued sales and the crediting of interest. Premiums collected increased in 2014 compared to 2013 primarily due to increased sales of indexed annuity products. Indexed annuity collected premiums were $78.8 million in 2014, $23.4 million in 2013 and $2.0 million in 2012. Total annuity premiums collected were lower in 2013 compared to 2012 as we decreased our emphasis on fixed rate deferred annuity sales due to the low interest rate environment.
Death benefits, net of reinsurance and reserves released during 2014, remained level compared with 2013. The increase in 2013 compared to 2012 was primarily due to an increase in the average size of claims.
the proceeds from maturing investments, compared with the average existing portfolio yield and continued decreases in investment fee income. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our interest sensitive life insurance products were impacted by crediting rate decreases taken on various products in 2014, 2013 and 2012 in response to the declining portfolio yield, partially offset by sales of products with higher crediting rates.
Pre-tax operating income increased in 2014 and 2013 compared to prior periods. The increase in 2014 was primarily due to an increase in investment fee income and decreases in interest expense, other expenses and death benefits, partially offset by a decrease in net investment income and an increase in the amortization of deferred acquisition costs from the impact of market performance and profits on our variable business. The increase in 2013 was primarily due to an increase in net investment income, a decrease in amortization of deferred acquisition costs from the impact of market performance and profits on our variable business and a decrease in death benefits, partially offset by an increase in pre-tax equity loss.
Other income and other expenses includes fees and expenses from sales of brokered products and operating results of our non-insurance subsidiaries, which include management, advisory, marketing and distribution services and leasing activities. The decrease in other expenses in 2014 compared to 2013 was primarily due to one-time impairment charges of $0.7 million in 2013 and decreases in salaries and benefits. Other income in 2012 included administrative fee income of $3.5 million received from EquiTrust Life for accounting and other services rendered to support the transition of that company subsequent to its sale in December 2011.
The effective tax rate on operating income was 23.2% for 2014, 25.3% for 2013 and 29.0% for 2012. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of low income housing credits from equity method investees, tax-exempt interest and dividend income and incentive stock option deductions. The 2014 effective tax rate decreased, compared to 2013, primarily due to an increase in tax credits from low income housing tax credit partnerships. The 2013 effective tax rates decreased compared to 2012 primarily due to an increase in our holdings in tax-exempt municipal securities and an increase in tax credits from low income housing tax credit partnerships. See Note 5 to our consolidated financial statements included in Item 8 for additional information on income taxes.
The level of realized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. See "Financial Condition - Investments" and Note 2 to our consolidated financial statements included in Item 8 for details regarding our unrealized gains and losses on available-for-sale securities at December 31, 2014 and 2013.
Fixed maturity other-than-temporary credit losses for 2014 occurred in the manufacturing and other asset-backed sectors due to market valuation declines on securities we expect to sell in future periods. An impairment charge was also recognized on a real estate investment.
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
A portion of the securities acquired during 2014 and 2013 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, the 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 4.75% in 2014 and 4.85% in 2013.
The other asset-backed securities are backed by both residential and non-residential collateral. The collateral for residential asset-backed securities primarily consists of second lien fixed-rate home equity loans. The cash flows of these securities are less subject to prepayment risk than residential mortgage-backed securities as the borrowers are less likely to refinance than those with only a first lien mortgage. The collateral for non-residential asset-backed securities primarily includes securities backed by credit card receivables, auto dealer receivables, auto installment loans, aircraft leases, middle market and syndicated business loans, timeshare receivables and trade and account receivables. These securities are high-quality, short-duration assets with limited cash flow variability.
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, 2014 and at December 31, 2013, 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 balance sheets with a fair value of $14.2 million at December 31, 2014 and $17.9 million at December 31, 2013. We do not own any direct investments in subprime lenders.
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 $120.5 million at December 31, 2014 and $96.6 million at December 31, 2013. These bonds are used to fund the construction of multi-family homes on United States military bases. The bonds are backed by a first mortgage lien on residential military housing projects.
State, municipal and other government securities totaled $1,447.5 million, or 21.6% of total fixed maturities at December 31, 2014, and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. We do not hold any Puerto Rico-related bonds, which has been in the news recently given its financial issues. Exposure to the state of Illinois and municipalities within the state accounted for 1.8% of our total fixed maturities at December 31, 2014. As of December 31, 2014, our Illinois-related portfolio holdings were rated investment grade, and were trading at 109.5% of amortized cost. Our municipal bond exposure had an average rating of AA and our holdings were trading at 112.2% of amortized cost at December 31, 2014.
Mortgage loans totaled $629.3 million at December 31, 2014 and $575.9 million at December 31, 2013. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of commercial mortgage loans outstanding was 146 at December 31, 2014 and 143 at December 31, 2013. In 2014, new loans ranged from $2.0 million to $12.3 million in size, with an average loan size of $5.4 million, an average loan term of 16 years
Deferred acquisition costs decreased 34.2% to $220.8 million at December 31, 2014, primarily due to a $124.0 million increase in the impact of the change in unrealized appreciation on fixed maturity securities during the period. Cash and cash equivalents increased $70.3 million in 2014, which was partially offset by a decrease in short-term investments, both of which fluctuate based on the relative attractiveness of other investment options and timing of payments made and received. Securities and indebtedness of related parties increased 11.7% to $129.9 million primarily due to additional investments made in equity investees specializing in low income housing and fixed income partnerships.
Future policy benefits increased 5.7% to $6,125.1 million at December 31, 2014 primarily due to an increase in the volume of annuity and life insurance business in force. Deferred income taxes increased 67.5% to $205.7 million at December 31, 2014, primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments.
A majority of our insurance liabilities are backed by fixed maturity securities and mortgage loans. The weighted average life of the fixed maturity and mortgage loan portfolio, based on fair values, was approximately 10.6 years at December 31, 2014 and 10.4 years at December 31, 2013. Accordingly, the earned rate on the portfolio lags behind changes in market yields. The extent that the portfolio yield lags behind changes in market yields generally depends upon the following factors:
Non-discretionary products primarily represent funding agreements, guaranteed investment contracts and supplementary contracts involving life contingencies where we do not have the ability to adjust crediting rates.
Equity price risk is limited due to the relatively small equity portfolio held at December 31, 2014. However, we are exposed to equity price risk in the following ways:
During 2014, our operating activities generated cash flows totaling $208.8 million, consisting of net income of $109.9 million adjusted for non-cash revenues and expenses netting to $98.9 million. We used cash of $308.6 million in our investing activities during 2014. The primary uses were $955.3 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $595.2 million in sales, maturities and repayment of investments. Our financing activities provided cash of $170.1 million during 2014. The primary financing source was $608.4 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $396.8 million for return of policyholder account balances on interest sensitive products. We also used $8.0 million for the net repurchase and issuance of common stock.
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, 2014, Farm Bureau Life’s statutory unassigned surplus was $418.5 million. There are certain additional limits on the amount of dividends that may be paid within a year without approval of the Insurance Division, Department of Commerce of the State of Iowa (the Iowa Insurance Division) as discussed in Note 7 to our consolidated financial statements included in Item 8. During 2015, the maximum amount legally available for distribution to the parent company without further regulatory approval is $97.8 million. However, due to the timing of a $45.0 million dividend paid by Farm Bureau Life on December 18, 2014, the maximum dividend available to be paid without further regulatory approval until December 19, 2015 is $52.8 million.
We manage the amount of capital held by our insurance subsidiaries to ensure we meet regulatory requirements. State laws specify regulatory actions if an insurer's risk-based capital (RBC) ratio, a measure of solvency, falls below certain levels. The
NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against a statutory "authorized control level" RBC at which point regulators have the option to assume control of the insurance company. The company action level RBC is 200% of the authorized control level and is the first point at which any action would be triggered. As of December 31, 2014, our statutory total adjusted capital was $614.2 million, resulting in a RBC ratio of 545%, based on company action level capital of $112.8 million.
On a consolidated basis, we anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. Our investment portfolio at December 31, 2014 included $48.6 million of short-term investments, $76.6 million of cash and cash equivalents and $602.7 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, our level of statutory admitted assets and excess reserves, and our willingness or capacity to hold activity-based FHLB common stock.
reserves for products such as annuities and universal life products are generally based on the account values of the contracts without taking into account surrender charges, while the contractual obligations table includes projected cash payments. The differences between contractual obligations and the account values are primarily the accumulation of interest and death benefits on universal life business in excess of projected account values.
Includes our estimated future contributions to defined and postretirement benefit plans. Contributions related to the qualified pension plan are included through 2015. No amounts related to the qualified pension plan are included beyond 2015 as the contribution amounts will be re-evaluated based on actual results.
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, 2014 pension obligation was computed based on an average 4.05% 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.
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. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on our consolidated financial statements. A summary of our significant accounting estimates and the hypothetical effects of changes in the material assumptions used to develop each estimate, are included in the following table. We have discussed the identification, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors.
At December 31, 2014, our fixed maturity securities classified as available for sale had a fair value of $6,700.7 million, with gross unrealized gains totaling $616.4 million and gross unrealized losses totaling $27.1 million. Due to the large number of fixed maturity securities held, the unique attributes of each security and the complexity of valuation methods, it is not practical to estimate a potential range of fair values for different assumptions and methods that could be used in the valuation process.
Amortization of deferred acquisition costs for participating life insurance and interest sensitive products is expected to total approximately $26.8 million for 2015, excluding the impact of new production in 2015.
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.
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, 2014.
At December 31, 2014, we held gross deferred tax assets totaling $56.8 million, primarily related to future policy benefits, employee benefits and loss carryforwards. Utilization of these deferred tax assets is dependent on our future earnings. No valuation allowance has been established for these deferred tax assets, as we believe future earnings will be sufficient to ensure their utilization. If future earnings are no longer expected to be sufficient, a valuation allowance will need to be established. Given the number of variables that impact the level of future earnings, it is not practicable to estimate a range of possible outcomes to the valuation of the deferred tax assets.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a - 15(f). Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2014.
In our opinion, FBL Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
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, 2014 and 2013, 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, 2014 of FBL Financial Group, Inc. and our report dated March 5, 2015 expressed an unqualified opinion thereon.
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2014 and 2013, 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, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FBL Financial Group, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations, comprehensive income and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance, including industry-specific guidance. Although insurance contracts are specifically excluded from the scope of this guidance, almost all entities will be affected to some extent by the significant increase in required disclosures. The new guidance is based on the principle that an entity should recognize revenue to reflect the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard, which becomes effective for fiscal years beginning after December 15, 2016; early adoption is not permitted. We are currently evaluating the impact of this new guidance on our consolidated financial statements.
Fixed maturities, comprised of bonds and 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 are included directly in stockholders' equity as a component of accumulated other comprehensive income. The unrealized gains and losses are reduced by a provision for deferred income taxes and adjustments to deferred acquisition costs, value of insurance in force acquired,
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 recognized as a realized loss on investments. There were two properties held for investment with an impairment charge of $0.4 million as of December 31, 2014 and one property held for investment with an impairment charge of less than $0.1 million as of December 31, 2013. There were no properties held for sale as of December 31, 2014 and 2013.
Policy loans are reported at unpaid principal balance. Short-term investments, which include investments with remaining maturities of one year or less, but greater than three months at the time of acquisition, are reported at cost adjusted for amortization of premiums and accrual of discounts. Other investments include call options, which are carried at fair value, and our ownership interest in aircraft acquired in a troubled debt restructuring with a bond issuer that filed for bankruptcy. The ownership interest in the aircraft is reported at cost, less accumulated depreciation.
Securities and indebtedness of related parties include investments in corporations and partnerships over which we may exercise significant influence and those investments for which we are required to use the equity method of accounting. These corporations and partnerships operate predominately in the investment company, real estate, broker/dealer and insurance industries and include low income housing tax credit-generating partnerships. Such investments are accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees. For partnerships operating in the investment company industry, this income or loss includes changes in unrealized gains and losses in the partnerships' investment portfolios.
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 methods that vary by asset class. 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. Fair values for all securities are reviewed for reasonableness by considering overall market conditions and values for similar securities. See Note 3 for more information on our fair value policies, including assumptions and the amount of securities priced using the valuation models.
Other assets include property and equipment, primarily comprised of capitalized software costs and furniture and equipment, which are reported at cost less allowances for depreciation and amortization. We expense costs incurred in the preliminary stages of developing internal-use software as well as costs incurred post-implementation for maintenance. Capitalization of internal-use software costs occurs after management has authorized the project and it is probable that the software will be used as intended. Amortization of software costs begins after the software has been placed in production. Depreciation and amortization expense is computed primarily using the straight-line method over the estimated useful lives of the assets, which range from two to twenty years. Property and equipment had a carrying value of $28.6 million at December 31, 2014 and $25.8 million at December 31, 2013, and accumulated depreciation and amortization of $53.2 million at December 31, 2014 and $50.3 million at December 31, 2013. Depreciation and amortization expense for property and equipment was $6.3 million in 2014, $4.6 million in 2013 and $4.8 million in 2012.
Other assets at December 31, 2014 and 2013, 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 our impairment review, we have determined our goodwill was not impaired as of December 31, 2014 or 2013.
Future policy benefit reserves for interest sensitive products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. We also have additional benefit reserves that are established for annuity or universal life-type contracts that provide benefit guarantees, or for contracts that are expected to produce profits followed by losses. The liabilities are accrued in relation to estimated contract assessments. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for our interest sensitive products ranged from 1.00% to 5.50% in 2014, 2013 and 2012.
The liability for future policy benefits for direct participating traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality and other factors underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 2.00% to 6.00%. The average rate of assumed investment yields used in estimating gross margins was 5.75% in 2014 and 5.84% in 2013 and 2012. The liability for future policy benefits for non-participating traditional life insurance is computed using a net level method, including assumptions as to mortality, persistency and interest and includes provisions for possible unfavorable deviations.
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 30% of receipts from policyholders during 2014 (2013 - 30% and 2012 - 35%) and represented 11% of life insurance in force at December 31, 2014 and 2013 and 12% in 2012.
Revenues for interest sensitive and variable products consist of policy charges for the cost of insurance, asset charges, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. The timing of revenue recognition as it relates to these charges and fees is determined based on the nature of such charges and fees. Policy charges for the cost of insurance, asset charges and policy administration charges are assessed on a daily or monthly basis and are recognized as revenue when assessed and earned. Certain policy initiation fees that represent compensation for services to be provided in the future are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are determined based upon contractual terms and are recognized upon surrender of a contract. Policy benefits and claims charged to expense include interest amounts credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances during the period. Amortization of deferred acquisition costs is recognized as expense over the life of the policy.
We also have share-based payment arrangements under our Class A Common Stock Compensation Plan, although no new awards have been made since 2011. We recognize compensation expense for all share-based payments granted, modified or settled. The stock option non-performance related stock-based expense was being 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. However, during 2014 we accelerated the vesting of all unvested stock options and recognized the remaining compensation expense. 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.
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 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, excludes net investment gains and losses included in net income which represent transfers from unrealized to realized gains and losses. These transfers are further discussed in Note 7. The components of the underfunded obligation for postretirement benefit plans are provided in Note 8.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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
Corporate securities include hybrid preferred securities with a fair value of $80.9 million at December 31, 2014 and $76.3 million at December 31, 2013. Corporate securities also include redeemable preferred stock with a fair value of $29.9 million at December 31, 2014 and $17.1 million at December 31, 2013.
The changes in net unrealized investment gains and losses are recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities. Subsequent changes in fair value of securities for which a previous non-credit OTTI loss was recognized in accumulated other comprehensive income are reported along with changes in fair value for which no OTTI losses were previously recognized.
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 OTTI 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 as well as our intent and ability to hold these investments until recovery of fair value, and have concluded they are not other than temporarily impaired.
Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $1.1 million at December 31, 2014, with the largest unrealized loss from an energy service provider. With respect to mortgage and asset-backed securities not backed by the United States Government, our largest aggregate unrealized loss from the same issuer at December 31, 2014 was $3.6 million, consisting of two different securities that are backed by different pools of Alt-A residential mortgage loans. Both securities are rated non-investment grade and the largest unrealized loss totaled $2.3 million.
The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically including when there is indication of a possible significant collateral decline, a loan modification or a refinance request.
interest. The amount, timing and extent of the concession granted is considered in determining if an impairment loss is needed for the restructuring.
There were no loan modifications during 2014. During 2013 we modified two commercial mortgage loans that met the criteria of a TDR with a carrying value after the restructuring of $18.9 million and recognized an impairment loss of $0.8 million.
Amount represents the credit-related losses recognized for fixed maturities which were not written down to fair value through income. As discussed above the non-credit portion of the losses have been recognized in other comprehensive income (loss).
Amount represents credit-related losses for mortgage loans, real estate and fixed maturities written down to fair value through income.
Realized losses on sales were on securities that we did not intend to sell at the prior balance sheet date or on securities that were impaired in a prior period, but decreased in value during the year.
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 OTTI was recognized in other comprehensive income (loss) and corresponding changes in such amounts.
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, 2014.
Level 3 - Fair values are based on significant unobservable inputs for the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. From time to time there may be movements between levels as inputs become more or less observable, which may depend on several factors including the activity of the
market for the specific security, the activity of the market for similar securities, the level of risk spreads and the source from which we obtain the information. Transfers in or out of any level are measured as of the beginning of the period.
The following methods and assumptions were used in estimating the fair value of our financial instruments:
Level 2 fixed maturities consist of corporate, mortgage and other asset-backed, United States Government agencies and private placement securities with observable market data, and in some circumstances recent trade activity. When quoted prices of identical assets in active markets are not available, our first priority is to obtain prices from third party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2.
We follow a “pricing waterfall” policy, which establishes the pricing source preference for a particular security or security type. The order of preference is based on our evaluation of the valuation methods used, the source's knowledge of the instrument and the reliability of the prices we have received from the source in the past. Our valuation policy dictates that fair values are initially sought from third party pricing services. If our review of the prices received from our preferred source indicates an inaccurate price, we will use an alternative source within the waterfall and document the decision. In the event that fair values are not available from one of our external pricing services or upon review of the fair values provided it is determined that they may not be reflective of market conditions, those securities are submitted to brokers familiar with the security to obtain non-binding price quotes. Broker quotes tend to be used in limited circumstances such as for newly issued, private placement 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 compare month-to-month price trends to detect unexpected price fluctuation based on our knowledge of the market and the particular instrument. As fluctuations are noted, we will perform further research which may include discussions with the original pricing source or other external sources to ensure we are in agreement with the valuation.
Level 3 equity securities consist of non-redeemable preferred stock for which no active market exists, and fair value estimates for these securities is based on the values of comparable securities which are actively traded. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.
Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using non-binding broker quotes. Transfers out of Level 3 include those assets that we are now able to obtain pricing from a third party pricing vendor that uses observable inputs. There were no transfers between Level 1 and Level 2 during 2014 and 2013.
Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate which have been deemed to be impaired during the reporting period. During 2014, one real estate property was impaired to a fair value totaling $1.0 million which resulted in an impairment charge of $0.4 million. During 2013, one real estate property was impaired to a fair value totaling $1.9 million which resulted in an impairment charge of $0.2 million.
Life insurance in force ceded totaled $13,837.9 million (24.3% of life insurance in force) at December 31, 2014 and $13,220.0 million (24.2% of life insurance in force) at December 31, 2013. Insurance premiums and product charges have been reduced by $32.5 million in 2014, $29.4 million in 2013 and $28.9 million in 2012 and insurance benefits have been reduced by $17.0 million in 2014, $21.7 million in 2013 and $20.5 million in 2012 as a result of cession agreements.
We have assumed closed blocks of certain life and annuity business through coinsurance and modified coinsurance agreements. Life insurance in force assumed totaled $592.0 million (1.4% of total life insurance in force) at December 31, 2014 and $613.3
million (1.5% of total life insurance in force) at December 31, 2013. Premiums and product charges assumed totaled $0.8 million in 2014 and 2013 and $0.6 million in 2012. Insurance benefits assumed totaled $1.7 million in 2014 and 2013 and $0.3 million in 2012.
We periodically revise key assumptions used in the calculation of the value of insurance in force acquired through an “unlocking” process, which increased amortization $1.4 million in 2014, $0.2 million in 2013 and $2.6 million in 2012. Net amortization, based on expected future gross profits/margins, for the next five years is expected to be as follows: 2015 - $2.4 million; 2016 - $2.4 million; 2017 - $2.3 million; 2018 - $2.2 million; and 2019 - $2.1 million.
Certain variable annuity and variable universal life contracts in our separate accounts and in separate accounts of reinsurance partners have minimum interest guarantees on funds deposited in our general account. In addition, we have certain variable annuity contracts that include a) guaranteed minimum death benefits (GMDBs), b) an incremental death benefit (IDB) rider that pays a percentage of the gain on the contract upon the death of the contract holder, and/or c) a guaranteed minimum income benefit (GMIB) that provides monthly income to the contract holder after the eighth policy year.
Deferred income taxes have been established based upon the temporary differences between the financial statement and income tax bases of assets and liabilities. The reversal of the temporary differences will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance we considered the scheduled reversal of deferred tax assets, projected future taxable income, taxable income from prior years available for recovery and tax planning strategies. Our tax planning strategies assume deferred tax assets related to unrealized losses on our investments are temporary as we have the ability to hold the investments until maturity, at which time the existing temporary difference is expected to reverse. As such, we have determined that the establishment of a valuation allowance was not necessary at December 31, 2014 and 2013.
On August 21, 2013, our Board of Directors authorized a tender offer to repurchase 99 percent of all Class B common shares outstanding. The tender price of $45.33 was based upon the average of the closing price of FBL’s Class A common stock for the seven consecutive business days preceding the tender closing date of September 25, 2013. All Class B shareholders participated with 1,023,948 Class B common shares repurchased for $46.4 million and 105,930 shares of Class B common stock converted to Class A common stock.
We have agreed that we will not pay dividends on the Class A or Class B Common Stock, nor on the Series B Preferred Stock, if we are in default of the Subordinated Deferrable Interest Note Agreement dated May 30, 1997 with FBL Financial Group Capital Trust. We are compliant with all terms of this agreement at December 31, 2014. See Note 6 for additional information regarding this agreement.
On August 21, 2013, the Board of Directors approved a special $2.00 per share cash dividend to Class A and Class B common shareholders of record as of September 6, 2013. The aggregate dividend totaling $51.4 million was paid on September 13, 2013.
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 have attained age 21, have one year of service, and were employed prior to January 1, 2013. We also have a plan which 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.
Pension settlement charges were recognized after determining the total cash payments exceeded the sum of the service and interest cost for 2014. The settlement has been recognized quarterly beginning September 30, 2014 when the threshold was first exceeded.
We expect contributions to be paid to the Multiemployer Plan by us and affiliates for 2015 to be approximately $15.0 million, of which $4.8 million is expected to be contributed by us. We expect contributions to be paid to the Other Plans by us and affiliates for 2015 to be approximately $4.1 million, of which $2.2 million is expected to be contributed by us. Expected benefits to be paid under the Multiemployer Plan are as follows: 2015 - $26.4 million, 2016 - $24.8 million, 2017 - $21.9 million, 2018 - $24.6 million, 2019 - $23.7 million and 2020 through 2024 - $117.0 million. Expected benefits to be paid under the Other Plans are as follows: 2015 - $4.1 million, 2016 - $3.2 million, 2017 - $2.2 million, 2018 - $2.4 million, 2019 - $3.1 million and 2020 through 2024 - $8.9 million.
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
The discount rate was 4.99% for the nine months ended September 30, 2014 and 4.42% for the three months ended December 31, 2014 due to remeasurement at September 30, 2014 for settlement accounting.
The Multiemployer Plan assets are primarily invested in annuity products and insurance company pooled separate accounts that invest predominately in equity securities and real estate. We have certain pension obligations that are fully funded through annuity contracts with Farm Bureau Life which are presented as funded annuity contracts below. For 2014, excluding the funded annuity contracts, we employed a long-term investment strategy of diversifying the Multiemployer Plan assets with 55% in fixed income investments, 40% in equities and 5% in alternative investments. At December 31, 2014, the Multiemployer Plan assets were invested approximately 58% in fixed income investments, 40% in diversified equities and 2% in alternative investments. The fixed income investments consist primarily of the group annuity contract and fixed income securities held in pooled separate accounts. The equity securities are in pooled separate accounts and mutual funds. The alternative investments consist of interests in limited partnerships that own various liquid and illiquid assets. Our investment strategy is to (1) achieve a long-term return sufficient to satisfy all Multiemployer Plan obligations, (2) assume a prudent level of risk and (3) maintain adequate liquidity. The expected return on Multiemployer Plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the Multiemployer Plan. In estimating the expected rate of return for each asset class, we take into account factors such as historical rates of return, expected future risk-free rates of return and anticipated returns expected given the risk profile of each asset class.
Mutual funds: the net asset value of our mutual funds is based on quoted market prices available in active markets.
The pension financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:
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% or 4% of the eligible compensation contributed by the employee and an amount equal to 50% of an employee's contributions on the next 2% of the eligible compensation contributed by the employee. As shown in the table below, certain employees will also receive an annual discretionary employer contribution based on age plus years of service ranging from 2.75% to 5.75% as a percent of pay. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Our expense related to the plan totaled $2.0 million in 2014, $1.8 million in 2013 and $0.9 million in 2012.
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 totaled $0.1 million in 2014, 2013 and 2012. Changes in the underfunded status of these plans, reported in other comprehensive income, aggregated $0.1 million in 2014, $0.2 million in 2013 and ($0.1) million in 2012.
The share-based payment arrangements under our Class A Common Stock Compensation Plan are described below. We allocate a portion of the expense for these arrangements to affiliates; expense amounts below represent our share of these expenses. Compensation expense for these arrangements totaled $0.2 million for 2014, $0.3 million for 2013 and $2.1 million for 2012. The income tax benefit recognized in the statements of operations for these arrangements totaled less than $0.1 million for 2014 and 2013 and $0.9 million for 2012.
The intrinsic value of options exercised during the year totaled $6.5 million for 2014, $6.6 million for 2013 and $5.4 million for 2012.
The final nonvested shares were vested and released in 2013 and the expense related to these shares has been fully recognized at December 31, 2013. The tax benefit realized from nonvested stock released to employees was $1.7 million in 2013 and $1.6 million in 2012. We have a policy of withholding shares to cover estimated future tax payments.
We also issued performance cash-based restricted stock units to an executive in 2014 and 2013. These units will vest and be paid out in cash over 5 years, contingent upon meeting an earnings per share goal as well as continued employment with the Company.
The weighted average grant-date fair value per common share of restricted stock units granted was $38.63 in 2014, $34.94 in 2013 and $35.10 in 2012. Unrecognized compensation expense related to unvested restricted stock units based on the stock price at December 31, 2014 totaled $3.8 million. This expense is expected to be recognized over a weighted-average period of 2.18 years. Dividends are paid on restricted stock units upon vesting. Cash payments including dividends for restricted stock units totaled $1.8 million in 2014 and $0.5 million in 2013.
We have a Director Compensation Plan under which non-employee directors on our Board may elect to receive a portion of their compensation in the form of cash or deferred cash-based stock units. Cash-based stock units outstanding totaled 19,066 at December 31, 2014 and 17,295 at December 31, 2013. 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 56,759 at December 31, 2014 and 58,159 at December 31, 2013. At December 31, 2014, there were 117,557 shares of Class A common stock available for future issuance under the Director Compensation Plan. We also have an Executive Salary and Bonus Deferred Compensation Plan
under which certain officers of the Company are allowed to use their base salary and annual cash bonus to purchase deferred cash-based stock units. Cash-based stock units outstanding total 16,923 at December 31, 2014 and 13,308 at December 31, 2013. 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 90,009 at December 31, 2014 and 98,630 at December 31, 2013. At December 31, 2014, shares of Class A common stock available for future issuance under this plan totaled 108,296. 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 meet salary guidelines and 401(k) contribution guidelines are allowed to purchase unregistered deferred cash-based stock units. Cash based stock units outstanding total 79 at December 31, 2014 and 93 at December 31, 2013. 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 2,878 at December 31, 2014 and 4,355 at December 31, 2013. This plan was frozen to future deferrals on December 31, 2013.
We lease our home office properties under a 10-year operating lease from a wholly-owned subsidiary of the IFBF. Future remaining minimum lease payments under this lease, as of December 31, 2014, are as follows: 2015 - $2.3 million, 2016 - $2.3 million, 2017 - $2.3 million, 2018 - $2.3 million, 2019 - $2.3 million and thereafter, through 2021 - $4.6 million. Rent expense for the lease totaled $4.3 million in 2014 and 2013 and $4.5 million in 2012. These amounts are net of $0.2 million in 2014,
2013 and 2012 in amortization of a deferred gain on the exchange of our home office properties for common stock in 1998. The remaining unamortized deferred gain totaled $1.2 million at December 31, 2014 and $1.4 million at December 31, 2013.
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. Expenses (recoveries) for guaranty fund assessments, net of related premium tax offsets, totaled less than $0.1 million in 2014 and 2013 and less than ($0.1) million in 2012.
The Corporate and Other segment consists of the following corporate items and products/services that do not meet the quantitative threshold for separate segment reporting:
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, 2014 represents net income excluding, as applicable, the impact of:
Amounts are net adjustments for assumed changes in deferred acquisition costs and value of insurance in force acquired and deferred income taxes attributable to these items.
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 $646.6 million in 2014, $635.6 million in 2013 and $646.3 million in 2012.