When reading the following Management's Discussion and Analysis of Financial Condition and Results of Operations, please refer to our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data," of this report. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its insurance subsidiaries Farm Bureau Life Insurance Company (Farm Bureau Life) and Greenfields Life Insurance Company (Greenfields Life).
We then review the results of operations beginning with an overview of the total Company results, followed by a more detailed review of those results by operating segment.
We also include within our analysis “premiums collected,” another measure which is not used in financial statements prepared in accordance with GAAP, but is a common industry measure of agent productivity. See Note 13 to our consolidated financial statements included in Item 8 for further information regarding this measure and its relationship to GAAP revenues.
Our profitability is also impacted by changes in accounting guidance that impact the timing of profit recognition. See Note 1 to our consolidated financial statements included in Item 8 for details on pending accounting pronouncements. In addition to guidance that has been adopted, the accounting standards setting bodies are currently working on other projects that could impact the timing of profit emergence including the accounting for insurance contracts, financial instruments and leases. It is uncertain what the outcome of these or other projects will be or when they will be completed.
Economic and other environmental factors which may impact our business include, but are not limited to, the following:
The U.S. 10-year Treasury yield increased during 2015 from 2.17% at December 31, 2014 to 2.27% at December 31, 2015.
The Department of Labor recently proposed to expand an insurance company's fiduciary responsibilities for sales of insurance products to be used in retirement plans. See Part 2, Item 1A for further discussion of this proposal.
The benchmark 10-year U.S. Treasury yield rose during the year, while credit spreads also increased. However, market yields remain low and this continues to negatively impact our investment yields as well as the interest we credit on our interest sensitive products. Our average investment portfolio yield declined during 2015 as yields on new acquisitions were generally lower than the average portfolio yield. As a result we proactively reduced customer crediting rates on certain annuity and universal life products during 2015. While low crediting rates pose challenges to maintaining attractive annuity and universal life products, our rates are comparable to other insurance companies, allowing us to maintain our competitive position within the market. We continue to reassess the future profitability of our interest-sensitive products as future profit expectations impact the valuation of deferred policy acquisition costs. During 2014 and 2015 we unlocked assumptions used to amortize deferred policy acquisition costs to reflect the expectation of lower earned spread rates, primarily driven by the expected continuation of low market interest rates. We experienced a decrease in the fair value of our fixed maturity security portfolio in 2015 due to the increase in market yields. See the segment discussion and “Financial Condition” section that follows for additional information regarding the impact of low market interest rates on our business.
Results of Operations for the Three Years Ended December 31, 2015
We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve for participating life insurance and interest sensitive products, as well as certain reserves on 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
Amortization of deferred acquisition costs and the value of insurance in force changed in 2015 and 2014, compared to prior year periods, due to changes in actual and expected profits on the underlying business. Amortization, as well as reserves held on certain products, also changed due to the impact of unlocking. Unlocking generally reflects changes in our projected earned spreads, withdrawal and mortality assumptions. The impact of unlocking on pre-tax operating income was as follows:
Continued growth in our business in force contributes to the increase in revenues and expenses. The increase in other underwriting expenses in 2015 was also due to a $1.1 million increase in defined benefit plan expense primarily due to settlement charges and the impact of changes in pension assumptions.
Death benefits, net of reinsurance and reserves released, increased in 2015, compared with 2014, due to increases in the number of claims and the average size of claims. Death benefits, net of reinsurance and reserves released during 2014, remained level compared with 2013.
operating income adjustments included a $1.8 million tax benefit resulting from the disposition of an equity method investment, for which the carrying value consisted solely of nondeductible goodwill.
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, 2015 and 2014.
Fixed maturity other-than-temporary credit losses for 2013 were incurred in our residential mortgage-backed securities due to changes in the amount and timing of future cash flows resulting in a decline in the present value. Losses within our asset-backed securities and the transportation and finance sectors were due to our intent to reduce our exposure by selling all or a portion of these securities. Losses were also incurred on mortgage loans that were restructured.
During 2015, certain oil pipeline fixed maturity securities with a carrying value of $149.4 million at December 31, 2014 were reclassified from the utilities to the energy sector.
At December 31, 2015, 89.7% of our energy holdings were investment grade. Our non-investment grade holdings included midstream issuers with a carrying value of $18.3 million and an unrealized loss of $4.7 million and oil field services with a carrying value of $16.4 million and an unrealized loss of $6.7 million. Non-investment grade oil field services included contract drillers with a carrying value of $5.9 million and an unrealized loss of $5.0 million.
At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed. See Note 1 to our consolidated financial statements included in Item 8 for more detail on accounting for the amortization of premium and accrual of discount on mortgage-backed and asset-backed securities.
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, 2015 and at December 31, 2014, 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
The Government National Mortgage Association (GNMA) guarantees principal and interest on mortgage-backed securities. The guarantee is backed by the full faith and credit of the United States Government. The Federal National Mortgage Association (FNMA) is a government-sponsored enterprise (GSE) that was chartered by Congress to reduce borrowing costs for certain homeowners. GSEs carry an implicit backing of the U.S. Government but do not have explicit guarantees like GNMA.
related portfolio holdings were rated investment grade, and were trading at 109.0% of amortized cost. Our municipal bond exposure had an average rating of Aa2/AA and our holdings were trading at 109.5% of amortized cost at December 31, 2015.
Mortgage loans totaled $744.3 million at December 31, 2015 and $629.3 million at December 31, 2014. 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 167 at December 31, 2015 and 146 at December 31, 2014. In 2015, new loans ranged from $1.2 million to $10.3 million in size, with an average loan size of $5.2 million, an average loan term of 15 years and an average net yield of 4.21%. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. The majority of our mortgage loans amortize principal, with 4.0% that are interest-only loans at December 31, 2015. At December 31, 2015, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 55.7% and the weighted average debt service coverage ratio was 1.5 based on the results of our 2015 annual study. See Note 2 to our consolidated financial statements included in Item 8 for further discussion regarding our mortgage loans.
At December 31, 2015, FBL's common stockholders' equity was $1,131.4 million, or $45.61 per share, compared to $1,249.8 million, or $50.57 per share at December 31, 2014. Included in stockholders' equity per common share is $4.62 at December 31, 2015 and $10.46 at December 31, 2014 attributable to accumulated other comprehensive income.
Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the profitability of insurance products and fair value of investments. The yield realized on new investments generally increases or decreases in direct relationship with interest rate changes. The fair value of our fixed maturity and mortgage loan portfolios generally increases when interest rates decrease and decreases when interest rates increase.
A prolonged period of low interest rates may result in increased downward pressure on average earned yields for the investment portfolios supporting our annuity and universal life business as higher-yielding fixed maturity securities and mortgages are sold, mature or are prepaid and replaced with lower-yielding investments. Lower investment income may cause us to lower crediting rates on our spread-based annuity and life insurance products, which in turn may reduce their attractiveness to potential customers. Failure to lower crediting rates as portfolio investment yields decline, either by choice, to ensure our spread-based insurance products are competitive within the market place or for contractual reasons in the case of products earning guaranteed rates, will result in lower earnings.
A major component of our asset-liability management program is structuring the investment portfolio with cash flow characteristics consistent with the 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. This measure includes the impact of estimated changes in portfolio cash flows from features such as bond calls and
Our exposure to interest rate risk stems largely from our annuity products as the cash flows of these products can vary significantly with changes in interest rates. We have holdings in fixed maturity and mortgage loan portfolios to offset the interest rate risk of our annuity products. We actively manage the projected cash flows and duration of these assets and liabilities by minimizing the difference between the two. While it can be difficult to maintain asset and liability durations that are perfectly matched in a dynamic environment, we have identified various strategies that can be implemented if duration mismatches exceed acceptable tolerances. The effective duration of the fixed maturity and mortgage loan portfolios backing our annuity products was 6.1 years at December 31, 2015 and 5.9 years at December 31, 2014. The effective duration of our annuity liabilities was approximately 6.4 years at December 31, 2015 and December 31, 2014.
During 2015, our operating activities generated cash flows totaling $224.9 million, consisting of net income of $113.5 million adjusted for non-cash operating revenues and expenses netting to $111.4 million. We used cash of $369.4 million in our investing activities during 2015. The primary uses were $1,120.1 million of investment acquisitions, mostly in fixed maturity securities, partially offset by $740.3 million in sales, maturities and repayments of investments. Our financing activities provided cash of $97.3 million during 2015. The primary financing source was $586.1 million in receipts from interest sensitive products credited to policyholder account balances, which was partially offset by $415.3 million for return of policyholder account balances on interest sensitive products and $89.3 million for dividends paid to stockholders.
Parent company cash inflows from operations consist primarily of fees that it charges various subsidiaries and affiliates for management of their operations, expense reimbursements and tax settlements from subsidiaries and affiliates, proceeds from the exercise of employee stock options, investment income and dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during 2015 included management fees from subsidiaries and affiliates totaling $7.9 million and dividends of $50.0 million. Cash outflows are principally for salaries, taxes and other expenses related to providing management services, dividends on outstanding stock, stock repurchases and interest on our parent company debt.
We paid regular cash dividends on our common and preferred stock totaling $39.8 million in 2015, $34.7 million in 2014 and $13.4 million in 2013. In addition, we paid a special $2.00 per common share cash dividend in March 2015 of $49.5 million and in September 2013 of $51.4 million. It is anticipated that quarterly cash dividend requirements for 2016 will be $0.0075 per Series B redeemable preferred share and $0.42 per common share. In addition, we expect to pay a special dividend of $2.00 per common share in the first quarter of 2016. The level of common stock dividends will be analyzed quarterly and will be dependent upon our capital and liquidity positions. In addition, alternative uses of excess capital may impact future dividend levels. Assuming these quarterly dividend rates and special dividend, the common and preferred dividends would total approximately $91.3 million in 2016. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2016. The parent company had available cash and investments totaling $76.5 million at December 31, 2015. FBL Financial Group, Inc. expects to rely on available cash resources, dividends from Farm Bureau Life and management fee income to make dividend payments to its stockholders and interest payments on its debt, as well as fund any capital initiatives such as stock repurchases. As of December 31, 2015, we had no other material commitments for capital expenditures.
Interest payments on debt totaled $4.9 million in 2015 and 2014 and $7.1 million in 2013. In September 2013, we redeemed our $50.0 million in notes with affiliates. Interest payments on our debt outstanding at December 31, 2015 are estimated to be $4.9 million in 2016.
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, payment of policy acquisition costs, policyholder benefits, income taxes, current operating expenses and dividends. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. Continuing operations and financing activities from Farm Bureau Life relating to interest sensitive products provided funds totaling $385.3 million in 2015, $410.3 million in 2014 and $361.0 million in 2013.
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. 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.
In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments which are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2015:
Amounts shown in this table are projected payments through the year 2065 which we are contractually obligated to pay to our life insurance and annuity contract holders. The payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency when applicable. These assumptions are based on our historical experience. The total of the contractual obligations relating to insurance contracts noted above differs from the liability balance on our consolidated balance sheet as follows:
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred acquisition costs, are capitalized and amortized into expense. We also record an asset, value of insurance in force acquired, for the cost assigned to insurance contracts when an insurance company is acquired. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued. For participating traditional life insurance and interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted (also known as "unlocked") when we revise our estimate of current or future gross profits or margins. For example, deferred acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
Excluding U.S. Government treasury securities, very few of our fixed maturity securities trade on the balance sheet date. For those securities without a trade on the balance sheet date, fair values are determined using valuation processes that require judgment.
We are required to exercise judgment to determine when a decline in the value of a security is other than temporary. Whether a realized loss needs to be recognized in earnings and the amount of the loss primarily depends on whether (1) a decline in fair value is other than temporary, (2) the extent to which a decline is related to credit versus non-credit related factors, (3) our intent to sell the security and (4) whether or not we could be required to sell prior to recovery. The previous amortized cost is adjusted by the loss reported in earnings to provide a new cost basis for fixed maturity securities and the fair value becomes the new cost basis for equity securities.
At December 31, 2015, we had 548 fixed maturity and equity securities with gross unrealized losses totaling $156.3 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.
We assume an expected long-term rate of return on plan assets of 6.75% and a discount rate of 4.65%. Details regarding the method used to determine the discount rate are summarized in Note 8 to our consolidated financial statements included in Item 8.
The 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, 2015.
At December 31, 2015, we held gross deferred tax assets totaling $53.3 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.
We have audited FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2015, 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). FBL Financial Group, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2015 and 2014, 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, 2015 of FBL Financial Group, Inc. and our report dated March 3, 2016 expressed an unqualified opinion thereon.
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the consolidated results of its operations, comprehensive income (loss) and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with generally accepted accounting principles.
FBL Financial Group, Inc. (we or the Company) operates predominantly in the life insurance industry through its principal subsidiary, Farm Bureau Life Insurance Company (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. Greenfields Life Insurance Company (Greenfields), a subsidiary of Farm Bureau Life, was launched in 2013 and offers life and annuity products in the state of Colorado. Several subsidiaries support various functional areas of Farm Bureau Life and other affiliates by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.
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, 2017; early adoption is not permitted. We are currently evaluating the impact of this new guidance on our consolidated financial statements.
Mortgage loans are reported at cost adjusted for amortization of premiums and accrual of discounts. 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 fair value, which may be based upon the present value of expected future cash flows from the loan, or the fair value of the underlying collateral. We evaluate each of our mortgage loans individually and establish an estimated loss, if needed, for each impaired loan identified. The carrying value of each specific loan is reduced by the estimated loss. Interest income is accrued on impaired loans to the extent it is deemed collectible (generally delinquent less than 90 days) and the loan continues to perform under its original or restructured contractual terms. 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.
In order to determine the credit and non-credit impairment loss for fixed maturities, every quarter we estimate the future cash flows we expect to receive over the remaining life of the instrument as well as review our plans to hold or sell the instrument. Significant assumptions regarding the present value of expected cash flows for each security are used when an OTTI occurs and there is a non-credit portion of the unrealized loss that won't be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities include collateral pledged, guarantees, vintage, anticipated principal and interest payments, prepayments, default levels, severity assumptions, delinquency rates and the level of nonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturities include anticipated principal and interest payments and an estimated recovery value, generally based on a percentage return of the current fair value.
After an OTTI write down of all equity securities and any fixed maturities with a credit-only impairment, the cost basis is not adjusted for subsequent recoveries in fair value. For fixed maturities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the remaining life
of the security. Amortization in this instance is computed using the prospective method and the current estimate of the amount and timing of future cash flows.
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 three to twenty years. Property and equipment had a carrying value of $30.2 million at December 31, 2015 and $28.6 million at December 31, 2014, and accumulated depreciation and amortization of $61.4 million at December 31, 2015 and $53.2 million at December 31, 2014. Depreciation and amortization expense for property and equipment was $8.2 million in 2015, $6.3 million in 2014 and $4.6 million in 2013.
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 5.66% in 2015, 5.75% in 2014 and 5.84% in 2013. The liability for future policy benefits for non-participating traditional life insurance is computed using a net level method, including assumptions as to mortality, persistency and interest and includes provisions for possible unfavorable deviations.
Other income and other expenses primarily consist of revenue and expenses generated by our various non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing services. They also include revenues and expenses generated by our parent company for management services. Certain of these activities are performed on behalf of our affiliates. Lease income from leases with affiliates totaled $4.9 million in 2015, $3.1 million in 2014 and $2.2 million in 2013. Investment advisory fee income from affiliates totaled $2.3 million in 2015, $1.9 million in 2014 and $1.7 million in 2013. In addition, Farm Bureau Life has certain items, including fees earned from brokered products, reported as other income and other expense, which netted to $3.2 million in 2015 and 2014 and $3.0 million in 2013. We expense legal costs associated with a loss contingency as incurred.
We participate with affiliates and an unaffiliated organization in defined benefit pension plans, including a multiemployer plan. The multiemployer plan records an asset or liability based on the difference between contributions made to the plan to date and expense recognized for the plan to date. The obligations for the single employer plans are based on an actuarial valuation of future benefits. For the multiemployer plan, our contributions are commingled with those of the other employers to fund the plan benefit obligations. Should a participating employer be unable to provide funding, the remaining employers would be required to continue funding all future obligations. We employ a long-term investment strategy of maintaining diversified plan assets. The expected return on plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy of the plans for assets at the end of the reporting period.
We have a Cash-Based Restricted Stock Unit Plan. Performance and non-performance units are awarded under this plan. In addition to meeting the performance goals, the performance units are subject to a five-year vesting schedule. The non-performance units awarded under this plan vest over five years. The amount payable per unit awarded is equal to the price per share of the Company's common stock at settlement of the award, and as such, we measure the value of the award each reporting period based on the current stock price. The expense related to the performance units is based on the number of units expected to vest and is recognized over the required service period. The expense related to the non-performance units is recognized over the five-year vesting schedule. The impact of forfeitures is estimated and compensation expense is recognized only for those units expected to vest.
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 possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the consolidated financial statements.
Corporate securities include hybrid preferred securities with a fair value of $43.5 million at December 31, 2015 and $80.9 million at December 31, 2014. Corporate securities also include redeemable preferred stock with a fair value of $24.8 million at December 31, 2015 and $29.9 million at December 31, 2014.
Fixed maturities in the above table include 542 securities from 435 issuers at December 31, 2015 and 185 securities from 160 issuers at December 31, 2014. We do not intend to sell or believe we will be required to sell any of our temporarily-impaired fixed maturities before recovery of their amortized cost basis. The following summarizes the more significant unrealized losses of fixed maturities and equity securities by investment category as of December 31, 2015.
Corporate securities: The largest unrealized losses were in the energy sector ($269.8 million fair value and $62.4 million unrealized loss) and in the basic industrial sector ($169.4 million fair value and $32.5 million unrealized loss). The largest unrealized losses in the energy sector were in the midstream ($82.5 million fair value and $23.6 million unrealized loss) and the oil field services ($49.1 million fair value and $15.7 million unrealized loss) sub-sectors. The largest unrealized losses in the basic industrial sector were in the metal/mining ($78.2 million fair value and $24.0 million unrealized loss) and the chemicals ($79.0 million fair value and $7.5 million unrealized loss) sub-sectors. The majority of losses were attributable to credit spread widening across the energy sector and metal/mining sub-sectors associated with sharp declines in commodity prices. The price of crude oil has decreased from $98.42 per barrel at December 31, 2013 to $37.04 per barrel at December 31, 2015. Energy-
related companies have been negatively impacted by the rapid decline in oil prices, which has pressured revenues and margins. The metal/mining sub-sector companies are experiencing lower demand for coal, copper, iron ore and other basic industrial minerals due to the economic slowdown in China in addition to sluggish demand in Europe and the U.S. Over the last 12 months, iron ore and copper prices have declined 37% and 23%, respectively. Lower metal prices are leading metal and mining companies to shut down production at high-cost mines and defer capital expenditures at mines in the development stage.
Other asset-backed securities: The unrealized losses on other asset-backed securities were primarily due to market concerns regarding defaults on subprime mortgages and home equity loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.
Our mortgage loan portfolio consists principally of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to- value ratio that provides sufficient excess collateral to absorb losses should we be required to foreclose and take possession of the collateral. In order to identify impairment losses, management maintains and regularly reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and establish an estimated loss, if needed, for each impaired loan identified. An estimated loss is needed for loans for which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements.
Our commercial mortgage loan portfolio includes loans that have been modified. We assess loan modifications on a loan-by-loan basis to evaluate whether a troubled-debt restructuring (TDR) has occurred. Generally, the types of concessions include: reduction of the contractual interest rate to a below-market rate, extension of the maturity date and/or a reduction of accrued interest. The amount, timing and extent of the concession granted is considered in determining if an impairment loss is needed for the restructuring.
Proceeds from sales of fixed maturities were $108.5 million in 2015, $67.2 million in 2014 and $138.4 million in 2013.
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 the non-credit portion of the OTTI was recognized in other comprehensive income (loss) and corresponding changes in such amounts.
We invest in non-guaranteed federal LIHTC which are included in securities and indebtedness of related parties in the balance sheet. The carrying value of these investments totaled $94.2 million at December 31, 2015 and $84.8 million at December 31, 2014. There were no impairment losses recorded on these investments during 2015, 2014 or 2013. We use the equity method of accounting for these investments and recorded the following in our consolidated statement of operations.
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, 2015.
Level 3 fixed maturities include corporate, mortgage- and asset-backed, United States Governments sponsored agencies and private placement corporate securities for which there is little or no current market data available. We use external pricing sources, or if prices are not available we will estimate fair value internally. Fair values of private corporate investments in Level 3 are determined by reference to the public market, private transactions or valuations for comparable companies or assets in the relevant asset class when such amounts are available. For other securities where an exit price based on relevant observable inputs is not obtained, the fair value is determined using a matrix calculation. Fair values estimated through the use of matrix pricing methods rely on an estimate of credit spreads to a risk-free U.S. Treasury yield. Selecting the credit spread requires judgment based on an understanding of the security and may include a market liquidity premium. Our selection of comparable companies as well as the level of spread requires significant judgment. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.
knowledge of the instrument and the reliability of the prices we have received from the source in the past. Our valuation policy dictates that fair values are initially sought from third party pricing services. If our review of the prices received from our preferred source indicates an inaccurate price, we will use an alternative source within the waterfall and document the decision. In the event that fair values are not available from one of our external pricing services or upon review of the fair values provided it is determined that they may not be reflective of market conditions, those securities are submitted to brokers familiar with the security to obtain non-binding price quotes. Broker quotes tend to be used in limited circumstances such as for newly issued, private placement corporate bonds and other instruments that are not widely traded. For those securities for which an externally provided fair value is not available we use cash flow modeling techniques to estimate fair value.
We evaluate third party pricing source estimation methodologies to assess whether they will provide a fair value which approximates a market exit price.
Short-term debt is not measured at fair value on a recurring basis and is a Level 3 measurement. Our short-term debt consists of advances with interest set to the debt issuer’s current lending rate during December 2015, repayable in less than one month. Given the recent issuance of this short-term debt, its carrying value approximates fair value.
Life insurance in force ceded totaled $14,263.4 million (24.1% of life insurance in force) at December 31, 2015 and $13,837.9 million (24.3% of life insurance in force) at December 31, 2014. Insurance premiums and product charges have been reduced by $33.5 million in 2015, $32.5 million in 2014 and $29.4 million in 2013 and insurance benefits have been reduced by $26.2 million in 2015, $17.0 million in 2014 and $21.7 million in 2013 as a result of cession agreements.
The separate account assets are principally comprised of stock and bond mutual funds. The net amount at risk for these contracts is based on the amount by which GMDB, IDB or GMIB exceeds account value. The reserve for GMDBs, IDBs or GMIBs, determined using modeling techniques and industry mortality assumptions, that is included in future policy benefits, totaled $5.4 million at December 31, 2015 and $3.3 million at December 31, 2014. The weighted average age of the contract holders with GMDB, IDB or GMIB rider exposure was 57 years at December 31, 2015 and 62 years at December 31, 2014. Benefits paid for GMDBs, IDBs and GMIBs totaled $0.4 million for 2015, $0.2 million for 2014 and $0.3 million for 2013.
We recognize the benefits of uncertain tax positions in accordance with the provisions of the FASB interpretation on accounting for uncertainty in income taxes. At December 31, 2015 and 2014, our reserve for uncertain tax positions is less than $0.1 million. Unrecognized tax benefits included in our reserve, if recognized, would impact our effective tax rate, although we do not expect these impacts to be material. We recognize interest related to unrecognized tax benefits in interest expense and related penalties in other expenses. We do not expect any significant increases or decreases in the amount of our reserve for uncertain tax positions within the next twelve months. We are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years prior to 2012.
At December 31, 2015, we had non-life net operating loss carryforwards for federal income tax purposes totaling $22.9 million, which expire beginning in 2033.
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, 2015 and 2014, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
Holders of the Class A common stock and Series B preferred stock vote together as a group in the election of Class A Directors (four to ten). The Class B common stock votes as a separate class to elect the Class B Directors (five to seven). Voting for the Directors is noncumulative. Ownership aspects of our Class B common stock are governed by a Class B Shareholder Agreement. The IFBF's ownership in the three classes of stock results in IFBF owning 71% of our voting stock as of December 31, 2015, and having the ability to control the Company. Holders of Class A common stock and Class B common stock receive equal per-share common stock dividends.
During 2013, we conducted 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 participate in various defined benefit pension plans (the Plans), including a multiemployer plan. The multiemployer plan is considered qualified under Internal Revenue Service regulations, and covers our employees and the employees of the other participating companies who had attained age 21, had one year of service, and were employed prior to January 1, 2013. We also have a plan 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.
The FBL Financial Group Retirement Plan (the Multiemployer Plan) is considered a multiemployer plan, with the participation of unaffiliated and affiliated organizations along with FBL Financial Group, Inc. and its subsidiaries. Under the multiemployer plan structure, our contributions are commingled with those of the other employers to fund the plan benefit obligations. Should a participating employer be unable to provide funding, the remaining employers would be required to continue funding all future obligations. If an employer elects to discontinue participation, prior to departure they will be required to contribute their portion of the underfunded pension obligation associated with their employees. This required contribution will be based on an actuarial estimate of future benefit obligations, which as an estimate may not ultimately be sufficient to fund future actual benefits. None of the participating employers have provided notice that they would be discontinuing participation in the Multiemployer Plan or would otherwise be unable to continue providing their share of required funding as of December 31, 2015.
Pension settlement charges were recognized after determining the total cash payments exceeded the sum of the service and interest cost for 2015 and 2014. The settlement has been recognized quarterly beginning June 30, 2015 and June 30, 2014 in anticipation of the threshold ultimately being exceeded in the next quarter.
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 $57.1 million at December 31, 2015 and $82.1 million at December 31, 2014.
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 beginning in fourth quarter of 2015, determined that a long-term return of 6.75% is reasonable based on the current and expected asset allocations and on the Multiemployer Plan's historical investment performance and best estimates for future investment performance. Prior to this, our expected long-term rate of return was 7.00%.
We also have a Cash-Based Restricted Stock Unit Plan. Compensation expense for arrangements under this plan totaled $1.7 million for 2015, $1.0 million for 2014 and $1.0 million for 2013. The income tax benefit recognized in the statements of operations for this arrangement totaled $0.9 million in 2015, $0.6 million in 2014 and $0.6 million in 2013.
Represents the difference between the share price and exercise price for each option, excluding options where the exercise price is above the share price, at December 31, 2015.
The intrinsic value of options exercised during the year totaled $4.5 million for 2015, $6.5 million for 2014 and $6.6 million for 2013.
In 2011 and prior years, we granted nonvested Class A common shares to certain executives. The restrictions on these shares lapsed and the shares vested if we met or exceeded operating goals, such as earnings per share, book value and expense targets,
within or during a three year period. Depending on performance, the actual amount of shares issued could range from zero to 100% of the granted amount. The value of the awards was based on the grant date fair value of the nonvested stock adjusted for expected forfeitures and an estimate of the number of shares expected to vest. The estimate for the number of shares to vest was reviewed each period and the impact of any changes in the estimate on expense was recorded in the current period. These awards were charged to expense using the straight-line method over the required service period. Dividends on the restricted stock during the restriction period were contingent upon vesting.
Shares of Class A common stock available for grant as additional awards under the Class A Common Stock Compensation Plan totaled 3,430,142 at December 31, 2015.
2015, shares of Class A common stock available for future issuance under this plan totaled 103,525. This plan was frozen to future deferrals on December 31, 2013. We also have an Executive Excess 401(k) Plan under which officers of the Company who met salary guidelines and 401(k) contribution guidelines were allowed to purchase unregistered deferred cash-based stock units. Cash-based stock units outstanding total 84 at December 31, 2015 and 79 at December 31, 2014. 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 2,991 at December 31, 2015 and 2,878 at December 31, 2014. This plan was frozen to future deferrals on December 31, 2013.
We share certain office facilities and services with the IFBF and its affiliated companies. These expenses are allocated on the basis of cost and time studies that are updated annually and primarily consist of rent, salaries and related expenses, travel and other operating costs. We also have an expense allocation agreement with Farm Bureau Property & Casualty Insurance Company for the use of property and equipment. Expense relating to this agreement totaled $0.7 million in 2015, $0.9 million in 2014 and $1.1 million in 2013.
We have management agreements, which include Farm Bureau Property & Casualty and other affiliates, under which we provide general business, administrative and management services. Fee income for these services totaled $2.3 million in 2015, $1.9 million in 2014 and $1.8 million in 2013. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the IFBF, provides certain services to us under a separate arrangement. We incurred related expenses totaling $1.0 million in 2015 and 2014 and $0.9 million in 2013.
We have service agreements with the Farm Bureau-affiliated property-casualty companies operating within our marketing territory, including Farm Bureau Property & Casualty Insurance Company and another affiliate. Under the service agreements, the property-casualty companies are responsible for development and management of our agency force for a fee. We incurred expenses totaling $9.9 million in 2015, $9.3 million in 2014 and $9.7 million in 2013 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. In recent years, companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We are not aware of any such matters threatened or pending against FBL Financial Group, Inc. or any of its subsidiaries.
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, 2015, are as follows: 2016 - $2.1 million, 2017 - $2.1 million, 2018 - $2.1 million, 2019 - $2.1 million, 2020 - $2.1 million and thereafter, through 2021 - $2.1 million. Rent expense for the lease totaled $4.0 million in 2015 and $4.3 million in 2014 and 2013. These amounts are net of $0.2 million in 2015,
The Annuity segment primarily consists of fixed rate annuities and supplementary contracts (some of which involve life contingencies). Fixed rate annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest. Fixed rate annuities primarily consist of flexible premium deferred annuities, but also include single premium deferred and immediate contracts. With fixed rate annuities, we bear the underlying investment risk and credit interest to the contracts at rates we determine, subject to interest rate guarantees. The Annuity segment also includes index annuities. With index annuities, we bear the underlying investment risk and credit interest in an amount equal to a percentage of the gain in a specified market index, subject to minimum guarantees.