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 141,000 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.
See Results of Operations in Item 7, Management’s Discussion and Analysis for discussion on net income and earnings per share.
Dividends in 2019, 2018 and 2017 include a special $1.50 per share cash dividend to Class A and B common shareholders. Dividends in 2016 and 2015 include a special $2.00 per share cash dividend to Class A and B common shareholders.
Amounts are impacted by accumulated other comprehensive income totaling $354.7 million in 2019, $91.3 million in 2018, $285.0 million in 2017, $149.6 million in 2016, and $114.5 million in 2015. These amounts are net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, unearned revenue reserve, value of insurance in force acquired and policyholder liabilities.
In this discussion and analysis, we explain our consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance, including:
We operate predominantly in the life insurance industry through our principal subsidiary, Farm Bureau Life. Farm Bureau Life markets individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in the Midwestern and Western sections of the United States through an exclusive agency force. Other subsidiaries provide external wealth management services as well as investment management and other support services to our affiliated insurance companies. In addition, we manage two Farm Bureau affiliated property-casualty companies.
U.S. net farm income is estimated to have increased 10.2% and farm real estate value is estimated to have increased 2.1% during 2019 according to recent U.S. Department of Agriculture estimates.
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves and deferred acquisition costs, as well as changes in interest sensitive product reserves and income taxes attributable to these items.
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.
Pre-tax adjusted operating income for the Annuity segment decreased in 2019, compared to 2018, primarily due to lower spread income earned and the impact of unlocking actuarial assumptions. Pre-tax adjusted operating income decreased in 2018, compared to 2017, primarily due to lower other investment-related income, an increase in other underwriting expenses and an increase in amortization of deferred acquisition costs.
The average aggregate account value for individual annuity contracts in force increased in 2019 and 2018, compared to the prior periods, due to continued sales and the crediting of interest. Continued growth in our indexed annuity business in force drives increases in interest sensitive product charges. Premiums collected decreased in 2019, compared to 2018, due to decreased sales of our fixed rate deferred and indexed annuity products. Premiums collected increased in 2018, compared to 2017, due to increased sales of our indexed annuity products, partially offset by decreased sales of our fixed rate deferred annuity products. Individual fixed rate deferred annuity collected premiums were $118.6 million in 2019, $139.0 million in 2018 and $167.7 million in 2017. Indexed annuity collected premiums were $128.2 million in 2019, $137.6 million in 2018 and $110.6 million in 2017. Outstanding funding agreements with FHLB, which are included in policyholder liabilities, totaled $488.4 million at December 31, 2019, $446.0 million at December 31, 2018 and $415.1 million at December 31, 2017.
In 2018, we offered a voluntary early retirement program to certain employees. The impact of the program to the Annuity segment was a $1.9 million increase in other underwriting expenses and a $0.6 million increase in investment expenses, which lowered net investment income.
Amortization of deferred acquisition costs and deferred sales inducements changed in 2019 and 2018, compared to prior year periods, due to unlocking actuarial assumptions and changes in actual and expected profits on the underlying business. Unlocking generally reflects changes in our projected earned spreads, policy lapses and mortality assumptions. Unlocking in 2019 was driven by a change in our withdrawal rate assumptions. The impact of unlocking on pre-tax adjusted operating income was as follows:
The weighted average yield on cash and invested assets for individual annuities decreased in 2019 and 2018, 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 and lower other investment-related income. See the “Financial Condition” section that follows for additional information regarding the yields obtained on investment acquisitions. Weighted average crediting rates on our individual annuity products increased in 2019, compared to 2018, due to increased cost of our call options supporting our indexed annuity products. Weighted average crediting rates on
our individual annuity products decreased in 2018, compared to 2017, due to crediting rate actions taken in 2018 and 2017 in response to the declining portfolio yield and a change in the underlying product mix.
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.
Death benefits vary from year-to-year due to changes in claim counts and average claim size.
In 2018, we offered a voluntary early retirement program to certain employees. The impact of the program to the Life Insurance segment was a $3.6 million increase in other underwriting expenses and a $0.4 million increase in investment expenses, which lowered net investment income. Excluding the impact of the voluntary early retirement program in 2018, other underwriting expenses increased in 2019, compared to 2018, due to expenses associated with system enhancements and various other general expense increases associated with the growth of our business.
The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in 2019 and 2018, 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. Weighted average crediting rates on our interest sensitive life insurance products increased in 2019, compared to 2018, due to increased cost of our call options supporting our indexed universal life product. Weighted average interest crediting rates on our interest sensitive life insurance products decreased in 2018, compared to 2017, due to crediting rate actions taken on various products in 2018 and 2017, partially offset by an increase in option costs.
Average invested assets including investments held as securities and indebtedness of related parties.
business, partially offset by the impact of unlocking actuarial assumptions and increases in expenses and death benefits. Pre-tax adjusted operating income decreased in 2018, compared to 2017, primarily due to lower net investment income including lower other investment-related income, an increase in amortization of deferred acquisition costs from the impact of market performance on our variable business and an increase in other expenses, partially offset by a decrease in death benefits.
Death benefits, net of reinsurance and reserves released, increased in 2019, compared to 2018, due to increases in the number of claims reported and higher average size of claims. Death benefits, net of reinsurance and reserves released, decreased in 2018, compared to 2017, primarily due to a decrease in the number of claims reported.
The level of gains and losses for these entities normally fluctuates from period to period depending on the prevailing economic environment, changes in the value of underlying investments held by the investment partnerships, the timing and success of initial public offerings or exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures. Equity income, net of related taxes was $3.5 million in 2019, $4.4 million in 2018 and $2.6 million in 2017. See Note 2 to our consolidated financial statements included in Item 8 for further information.
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.
The items excluded from adjusted operating income impact the amortization of deferred acquisition costs and unearned revenue reserve. Certain interest sensitive reserves as well as income taxes are also impacted.
Fixed maturity other-than-temporary credit losses for 2018 included an energy sector bond due to the commencement of bankruptcy proceedings, an asset backed security due to concerns regarding the company’s recovery plan, and a construction sector bond due to a missed bond payment. We also increased our valuation allowance on a mortgage loan due to the commencement of bankruptcy proceedings.
As of December 31, 2019, 97.7% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 2019, no single non-investment grade holding exceeded 0.2% of total investments.
Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans. We also have a partnership interest in one fund at December 31, 2019 and December 31, 2018, 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 $1.4 million at December 31, 2019 and $2.0 million at December 31, 2018. We do not own any direct investments in subprime lenders.
State and political subdivision securities totaled $1,477.2 million, or 19.2% of total fixed maturities at December 31, 2019, and $1,539.6 million, or 21.9% of total fixed maturities at December 31, 2018, 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 110.8% of amortized cost at December 31, 2019. 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, 2019. As of December 31, 2019, our Illinois-related portfolio holdings were rated investment grade and were valued at 116.6% of amortized cost.
Future policy benefits increased at December 31, 2019 compared to the prior year end primarily due to an increase in the volume of life business in force. Deferred income taxes increased during the same period primarily due to the tax impact of the change in unrealized appreciation/depreciation on investments. Other liabilities increased during the same period due to lease obligations as discussed above.
As discussed in Note 7 to our consolidated financial statements included in Item 8, stockholders’ equity was impacted by capital deployment actions during 2019. We paid a special cash dividend of $1.50 per share on our common stock and increased our regular quarterly common stock dividend by 4.3% to $0.48 per share.
Our stockholders’ equity increased at December 31, 2019 compared to the prior year end primarily due to the change in unrealized appreciation of fixed maturity securities during the period and net income, partially offset by dividends paid.
For a portion of our business in force, we have the ability to adjust interest or dividend crediting rates in response to changes in portfolio yield. However, the ability to adjust these rates is limited by competitive factors and contractual guarantees. Surrender rates could increase and new sales could be negatively impacted if the crediting rates are not competitive with the rates on similar products offered by other insurance companies and financial services institutions. In addition, if market rates were to stay at a low level for an extended period of time, our spread earnings could be lowered due to interest rate guarantees on many of our interest sensitive products. See Part 1, Item 1 - Business, Business Segments for the ranges of guaranteed rates and where our products fall within those ranges.
A major component of our asset-liability management program is structuring the investment portfolio with cash flow characteristics consistent with the expected cash flow characteristics of our insurance liabilities. We use models to perform simulations of the cash flows generated from existing insurance policies under various interest rate scenarios. Information from these models is used in the determination of investment strategies. Effective duration is a common measure for price sensitivity to changes in interest rates. It measures the approximate percentage change in the fair value of a portfolio when interest rates change by 100 basis points at all points on the curve. Key rate duration is a bifurcation of the effective duration that measures the price sensitivity to changes in interest rates within two points on a curve. These measures include the impact of estimated changes in portfolio cash flows from features such as bond calls and prepayments. When the estimated effective durations of assets and liabilities are similar, exposure to interest rate risk is reduced because a change in the value of assets should be largely offset by a change in the value of liabilities.
Our exposure to interest rate risk stems from both the longevity of our life block and the interest rate sensitivity of our annuity products. We actively manage the projected cash flows, duration and key rate duration of these assets and liabilities by
Equity price risk is limited due to the relatively small equity portfolio held at December 31, 2019. However, we are exposed to equity price risk in the following ways:
We earn mortality and expense fee income based on the value of our separate accounts at annual rates ranging from 0% to 1.45% for 2019, 2018 and 2017. As a result, revenues from these sources fluctuate with changes in the fair value of the equity, fixed maturity and other securities held by the separate accounts.
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 $36.3 million remaining for repurchases at December 31, 2019, under the current $50 million Class A common stock repurchase program. Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice. We repurchased 66,475 shares of Class A common stock for $4.6 million in 2019, 232,837 shares of Class A common stock for $15.9 million in 2018 and 3,511 shares of stock Class A common stock for $0.2 million in 2017.
Farm Bureau Life’s cash inflows primarily consist of premiums, deposits to policyholder account balances, income from investments, sales, maturities and calls of investments; and repayments of investment principal. Farm Bureau Life’s cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases and payment of policy acquisition costs, policyholder benefits, income taxes, current operating expenses and dividends. Life insurance companies generally produce a positive cash flow that may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. Continuing operations and financing activities from Farm Bureau Life relating to interest sensitive products provided funds totaling $235.5 million in 2019, $268.9 million in 2018 and $325.2 million in 2017.
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, 2019, Farm Bureau Life’s statutory total adjusted capital was $718.2 million, resulting in an RBC ratio of 562%, based on company action level capital of $127.9 million.
In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments that are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2019:
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, 2019 pension obligation was computed based on an average 3.37% 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.
At December 31, 2019, our fixed maturity securities classified as available for sale had a fair value of $7,702.6 million, with gross unrealized gains totaling $709.7 million and gross unrealized losses totaling $22.4 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.
At December 31, 2019, we had 189 fixed maturity securities with gross unrealized losses totaling $22.4 million. Included in the gross unrealized losses are losses attributable to both movements in market interest rates as well as temporary credit issues. Details regarding these securities are included in the “Financial Condition - Investments” section above.
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 2019 totaled $4.0 million.
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, 2019.
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, 2019.
We have audited FBL Financial Group, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, FBL Financial Group, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
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
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc (the Company) as of December 31, 2019 and 2018, 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, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
The Company’s deferred acquisition costs totaled $289.5 million at December 31, 2019. The carrying amount of the deferred acquisition costs is the total costs deferred less amortization. As disclosed in Note 1 to the consolidated financial statements, a portion of the deferred acquisition costs are being amortized in proportion to expected gross profits or estimated gross margins of the underlying contracts. There is a significant amount of uncertainty inherent in calculating EGPs as the calculation includes management’s best estimate of assumptions such as expected mortality experience, policyholder lapse rates, premium persistency, and yield of investments. EGMs include similar assumptions as the components of EGPs. Management’s assumptions are adjusted, also known as unlocking, over time for emerging experience and expected trends. The unlocking results in amortization being recalculated, using the new assumptions for EGPs or EGMs that results either in additional or less cumulative amortization expense.
In February 2018, the Financial Accounting Standards Board (FASB) issued guidance allowing a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from changes in the federal income tax rate due to enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act) on December 22, 2017. Accounting guidance requires that deferred tax assets and liabilities, including those associated with components of AOCI, be remeasured during the period new tax laws are enacted, with any changes reflected as a component of income tax expense (benefit). Under the previous guidance, retained earnings would reflect the full amount of the change and AOCI would not be adjusted for the portion of the change related to its components, leaving the unadjusted change “stranded” in AOCI. The new guidance allows AOCI to be adjusted to reclassify these stranded tax effects to retained earnings.
The new guidance was effective for 2018 with early adoption permitted for public companies during periods for which financial statements have not been issued. We adopted the new guidance in 2017 and have reported the reclassification in our Consolidated Statement of Stockholders’ Equity. The adjustment does not impact earnings, but rather is a reclassification of amounts between stockholders’ equity accounts.
Upon adoption using the modified retrospective approach, we reclassified $5.5 million of net unrealized investment gains, net of adjustments to deferred acquisition costs, interest sensitive policy reserves and income taxes, on our equity securities from AOCI to retained earnings as a cumulative effect adjustment. Application of this guidance resulted in a decrease to net income of $6.2 million ($0.25 per basic and diluted share) for the year ended December 31, 2018 and an increase to net income of $4.3 million ($0.17 per basic and diluted share) for the year ended December 31, 2019. Prior periods were not restated.
In June 2016, the FASB issued guidance amending the accounting for the credit impairment of financial instruments. Under the new guidance, impairment losses are required to be estimated using an expected loss model under which a valuation allowance is established and adjusted over time. The valuation allowance will be based on the probability of loss over the life of the instrument, considering historical, current and forecasted information. The new guidance differs significantly from the incurred loss model used today and will result in the earlier recognition of estimated impairment losses. The new guidance may also increase the volatility of earnings to the extent actual results differ from the assumptions used in the establishment of the valuation allowance. The financial instruments for which we will be required to use the new model include, but are not limited to, commercial mortgage loans and reinsurance recoverables. Our available-for-sale fixed maturities will continue to apply the incurred loss model; however, such losses will be in the form of a valuation allowance, which can be increased in the case of future credit losses or decreased should conditions improve, rather than taken into earnings over the remaining life of the security.
Fixed maturities are comprised of bonds and redeemable preferred stock and are designated as “available for sale.” Available-for-sale securities, with the exception of interest-only bonds, are reported at fair value and unrealized gains and losses on these securities are included directly in stockholders’ equity as a component of AOCI. The unrealized gains and losses, included in AOCI, are reduced by a provision for deferred income taxes and adjustments to deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves and policyholder liabilities that would have been required as a charge or credit to
Beginning in 2018, 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 investment gains (losses) in the consolidated statement of operations. Prior to 2018, these securities were designated as “available for sale” and reported at fair value with the change in unrealized gains and losses included in AOCI.
Mortgage loans are reported at cost adjusted for amortization of premiums, accrual of discounts and net of allowance for loan losses. If we determine that the value of any mortgage loan is impaired (i.e., when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to its estimated value, which is based upon the present value of expected future cash flows from the loan, the estimated market price of the loan, or the fair value of the underlying collateral less estimated costs to sell. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely.
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, 2019 or 2018.
level of current market interest rates compared to market interest rates when the security was purchased.
In order to determine the credit and non-credit impairment loss for fixed maturities, we estimate the future cash flows we expect to receive over the remaining life of the instrument as well as review our plans to hold or sell the instrument. Significant assumptions regarding the present value of expected cash flows for each security are used when an OTTI occurs and there is a non-credit portion of the unrealized loss that will not be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities include collateral pledged, guarantees, vintage, anticipated principal and interest payments, prepayments, default levels, severity assumptions, delinquency rates and the level of nonperforming assets for the remainder of the investments’ expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturities include anticipated principal and interest payments and an estimated recovery value, generally based on a percentage return of the current fair value.
After an OTTI write down of fixed maturities with a credit-only impairment, the cost basis is not adjusted for subsequent recoveries in fair value. For fixed maturities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the remaining life of the security. Amortization in this instance is computed using the prospective method and the current estimate of the amount and timing of future cash flows.
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 that 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.
We use reinsurance to manage certain risks associated with our insurance operations. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential risks arising from large claims and provide additional capacity for growth. For business ceded to other companies, reinsurance recoverable includes the reinsurers’ share of policyholder liabilities, claims and expenses, net of amounts due the reinsurers for premiums. We monitor the financial condition of these reinsurers, establishing an allowance for uncollectible reinsurance recoverables as necessary. We have concluded that no such allowance was required at December 31, 2019 or 2018. See Adoption of New Accounting Pronouncements above regarding a change in the accounting for valuation allowances that will be adopted in 2020. For business assumed from other companies, reinsurance recoverable includes premium receivable net of our share of benefits and expenses we owe to the ceding company.
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 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 also include property and equipment, primarily comprised of capitalized software costs and furniture and equipment, which are reported at cost less allowances for depreciation and amortization. We expense costs incurred in the preliminary stages of developing internal-use software as well as costs incurred post-implementation for maintenance. Capitalization of internal-use software costs occurs after management has authorized the project and it is probable that the software will be used as intended. Amortization of software costs begins after the software has been placed in production. Depreciation and amortization expense is computed primarily using the straight-line method over the estimated useful lives of the assets, which range from three to twenty years. Property and equipment had a carrying value of $42.2 million at December 31, 2019 and $38.5 million at December 31, 2018, and accumulated depreciation and amortization of $91.0 million at December 31, 2019 and $79.2 million at December 31, 2018. Depreciation and amortization expense for property and equipment was $12.1 million in 2019, $9.9 million in 2018 and $8.7 million in 2017.
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 gross investment yields used in estimating gross margins was 5.23% in 2019, 5.48% in 2018 and 5.47% in 2017. The liability for future policy benefits for nonparticipating traditional life insurance is computed using a net level method, including assumptions as to mortality, persistency and interest and includes provisions for possible unfavorable deviations.
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 25% of traditional, universal and variable life insurance premiums collected from policyholders during 2019 (2018 - 28% and 2017 - 29%) and represented 9% of life insurance in force at December 31, 2019 and 10% at December 31, 2018 and 2017.
Revenues for interest sensitive and variable products consist of policy charges for the cost of insurance and product guarantees, asset charges, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. The timing of revenue recognition as it relates to these charges and fees is determined based on the nature of such charges and fees. Policy charges for the cost of insurance, asset charges and policy administration charges are assessed on a daily or monthly basis and are recognized as revenue when assessed and earned. Certain policy initiation fees that represent compensation for services to be provided in the future are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are determined based upon contractual terms and are recognized upon surrender of a contract. Policy benefits and claims charged to expense include interest amounts credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances during the period. Amortization of deferred acquisition costs is recognized as expense over the estimated life of the policy.
Lease income from leases with affiliates totaled $5.3 million in 2019, $4.9 million in 2018 and $4.6 million in 2017. Investment advisory fee income from affiliates totaled $3.1 million in 2019, $2.9 million in 2018 and $2.7 million in 2017. In addition, Farm Bureau Life has certain items, including fees earned from brokered products, reported as other income and other expense, which netted to $1.7 million in 2019, $2.7 million in 2018 and $2.5 million in 2017. We expense legal costs associated with a loss contingency as incurred.
Unrealized losses decreased during 2019 primarily due to lower market interest rates. We do not consider securities to be OTTI when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality when recovery of all amounts due under the contractual terms of the security is anticipated. Based on our intent not to sell or our belief that we will not be required to sell these securities before recovery of their amortized cost basis, we do not consider these investments to be OTTI at December 31, 2019.
Any loan delinquent on contractual payments is considered non-performing. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as non-accrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely. At December 31, 2019 and December 31, 2018, there were no non-performing loans over 90 days past due on contractual payments. At December 31, 2019, we had not committed to provide additional funding for any mortgage loans.
This table sets forth the amount of credit loss impairments on fixed maturities held by the Company for which the non-credit portion of the OTTI was recognized in other comprehensive income (loss) and corresponding changes in such amounts. Credit loss impairments with no portion of the loss recognized in other comprehensive income, such as securities for which OTTI were measured at fair value, are excluded from the table.
We have reviewed the circumstances surrounding our investments in VIEs, which consist of (i) limited partnerships or limited liability companies accounted for under the equity method included in securities and indebtedness of related parties and (ii) non-guaranteed federal LIHTC investments included in other assets. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carrying value and any unfunded commitments that exist for each particular VIE. We also have not provided additional support or other guarantees that were not previously contractually required (financial or otherwise) to any of the VIEs as of December 31, 2019 or December 31, 2018. Based on this analysis, none of our VIEs were required to be consolidated at December 31, 2019 or December 31, 2018.
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.
We obtain fixed maturity fair values from a variety of external independent pricing services, including brokers, with access to observable data including recent trade information, if available. In certain circumstances in which an external price is not available for a Level 3 security, we will internally estimate its fair value. Our process for evaluation and selection of the fair values includes:
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.
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 2019.
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: 2020 - $2.2 million; 2021 - $2.0 million; 2022 - $2.0 million; 2023 - $2.0 million; and 2024 - $1.0 million.
The Tax Act made broad changes to the U.S. tax code impacting our companies, including reducing the federal corporate tax rate from 35% to 21% and numerous base-broadening provisions. At December 31, 2017, we recorded a provisional estimate of the impact of the Tax Act, which resulted in a reduction of net deferred tax liabilities of $84.8 million, which includes $48.2 million related to deferred taxes previously recognized in accumulated other comprehensive income. At December 31, 2018, the accounting for the Tax Act was completed, as the provisional estimates used were finalized by filing the 2017 income tax return. This resulted in no significant impact to earnings. Additional estimates were also adjusted, resulting only in reclassification between deferred tax items, such as the deferred tax asset on future policy benefits. In these cases, the overall impact of the Tax Act did not change from 2017.
Long-term debt includes $97.0 million of our subordinated debt obligation to FBL Financial Group Capital Trust (the Trust). We issued 5% Subordinated Deferrable Interest Notes due June 30, 2047 (the Notes) with a principal amount of $100.0 million to support $97.0 million of 5% Preferred Securities issued by the Trust. We also have a $3.0 million equity investment in the Trust, which is netted against the Notes on the consolidated balance sheets due to a contractual right of offset. The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes. As of December 31, 2019 and 2018, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
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 66,475 shares of stock for $4.6 million in 2019, 232,837 shares of stock for $15.9 million in 2018 and 3,511 shares of stock for $0.2 million in 2017. 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 $36.3 million remaining available for repurchases at December 31, 2019 under the active repurchase program.
Holders of the Class A common stock and Series B preferred stock vote together to elect Class A Directors (four to ten). Holders of the Class B common stock elect the Class B Directors (five to seven). Voting for the Directors is noncumulative. All of the holders of our Class B common stock are parties to a Stockholders’ Agreement. The IFBF’s ownership in the three classes of stock results in IFBF owning 71.5% of our voting stock as of December 31, 2019 and having the ability to control the Company. Holders of Class A common stock and Class B common stock receive equal per-share cash dividends.
Net periodic pension cost of the Multiemployer Plan is allocated between participating employers on a basis of time incurred by the respective employees for each employer. Such allocations are reviewed annually. The Multiemployer Plan is not subject to collective bargaining agreements, a financial improvement plan or a rehabilitation plan. No surcharges were required to be paid to the Multiemployer Plan during 2019, 2018 or 2017. We are the primary employer in the Multiemployer Plan, providing more than 5 percent of the total contributions during 2019, 2018 and 2017.
The other defined benefit plans (the Other Plans) provide benefits in addition to those offered under the Multiemployer Plan to certain of our employees or affiliated employers. These non-qualified benefit plans are not funded, whereby contributions are made as current benefit obligations become due. Net periodic pension cost of the Other Plans is allocated between the subsidiaries of FBL Financial Group, Inc. and the Farm Bureau affiliated property-casualty companies on a basis of time incurred by the respective employees for each company.
The Plans’ prior service costs are amortized using a straight-line amortization method over the average remaining service period or life expectancy of the employees, depending upon who is covered under each plan. For actuarial gains and losses, a corridor (10% of the greater of the projected benefit obligation or the market value of plan assets) is used to determine the amounts to amortize. For the Multiemployer Plan it is expected that net periodic pension cost in 2020 will include $11.2 million for amortization of the actuarial loss. For the Other Plans it is expected that net periodic pension cost in 2020, included in accumulated other comprehensive income, will include $1.3 million for amortization of the actuarial loss.
For our Multiemployer Plan, the underfunded portion of the pension benefit obligation is not required to be recognized as a liability in our consolidated balance sheets. The unrecognized liability for the underfunded status of our Multiemployer Plan totaled $18.3 million at December 31, 2019 and $3.9 million at December 31, 2018.
The Multiemployer Plan assets are primarily invested in annuity products and diversified investments including insurance company pooled separate accounts, mutual funds, fixed maturity securities and alternative investments. Certain pension obligations that are fully funded through annuity contracts with Farm Bureau Life, are presented as funded annuity contracts below. For 2019, excluding the funded annuity contracts, the Multiemployer Plan’s long-term investment allocation targets were as follows: 47% in fixed income investments, 30% in equities, 15% in long duration fixed income investments and 8% in alternative investments. At December 31, 2019, the Multiemployer Plan assets were invested approximately 49% in fixed income investments, 29% in equities, 17% in long duration fixed income investments and 5% in alternative investments. The fixed income investments consist primarily of the group annuity contract and fixed income securities held in pooled separate accounts. The equity securities are in pooled separate accounts and mutual funds. The long duration fixed income investments consist of holdings of corporate bonds, United States government treasuries and cash. The alternative investments consist of interests in limited partnerships that own various liquid and illiquid assets. The investment strategy for the Multiemployer Plan is to (1) achieve a long-term return sufficient to satisfy all Multiemployer Plan obligations, (2) assume a prudent level of risk and (3) maintain adequate liquidity. The expected return on Multiemployer Plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the Multiemployer Plan. In estimating the expected rate of return for each asset class, factors such as historical rates of return, expected future risk-free rates of return and anticipated returns given the risk profile of each asset class are analyzed.
Pooled separate accounts: valued at net asset value practical expedient, which is based on the latest quoted market price of the investments held within the fund.
Fixed maturities: the fair value of U.S. Treasuries is estimated using quoted market prices available in active markets. The fair value of corporate securities is obtained from third-party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and confirm they are utilizing observable market information. The pricing methodologies include observable inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events.
Cash and cash equivalents: due to the short-term nature, the carrying amounts approximate fair value.
Represents interests in several limited partnerships. A limited partnership with a fair value estimate of $1.5 million as of December 31, 2019 and$0.6 million as of December 31, 2018, 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.
We participate with affiliated and unaffiliated employers in a 401(k) defined contribution plan, which covers substantially all employees. We match employee contributions and provide an additional discretionary contribution as summarized in the table below. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Our expense related to this plan totaled $3.1 million in 2019, $2.9 million in 2018 and $2.6 million in 2017.
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.
Represents the difference between the share price and exercise price for each option, excluding options for which the exercise price is above the share price, at December 31, 2019.
The weighted average grant-date fair value per common share of restricted stock units granted was $70.88 in 2019, $71.20 in 2018 and $69.10 in 2017. Unrecognized compensation expense related to unvested restricted stock units based on the stock price at December 31, 2019 totaled $1.4 million. This expense is expected to be recognized over a weighted-average period of 2.03 years. Dividends are paid on restricted stock units upon vesting. Cash payments including dividends for restricted stock units totaled $2.5 million in 2019 and $3.3 million in 2018 and 2017.
We also have an expense allocation agreement with Farm Bureau Property & Casualty Insurance Company for the use of property and equipment. Expense relating to this agreement totaled $0.3 million in 2019, 2018 and 2017.
the property-casualty companies are responsible for development and management of our agency force for a fee. We incurred expenses totaling $8.0 million in 2019, $9.2 million in 2018 and $9.1 million in 2017 relating to these arrangements.
In the normal course of business, we may be involved in litigation in which damages are alleged that are substantially in excess of contractual policy benefits or certain other agreements. We are not aware of any claims threatened or pending against FBL Financial Group, Inc. or any of its subsidiaries for which a material loss is reasonably possible.
As discussed in Note 1 to our consolidated financial statements, we adopted new accounting guidance for leases during 2019. Upon adoption, we elected to follow the following practical expedients as allowed under the new guidance:
We did not reassess whether any expired or existing contracts are or contain leases.
We did not reassess the lease classification (operating vs. finance) for any expired or existing leases.
On the date of adoption, January 1, 2019, we held four long-term leases; and at December 31, 2019, we held eight long-term leases, all of which relate to real estate. The net present value of future cash flows for these leases is reported within our consolidated balance sheet in other assets and other liabilities. The carrying value of these leases total $14.0 million at December 31, 2019 and $7.2 million on the date of adoption. The most significant lease is for our home office facilities, which is owned by a subsidiary of the IFBF. The carrying value of this lease increased from $6.1 million on January 1, 2019 to $12.6 million on December 31, 2019 because we have reasonable assurance of exercising the five-year renewal of the lease term due to substantial leasehold improvements underway on this property. All of our leases are based on fixed terms which expire from 2021 through 2026 but allow renewal. Two of our leases, not including the home office property, contain provisions that allow the lease cost to increase based on a stated step-up schedule or changes in the consumer price index. Our estimated incremental borrowing rate of 4.5% was used in determining the net present value of the future lease commitments.
Our chief operating decision makers use pre-tax adjusted operating income to evaluate segment performance and allocate resources. Pre-tax adjusted operating income consists of pre-tax net income adjusted to exclude realized gains and losses on investments and the change in fair value of derivatives and equity securities, which can fluctuate greatly from period to period. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income (loss). Specifically, call options relating to our indexed annuity business are one-year assets while the embedded derivatives in the indexed contracts represent the rights of the contract holder to receive index credits over the entire period the indexed products are expected to be in force. Adjustments to pre-tax net income are net of amortization of unearned revenue reserves and deferred acquisition costs, as well as changes in interest sensitive product reserves. While not applicable for the periods reported herein, in determining pre-tax adjusted operating income we will also remove the impact of settlements or judgments arising from lawsuits, net of any recoveries from third parties, the cumulative effect of changes in accounting principles and discontinued operations.
Amounts are net adjustments for assumed changes in deferred acquisition costs and value of insurance in force acquired attributable to these items.