distribution are conducted from approximately 26,000 square feet of another office building in West Des Moines, Iowa, which is leased through 2016. We consider the current facilities to be adequate for the foreseeable future.
Amounts are impacted by accumulated other comprehensive income (loss) totaling ($118.7) million in 2009, ($649.8) million in 2008, ($36.3) million in 2007, $28.2 million in 2006, and $82.3 million in 2005. These amounts are net of deferred income taxes and other adjustments for assumed changes in the amortization of deferred policy acquisition costs, deferred sales inducements, unearned revenue reserve and value of insurance in force acquired.
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 sell individual life insurance and annuity products through an exclusive distribution channel and individual annuity products through independent agents and brokers. Our exclusive agency force consists of 2,020 Farm Bureau agents and managers operating in the Midwestern and Western sections of the United States. Our independent channel, which we began in 2003, consists of 20,195 agents and brokers operating throughout the United States. In addition to writing direct insurance, we assume business through various coinsurance agreements. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.
The amount of fees we earn on contract holders' separate account balances.
Actual experience and changes in assumptions for expected surrender and withdrawal rates, mortality and spreads used in the amortization of deferred policy acquisition expense and deferred sales inducement amounts.
Changes in fair values of derivatives and embedded derivatives relating to our index annuity business.
The financial markets experienced unprecedented volatility and stress in 2008 and into the first part of 2009. Consumer confidence weakened as oil prices and unemployment increased and home prices and the equity markets declined. At the same time, there was an increase in the cost of credit and a coincident decline in its availability. Overall, the U.S. economy endured a recession comparable in many ways to the Great Depression.
The financial markets began to improve in the latter half of 2009 as credit spreads (the difference between bond yields and benchmark risk-free yields) narrowed and the equity markets rallied. Subsequently, the economy began to improve. Home prices slowed their descent markedly and unemployment continued to rise, but at a slowing pace. Leading economic indicators now suggest that the economy has passed through the deepest part of the recession and may grow in the near term. Despite these improvements, the economy remains a concern given continued high unemployment, large U.S. Government budget deficits and the threat of inflation.
Our fixed annuity products contain features that allow contract holders to surrender a policy. To encourage persistency, we impose a surrender charge against the account balance for early termination of a contract within a specified period after its effective date. Most of the fixed annuity products sold by the EquiTrust Life independent channel offer a market value adjustment (MVA) feature which is based on U.S. Treasury rates. This feature provides us interest rate protection when U.S. Treasury interest rates are greater than the rates in effect when a contract is issued and provides a benefit to contract holders when U.S. Treasury interest rates are less than the rates in effect when a contract is issued. The unprecedented low U.S. Treasury yields late in 2008 and continuing into early 2009 provided an environment where contract holders were able to surrender with smaller net surrender charges, which significantly increased the level of surrender activity. Surrender activity
Premiums collected is not a measure used in financial statements prepared according to U.S. generally accepted accounting principles (GAAP). There is no comparable GAAP financial measure. We use premiums collected to measure the productivity of our exclusive and independent agents. Direct premiums collected in the Traditional Annuity - Exclusive Distribution segment increased in 2009 primarily due to lower short-term market interest rates during the first part of the year making certificates of deposits and other short-term investments less attractive in relation to our traditional fixed annuity products. Direct premiums collected in the Traditional Annuity - Independent Distribution segment decreased in 2009 as a result of rate and other actions taken to preserve capital in the second half of 2008 and 2009, partially offset by a more favorable market environment for traditional annuity products. Variable premiums collected tend to vary with volatility, performance of and confidence level in the equity markets as well as crediting and interest rates on competing products, including fixed rate annuities and bank-offered certificates of deposit. Premiums from reinsurance assumed decreased in 2009 due to the recapture of a closed block of annuity and life insurance policies by a reinsurer. See additional details on this transaction in the "Reinsurance Recapture Transaction" and "Traditional Annuity - Independent Distribution Segment" sections that follow.
The increase in the withdrawal rate for the Traditional Annuity - Independent Distribution segment in 2009 is primarily due to the impact of low U.S. Treasury yields on the MVA feature for our direct fixed annuity products, which provided an environment where contract holders could surrender with smaller net surrender charges. Additional details on this feature are discussed above in the "Impact of Recent Business Environment" section.
Net income (loss) attributable to FBL Financial Group, Inc. (FBL Net Income (Loss)) was $69.8 million for 2009 compared to ($18.1) million in 2008 and $86.3 million in 2007. As discussed in detail below, net income (loss) increased in 2009 primarily due to realized capital gains on the sale of investments, a decrease in impairment losses on investments and the impact of an increase in the volume of business in force in the Traditional Annuity - Exclusive Distribution and Traditional and Universal Life Insurance segments. In addition, the gain from a reinsurance recapture transaction and the impact of refinements made to reserve calculations were nonrecurring items that increased net income in 2009. These items were partially offset by the impact of the change in unrealized gains and losses on derivatives and increased surrenders in the Traditional Annuity - Independent Distribution segment. Net income (loss) decreased in 2008 primarily due to realized losses on investments, the impact of changes in the assumptions used to amortize deferred policy acquisition costs and deferred sales inducements and an increase in death benefits. The increase in volume of business in force is quantified in the detailed discussion that follows by summarizing the face amount of insurance in force for life products or account values of contracts in force for interest sensitive products. The face amount of life insurance in force represents the gross death benefit payable to policyholders and account value represents the value of the contract to the contract holder before application of surrender charges or reduction for any policy loans outstanding. The following discussion provides additional details on the items impacting FBL Net Income (Loss).
Growth in the volume and aging of business in force also contributed to the increase in gross surrender charges. The average aggregate account value for annuity and universal life insurance in force, which increased due to premiums collected as summarized in the "Other data" table above, totaled $10,031.1 million for 2009, $9,715.4 million for 2008 and $8,428.8 million for 2007.
Other income and other expenses include revenues and expenses, respectively, relating primarily to our non-insurance operations. Our non-insurance operations include management, advisory, marketing and distribution services and leasing activities. Fluctuations in these financial statement line items are generally attributable to fluctuations in the level of these services provided during the years. For 2009, other income also includes an $11.1 million pre-tax gain from the reinsurance recapture transaction discussed above.
Interest sensitive and index product benefits and change in value of index product embedded derivatives increased 133.5% in 2009 to $586.2 million and decreased 42.5% in 2008 to $251.1 million. The increase in 2009 is primarily due to the change in value of index product embedded derivatives and an increase in the average volume of business in force. These items were partially offset by the impact of operating adjustments and unlocking on amortization of deferred sales inducements and refinements made to certain reserve estimates. The decrease in 2008 is primarily due to market depreciation on the indices backing the index annuities, partially offset by the impact of unlocking of amortization of deferred sales inducements associated with increased surrenders and withdrawals. Interest sensitive and index product benefits tend to fluctuate from period to period primarily as a result of changes in mortality experience and the impact of changes in the equity markets on index credits, amortization of deferred sales inducements and the value of the embedded derivatives in our index annuities.
The average aggregate account value of annuity contracts in force, which increased primarily due to premiums in excess of policyholder benefits at Farm Bureau Life, partially offset by the reduction in sales and increased surrender activity from the EquiTrust Life independent distribution channel and a decrease in coinsured business, totaled $9,268.9 million for 2009, $8,821.1 million for 2008 and $7,536.9 million for 2007. These account values include values relating to index contracts totaling $4,392.4 million for 2009, $4,709.6 million for 2008 and $4,106.8 million for 2007. As discussed above, during 2009 we refined the calculation of certain interest sensitive life reserves resulting in a $11.4 million decrease to interest credited.
The weighted average interest crediting rate/index cost for universal life and individual traditional annuity products, excluding the impact of the amortization of deferred sales inducements and in 2009, the impact of refining certain reserve estimates, was 3.96% for 2009, 3.94% for 2008 and 3.72% for 2007. See the "Segment Information" section that follows for additional details on our spreads.
The changes in amortization of deferred sales inducements are primarily due to the impact of operating adjustments and unlocking. In addition, the impact of increased surrender activity from the EquiTrust Life independent distribution channel increased amortization in 2009 and the impact of new sales increased amortization in 2008. Amortization of deferred sales inducements on interest sensitive and index products, excluding the impact of operating adjustments and unlocking, totaled $46.1 million in 2009, $34.7 million in 2008 and $23.4 million in 2007. See the "Impact of Operating Adjustments on FBL Net Income" and "Impact of Unlocking" sections above for additional details on these items.
Underwriting, acquisition and insurance expenses increased 5.3% in 2009 to $233.1 million and 36.8% in 2008 to $221.4 million. Amortization of deferred policy acquisition costs increased in 2009 primarily due to increased surrender activity from the EquiTrust Life independent distribution channel and the net impact of operating adjustments, partially offset by the impact of unlocking assumptions used in the amortization calculation. Amortization of deferred policy acquisition costs increased in 2008 primarily due to the impact of unlocking and an increase in the volume of business in force, partially offset by the net impact of operating adjustments. Amortization of deferred policy acquisition costs on our direct EquiTrust Life business, excluding the impact of unlocking and operating adjustments totaled $58.3 million in 2009, $42.5 million in 2008 and $24.6 million in 2007. The decrease in amortization of value of insurance in force acquired in 2008 is primarily due the impact of unlocking, which increased that amortization in 2007. See sections above and the "Market Risks of Financial Instruments - Interest Rate Risk" section that follows for additional information on the impact of increased surrender activity on the amortization. Also, see the "Impact of Operating Adjustments on FBL Net Income" and "Impact of Unlocking" sections above for additional details on these items.
Income tax expense (benefit) totaled $33.2 million in 2009, ($13.7) million in 2008 and $41.1 million in 2007. The effective tax rate was 32.5% for 2009, 42.9% for 2008 and 32.6% for 2007. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of tax-exempt interest and tax-exempt dividend income. The permanent differences between book and tax income increase the effective rate when there is a net loss and decrease the effective rate when there is a net gain. Permanent differences had a greater impact on the effective rates in 2008 due to the size of the pre-tax loss for the year relative to the size of the permanent differences.
(1) See "Net Income (Loss) Attributable to FBL Financial Group, Inc." above for additional details on operating income adjustments.
The change in the weighted average yield on cash and invested assets is primarily attributable to fees from bond calls, tender offers and mortgage loan prepayments and the change of net discount accretion on mortgage and asset-backed securities totaling $1.4 million in 2009, $1.5 million in 2008 and $4.6 million in 2007 and the cost of our interest rate swap program which totaled ($4.8) million in 2009, ($2.5) million in 2008 and $3.9 million in 2007. See "Market Risks of Financial Instruments" and Note 3 to our consolidated financial statements for additional details on our interest rate swaps. The decreases in the weighted average interest crediting rate are due to decreases in the interest crediting rates on a significant portion of our annuity portfolio during 2009 and 2008.
Pre-tax operating income for the Independent Annuity segment increased 333.6% in 2009 to $23.2 million and decreased 86.6% in 2008 to $5.4 million. The increase in 2009 is primarily due to an increase in surrender charges from the EquiTrust Life independent distribution channel and the impact of unlocking, partially offset by a decrease in spreads earned. The decrease in 2008 is primarily attributable to the impact of unlocking on our direct business and a reduction in spreads on assumed business, partially offset by increased average volume of business in force. The average volume of business in force increased during 2009 and 2008 primarily due to sales of our EquiTrust Life independent distribution business during 2008, partially offset by the impact of the increased surrender activity and a reduction in coinsured business. The average aggregate account value for annuity contracts in force in the Independent Annuity segment totaled $7,359.5 million for 2009, $7,169.0 million for 2008 and $5,966.7 million for 2007.
The changes in derivative income (loss) are primarily due to changes in proceeds from call option settlements and the cost of money for call options as discussed under "Derivative Income (Loss)" above. Call option settlements totaled $27.7 million in 2009, $35.9 million in 2008 and $155.3 million in 2007. The cost of money for call options totaled $110.2 million in 2009, $128.1 million in 2008 and $108.0 million in 2007.
Benefits and expenses increased in 2009 primarily due to the average volume of business in force and an increase in amortization of deferred acquisition costs, partially offset by the impact of unlocking. Benefits and expenses decreased in 2008
primarily due to a decrease in index credits, partially offset by the impact of unlocking and an increase in the volume of business in force. Amortization of deferred policy acquisition costs and deferred sales inducements increased in 2009 as a result of increased surrender activity and increased in 2008 primarily due to the impact of unlocking. Unlocking adjustments increased amortization $8.6 million in 2009 and $28.7 million in 2008 and decreased amortization $1.9 million in 2007. Index credits totaling $29.6 million in 2009, $35.5 million in 2008 and $154.0 million in 2007 were primarily impacted by changes in the underlying market indices.
Other income in 2009 represents a one-time pre-tax gain of $8.3 million from the reinsurance recapture transaction described above. Traditional life insurance premiums increased in 2009 and 2008 primarily due to sales of life products by our Farm Bureau Life agency force. Net investment income includes fee income from bond calls, tender offers and mortgage loan prepayments and the change of net discount accretion on mortgage and asset-backed securities totaling $0.4 million in 2009, $1.7 million in 2008 and $2.9 million in 2007.
The impact of refining estimates on certain life insurance reserves decreased benefits and expenses $12.1 million in 2009. Death benefits totaled $84.3 million in 2009, $91.0 million in 2008 and $77.3 million in 2007. Amortization of deferred policy acquisition costs and the value of insurance in force fluctuated between the periods primarily due to the impact of unlocking, which decreased amortization $0.1 million in 2009 and increased amortization $0.3 million in 2008 and $2.4 million in 2007. In addition, amortization was impacted by changes in gross margins due to fluctuations in mortality and traditional life premiums.
Pre-tax operating income (loss) for the Variable segment totaled $11.2 million in 2009, ($1.6) million in 2008 and $12.5 million in 2007. The improvement in operating results in 2009 is primarily due to the impact of market performance on amortization of deferred policy acquisition costs. The loss in 2008 is primarily due to an increase in death benefits and amortization of deferred policy acquisition costs, partially offset by an increase in interest sensitive product charges.
Interest sensitive product charges decreased in 2009 primarily due to a $1.8 million reduction in separate account charges due to market depreciation on separate account balances. Average separate account balances were $624.2 million for 2009 compared to $751.1 million for 2008 and $823.2 million for 2007. Interest sensitive product charges increased in 2008 primarily due to the impact of the aging of business in force. Cost of insurance charges totaled $30.4 million in 2009, $29.7 million in 2008 and $28.2 million in 2007.
Amortization of deferred policy acquisition costs decreased $10.8 million in 2009 and increased $8.0 million in 2008 primarily due to the impact of separate account performance and updating the amortization model for the current volume of business in force. Death benefits in excess of related account values on variable policies decreased 1.7% to $16.0 million in 2009 and increased 54.6% to $16.3 million in 2008.
Pre-tax operating loss totaled $21.8 million in 2009 compared to $12.4 million in 2008 and $2.0 million in 2007. Net investment income decreased in 2009 and 2008 primarily due to a decrease in short-term interest rates and our desire to maintain a more liquid portfolio. Derivative loss consists of net interest expense on an interest rate swap purchased to hedge our previously outstanding line of credit. See Note 3 to our consolidated financial statements for additional information on this interest rate swap. Interest expense increased in 2009 and 2008 due to an increase in our average debt outstanding resulting from additional borrowings.
Our investment portfolio increased 7.4% to $11,653.0 million at December 31, 2009 compared to $10,854.1 million at December 31, 2008. This increase is primarily the result of a $1,093.2 million decrease in the net unrealized depreciation of fixed maturity securities during 2009 to a net unrealized loss of $474.1 million at December 31, 2009. This decrease is principally due to credit spreads tightening and overall market improvements during the year, partially offset by the adoption of a new accounting rule in 2009, which required that non-credit impairments be recorded in accumulated other comprehensive loss. The impact of this adoption increased unrealized losses $27.6 million in 2009. Volatile and illiquid market conditions in 2008 and early 2009 led to wide credit spreads and resulted in significant unrealized losses for our portfolio. As discussed in the "Impact of Recent Business Environment" section above, financial market conditions and our unrealized loss position improved throughout 2009. However, credit defaults and downgrades and moderately wide credit spreads in certain sectors continue to impact our investment portfolio. Details regarding the investment impairments are discussed above in the "Realized/Unrealized Gains (Losses) on Investments" section under "Results of Operations." Additional details regarding
securities in an unrealized loss position at December 31, 2009 are included in the discussion that follows and in Note 2 to our consolidated financial statements.
We manage our investment portfolio with a strategy designed to achieve superior risk-adjusted returns consistent with the investment philosophy of maintaining a largely investment grade portfolio and providing adequate liquidity for obligations to policyholders and other requirements.
At December 31, 2009, unrealized losses on available-for-sale fixed maturity securities totaled $725.8 million primarily due to $326.2 million in unrealized losses on mortgage and asset-backed securities. The unrealized losses on mortgage and asset-backed securities were primarily due to an increase in credit spreads and decrease in market liquidity resulting from concerns about mortgage defaults on subprime and other risky mortgages, and potential downgrades or defaults of monoline bond insurers. In addition, the unrealized losses on corporate securities totaling $241.6 million were primarily due to a decrease in market liquidity and credit quality concerns of assets held by banking institutions and an increase in credit spreads on commercial real estate investment trust bonds, due to the underlying real estate exposure and market concerns about the ability to access capital markets. We do not intend to sell or believe we will be required to sell these investments before their anticipated recovery of amortized cost, therefore we do not consider these investments to be other-than-temporarily impaired at December 31, 2009. See Note 2 to our consolidated financial statements for additional analysis of these unrealized losses.
The residential mortgage-backed portfolio includes pass-through and collateralized mortgage obligation (CMO) securities. With a pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. We invest in sequential tranches which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as
planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to greater than average risk. These include, but are not limited to, principal only, floater, inverse floater, PAC II and support tranches.
Government National Mortgage Association (GNMA or Ginnie Mae), 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 or Fannie Mae) and the Federal Home Loan Mortgage Association (FHLMC or Freddie Mac), are government-sponsored enterprises (GSE's) that were chartered by Congress to reduce borrowing costs for certain homeowners. GSE's have carried an implicit backing of the U.S. Government but do not have explicit guarantees like GNMA. The Housing and Economic Recovery Act of 2008 allows the government to expand its line of credit to $200 billion each for Fannie Mae and Freddie Mac. Late in 2009, the Treasury revised these caps to expand as needed to cover losses over the next three years. The revision was intended to show support for these firms throughout the housing crisis by the Treasury.
Insurance on 2006 Alt-A issues is provided by Financial Guaranty Insurance Co. (44% in 2009 and 38% in 2008) and AMBAC Assurance Corporation (30% in 2009 and 34% in 2008). Insurance on 2007 Alt-A issues is provided by AMBAC Assurance Corporation (53% in 2009 and 57% in 2008), MBIA Insurance Corporation (27% in 2009 and 29% in 2008) and Financial Guaranty Insurance Co. (21% in 2009 and 14% in 2008). The 2006 and 2007 Government & Prime issues are 100% insured by AMBAC Assurance Corporation (2006 issues) and MBIA Insurance Corporation (2007 issues). There is no insurance coverage on other asset-backed securities with subprime or non-mortgage collateral or on collateral originating prior to 2006.
State, municipal and other government securities include investments in general obligation, revenue, military housing 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. The insolvency of one or more of the credit enhancing entities would be a meaningful short-term market liquidity event, but would not dramatically increase our investment portfolio's risk profile.
Mortgage loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to contractual terms of the loan agreement. At December 31, 2009, we held a valuation allowance for two impaired loans totaling $0.7 million. There was no valuation allowance for mortgage loans at December 31, 2008. During 2009, we foreclosed on three mortgage loans with a book value at December 31, 2009 totaling $14.0 million and took possession of the real estate with an appraised value totaling $16.8 million.
Derivative instruments totaling $44.0 million at December 31, 2009 and $12.9 million at December 31, 2008 consist primarily of call options supporting our index annuity business net of collateral received from counterparties. See "Market Risks of Financial Instruments" for details regarding how we manage counterparty credit risk.
We previously participated in a securities lending program whereby certain fixed maturity securities from our investment portfolio were loaned to other institutions for a short period of time. We required collateral equal to or greater than 102% of the fair value of the loaned securities and at least 100% collateral be maintained through the period the securities were on loan. The collateral was invested by the lending agent, in accordance with our guidelines, generating fee income that was recognized as net investment income over the period the securities were on loan. The collateral was accounted for as a secured borrowing and was recorded as an asset on our consolidated balance sheet, with a corresponding liability reflecting our obligation to return this collateral upon the return of the loaned securities. Securities recorded on our consolidated balance sheet with a fair value of $66.4 million at December 31, 2008 were on loan under the program, and we were liable for cash collateral under our control totaling $69.6 million at December 31, 2008. During 2008, we discontinued entering into any new securities lending agreements and we terminated the program during 2009.
Policy liabilities and accruals decreased 3.5% to $11,518.0 million at December 31, 2009 primarily due to decreases in interest sensitive and index product reserves as a result of the increased surrenders of the EquiTrust Life independent distribution business. Policy liabilities and accruals also decreased $246.8 million due to the reinsurance recapture transaction discussed above, partially offset by an increase in the volume of Farm Bureau Life's business in force. We paid off our $60.0 million line of credit borrowings in the first quarter of 2009, which reduced our short-term debt. Other liabilities decreased 19.6% to $87.3 million primarily due to decreases in payables for reinsurance and insurance suspense account balances relating to new sales that have not been processed.
The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities accelerate during periods of declining interest rates.
For the majority of index annuities, call options are purchased to fund the index credits owed to contract holders who elect to participate in one or more market indices. Except for certain contracts for which minimum guaranteed interest rates apply, the options are purchased to fund the full amount of the annual index credits. For contracts for which minimum guaranteed interest rates apply, the options are generally purchased to fund the amount of the annual index credits in excess of minimum guaranteed interest accrued on the contracts. In addition, in 2008 and 2009, certain contracts assumed from a coinsurer were not hedged due to the limited availability and high cost of call options for certain bond indices in the current market environment. At December 31, 2009, the assumed account value of unhedged contracts totaled $28.1 million, which represented 2.8% of assumed index annuities, or 0.7% of our total index annuity business. At December 31, 2008, the assumed
account value of unhedged contracts totaled $88.5 million, which represented 8.0% of assumed index annuities, or 1.8% of our total index annuity business. In 2009, proceeds from the maturity of call options totaled $27.9 million while related index amounts credited to contract holders' account balances totaled $29.8 million. The difference between index credits and option proceeds is primarily attributable to the timing of option purchases in volatile market conditions and proceeds not received from a counterparty that filed for bankruptcy in 2008, partially offset by call options being purchased for contracts that had a full or partial surrender during the year.
Profitability on the portion of the index annuities tied to market indices is significantly impacted by the spread on interest earned on investments and the sum of (1) cost of underlying call options purchased to fund the credits owed to contract holders and (2) minimum interest guarantees owed to the contract holder, if any. The cost of the call options is managed through the terms of the index annuities, which permit adjustments to annual participation rates, asset fees, and/or caps, subject to guaranteed minimums. Extremely volatile market conditions, such as those experienced in 2008 and the first half of 2009, generally cause the cost of options to increase. The minimum guaranteed contract values for the majority of annuities marketed by our EquiTrust Life distribution channel are equal to 87.5% of the premium collected, excluding any premium bonus, plus interest credited at a range of 1.00% to 3.00%. In addition, five products with an account value totaling $1,041.6 million at December 31, 2009 offer a minimum guarantee of 100% of premium collected accumulated at a range of 1.50% to 3.00%. The minimum guaranteed contract values for the assumed index annuities are equal to 80% to 100% of the premium collected plus interest credited at rates ranging between 2.25% to 3.50%. If there were little or no gains in the entire series of options purchased over the expected life of an index annuity (typically 15 to 20 years), we would incur expenses for credited interest over and above our option costs. This can cause our spreads to decrease and reduce our profits.
U.S. Treasury rates decreased significantly during the fourth quarter of 2008 and low rates continued during the first half of 2009. The 10-year U.S. Treasury rate was 2.25% at December 31, 2008 and during 2009 averaged 2.74% in the first quarter, 3.32% in the second quarter, 3.52% in the third quarter and 3.46% in the fourth quarter. As a result, the surrender charge protection after the MVA offset on this business decreased significantly and the volume of surrenders increased during the first half of 2009. Surrender and withdrawal benefits for our EquiTrust Life direct index and fixed rate annuity contracts during 2009 totaled $302.1 million in first quarter, $353.0 million in second quarter, $104.4 million in third quarter and $61.2 million in the fourth quarter. We believe the decrease in surrender activity is the result of the following:
We have terminated certain agents that excessively promoted surrender and exchange activity.
The impact of U.S. Treasury rates on the level of net surrender charge protection after the MVA is illustrated below.
To hedge our exposure to future MVA losses, we have purchased a zero-coupon U.S. Treasury bond with a maturity date in 2039. At December 31, 2009, this security has a book value of $52.0 million, fair value of $49.7 million and average effective
If interest rates were to increase 10% from levels at December 31, 2009 and 2008, the fair value of our fixed maturity securities and short-term investments would decrease approximately $232.8 million at December 31, 2009 and $127.5 million at December 31, 2008, and the value of our interest rate swaps would increase approximately $0.1 million at December 31, 2009 and $0.4 million at December 31, 2008. These hypothetical changes in value do not take into account any offsetting change in the value of insurance liabilities for investment contracts since we estimate such value to be the cash surrender value for a majority of the underlying contracts. However, insurance liabilities for index annuity contracts are based on a number
The amortization of deferred policy acquisition costs on our variable business can fluctuate with changes in the performance of the underlying separate accounts. See the Variable Segment discussion above for additional discussion of this amortization.
In connection with our use of call options and interest rate swaps, we are exposed to counterparty credit risk (the risk that a counterparty fails to perform under the terms of the derivative contract). Our policy is to purchase derivative instruments from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. We believe that purchasing such agreements from financial institutions with superior performance reduces the credit risk associated with these agreements. Our policy allows us to purchase derivative instruments from nationally recognized investment banking institutions with an S&P rating of BBB+ or higher. As of December 31, 2009, all derivative instruments have been purchased from counterparties with an S&P rating of A- or higher. Collateral support documents are negotiated to further reduce the exposure when deemed necessary. See Note 3 to our consolidated financial statements for details regarding collateral we held as of December 31, 2009. Counterparty credit ratings and credit exposure are monitored monthly and reviewed quarterly by our credit and investment committees. Our credit exposure is the fair value of derivative instruments with a positive value, which totaled $44.0 million at December 31, 2009, net of collateral held.
Interest payments on our debt totaled $25.3 million in 2009, $18.8 million in 2008 and $15.1 million in 2007. Interest payments on our debt outstanding at December 31, 2009 are estimated to be $24.4 million in 2010. We paid cash dividends on our common and preferred stock totaling $9.5 million in 2009, $15.1 million in 2008 and $14.4 million in 2007. It is anticipated that quarterly cash dividend requirements for 2010 will be $0.0075 per Series B redeemable preferred share and $0.0625 per common share. The level of common stock dividends will be analyzed quarterly and will be dependent upon our capital and liquidity positions. Assuming a dividend rate of $0.0625 per common share, the common and preferred dividends would total approximately $7.7 million in 2010. As discussed in Note 10 to our consolidated financial statements, the Company has a royalty agreement with the Iowa Farm Bureau Federation (IFBF), our majority shareholder, which provides an option for the IFBF to terminate the agreement when FBL's quarterly common stock dividend is less than $0.10 per share. Assuming no further reduction in the quarterly dividend, the IFBF has agreed to temporarily forgo its right of termination through August 31, 2010 and we anticipate they will continue to forgo such right thereafter.
short-term investments, $11.7 million of cash and $1,198.3 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value. In addition, Farm Bureau Life and EquiTrust Life are members of the Federal Home Loan Bank (FHLB), which provides a source for additional liquidity if needed. This membership allows the companies 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 total market value of eligible collateral, current market value of the par value of admitted assets less legal reserve requirements, and our willingness or capacity to hold activity-based FHLB common stock.
We do not have any off-balance sheet arrangements as of December 31, 2009 or 2008.
Includes our estimated future contributions to multiemployer defined benefit plans. Contributions related to the qualified pension plan are included through 2010. No amounts related to the qualified pension plan are included beyond 2010 as the contribution amounts will be re-evaluated based on actual results.
We are also a party to other operating leases with total payments of approximately $0.5 million per year. Generally, these leases are renewable annually with similar terms. Although our current intention is to renew these leases, we are not obligated to do so.
Inflation has not had a material effect on our consolidated results of operations.
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs and deferred sales inducements, 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, interest sensitive and index 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 the Life Companies revise their estimate of current or future gross profits or margins. For example, deferred policy acquisition costs and deferred sales inducements 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.
We test our goodwill balances by comparing the fair value of our reporting units to the carrying value of the goodwill. We have performed impairment testing using cash flow and other analyses and determined that our goodwill was not impaired as of December 31, 2009 or December 31, 2008.
Pension assets and liabilities are affected by the estimated market value of plan assets, estimates of the expected return on plan assets and/or discount rates. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. The December 31, 2009 pension obligation was computed based on an average 5.52% 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 determined based on current market values of our pension investments. Declines in comparable bond yields would increase our net pension liability. Our net pension liability could increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the discount rate.
The determination of net periodic pension expense and related accrued/prepaid pension cost requires the use of estimates as to the expected return on plan assets, discount rate on plan liabilities and other actuarial assumptions. Pension expense for 2009 totaled $8.5 million.
A 100 basis point decrease in the expected return on assets would result in a $0.7 million increase in pension expense and a 100 basis point increase would result in a $0.7 million decrease to pension expense. A 100 basis point decrease in the assumed discount rate would result in a $0.5 million increase in pension expense while a 100 basis point increase would result in a $0.7 million decrease to pension expense.
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, 2009.
We utilize tax planning strategies, which require forward-looking assumptions and management judgment, to assess the need for a valuation allowance. The deferred tax assets related to fixed maturity and equity securities will more likely than not be fully realized considering our buy-and-hold investment philosophy for securities experiencing unrealized losses and available tax planning strategies that management is willing to implement for securities experiencing realized losses, if necessary. Our tax planning strategy is to sell various appreciated securities and other capital assets that if sold would result in sufficient capital gains to realize the deferred tax assets, thus minimizing the need for a valuation allowance.
See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements that have been implemented during 2009 and those that have been issued and will be implemented in the future.
We engage Ernst & Young LLP as the independent registered public accounting firm to audit our financial statements and internal control over financial reporting and express their opinion thereon. A copy of Ernst & Young LLP's audit opinions follows this letter.
We have audited FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Management of FBL Financial Group, Inc. (the Company) is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. 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.
FBL Financial Group, Inc. (we or the Company) operates predominantly in the life insurance industry through its principal subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust Life) (collectively, the Life Companies). 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. EquiTrust Life markets individual annuity products through independent agents and brokers and variable products through alliances with other insurance companies. These sales take place throughout the United States. In addition to writing direct insurance business, EquiTrust Life has assumed closed blocks of annuity business through coinsurance agreements. Several subsidiaries support various functional areas of the Life Companies 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 June 2009, the FASB issued guidance which removes the concept of and exceptions for a qualifying special-purpose entity from GAAP. The objective of this guidance is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This guidance is effective for financial statements for periods that begin after November 15, 2009. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.
Effective January 1, 2009, we adopted guidance that specifies criteria for determining whether impairments in debt securities
are other than temporary and requires that the non-credit portion of an impairment be recorded in accumulated other comprehensive loss rather than the statements of operations. The guidance also requires additional disclosures relating to other-than-temporary impairments and unrealized losses on investments in interim and annual financial statements. The impact of adoption increased net income by $18.2 million ($0.60 per basic and diluted common share) for the year ended December 31, 2009. In addition, the adoption resulted in a reclassification from retained earnings to accumulated other comprehensive loss of $15.6 million for the non-credit portion of other-than-temporary impairments on securities held on January 1, 2009.
Effective April 1, 2007, we adopted guidance that clarified the accounting for a cash flow hedge of a variable-rate asset or liability, specifically addressing when an entity is permitted to hedge benchmark interest rate risk. The new standard indicated that the risk being hedged in a cash flow hedge of a variable-rate financial asset or liability cannot be designated as interest rate risk unless the cash flows of the hedged transaction are explicitly based on that same benchmark interest rate. In addition, the new standard clarified that the only permitted benchmarks are the risk-free rate and rates based on the LIBOR swap curve. Hedging relationships that no longer qualify for cash flow hedge accounting based on this guidance must be undesignated prospectively. Changes in fair value of derivatives not subsequently re-designated to a new qualifying hedging relationship are recorded in earnings. Gains or losses previously included in accumulated other comprehensive loss remain in accumulated other comprehensive loss and are amortized to net income over the remaining term of the swaps as the hedged anticipated cash flows occur. If it becomes probable that the anticipated cash flows will not occur, the deferred gains or losses will be reclassified into earnings immediately. As a result of adopting this guidance, we undesignated the hedging relationship for the interest rate swaps related to our flexible premium deferred annuity contracts as they are not explicitly based on one of the two permitted benchmarks. Net unrealized gains on these swaps included in accumulated other comprehensive loss totaled $2.8 million at March 31, 2007 and are being amortized into income over the life of the individual swaps. The adoption of this guidance decreased net income $2.2 million ($0.07 per basic and diluted common share) during 2007. This guidance did not impact the interest rate swap on our line of credit, as both the derivative instrument and hedged item were based on the three-month LIBOR rate.
Fixed maturity securities that are purchased with the intent to sell within a short period of time are classified as trading. These securities are carried at fair value and unrealized gains and losses are reflected in the consolidated statements of operations as a component of realized/unrealized gains (losses) on investments. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on mortgage and asset-backed securities incorporates prepayment assumptions to estimate the securities' expected lives.
Derivative instruments include interest rate swaps used to reduce our exposure to increases in market interest rates and call options used to fund index credits on index annuities. In addition, we have embedded derivatives associated with our index annuity business and certain modified coinsurance contracts. All derivatives are measured at fair value and recognized as either derivative instruments or other liabilities, net of related collateral receivable or payable, in the consolidated balance sheets.
See Note 3, "Derivative Instruments," for more information regarding our derivative instruments, embedded derivatives and the changes in accounting for interest rate swaps.
Real estate is reported at cost less allowances for depreciation, as applicable. The carrying value of these assets is subject to regular review. For properties not held for sale, if indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying value, an impairment loss is recognized and the property's cost basis is reduced to fair value. If the fair value, less estimated sales costs, of real estate held for sale decreases to an amount lower than its carrying value, the carrying value of the real estate is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. There was one real estate property held for sale with a valuation allowance of less than $0.1 million at December 31, 2009. There was no valuation allowance for real estate at December 31, 2008.
Realized gains and losses on sales of investments are determined on the basis of specific identification. This line item also includes the change in unrealized gains and losses on trading securities. The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. Effective January 1, 2009, with adoption of new GAAP guidance, when our review indicates a decline in fair value for a fixed maturity security is other than temporary and we do not intend to sell or believe we will be required to sell the security before recovery of our amortized cost, a specific write down is charged to earnings for the credit loss and a specific charge is recognized in accumulated other comprehensive loss for the non-credit loss component. If we intend to sell or believe we will be required to sell a fixed maturity security before its recovery, the full amount of the impairment write down to fair value is charged to earnings. For fixed maturity securities impaired prior to 2009 and all equity securities, the full amount of an other-than-temporary impairment write down is recognized as a realized loss on investments in the statements of operations and the new cost basis for the security is equal to its fair value.
Fair values of fixed maturity securities are based on quoted market prices in active markets when available. Fair values of fixed maturity securities that are not actively traded are estimated using valuation models that vary by asset class. See Note 4, "Fair Values of Financial Instruments," for more information on assumptions and the amount of securities priced using the valuation models. Fair values for all securities are reviewed for reasonableness by considering overall market conditions and values for similar securities.
We assume, under coinsurance agreements, certain fixed rate and index annuity contracts. Call options used to fund index credits on the assumed index annuities are purchased by and maintained on the books of the ceding company. We record our proportionate share of the option value supporting the business we reinsure as reinsurance recoverable on the consolidated balance sheets at fair value.
Deferred policy acquisition costs include certain costs of acquiring new insurance business, principally commissions and other expenses related to the production of new business, to the extent recoverable from future policy revenues and gross profits. Deferred sales inducements include premium bonuses and bonus interest credited to contracts during the first contract year only. The value of insurance in force acquired represents the cost assigned to insurance contracts when an insurance company is acquired. The initial value is determined by an actuarial study using expected future gross profits as a measurement of the net present value of the insurance acquired. Interest accrued on the unamortized balance at a weighted average rate of 4.85% in 2009, 4.89% in 2008 and 4.96% in 2007.
Treasury yields on the market value adjustment feature for our direct fixed annuity products, which provided an environment where contract holders could surrender with smaller net surrender charges. This unanticipated activity required us to update the assumptions in our amortization models, which decreased deferred policy acquisition costs $17.0 million and deferred sales inducements $12.6 million in 2008. After taxes, this increased the 2008 net loss $19.2 million ($0.64 per basic and diluted common share).
Property and equipment, comprised primarily of furniture, equipment and capitalized software costs, are reported at cost less allowances for depreciation and amortization. At December 31, 2008, it also included $6.6 million in assets held for sale, which were reported at fair value. Depreciation and amortization expense is computed primarily using the straight-line method over the estimated useful lives of the assets. Furniture and equipment had a carrying value of $6.3 million at December 31, 2009 and $9.4 million at December 31, 2008, and estimated useful lives that generally range from two to twenty years. Capitalized software costs had a carrying value of $11.0 million at December 31, 2009 and $13.7 million at December 31, 2008, and estimated useful lives that range from two to five years. Depreciation expense for furniture and equipment was $0.4 million in 2009, $8.4 million in 2008 and $9.0 million in 2007. Amortization expense for capitalized software was $6.2 million in 2009, $7.2 million in 2008 and $5.3 million in 2007.
margins was 6.18% in 2009, 6.27% in 2008 and 6.32% in 2007. Accrued dividends for participating business 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 40% of direct receipts from policyholders during 2009 (2008 - 41% and 2007 - 42%) and represented 12% of life insurance in force at December 31, 2009 (2008 and 2007 - 13%). 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.
Traditional life insurance premiums are recognized as revenues over the premium-paying period. Future policy benefits and policy acquisition costs are recognized as expenses over the life of the policy by means of the provision for future policy benefits and amortization of deferred policy acquisition costs and deferred sales inducements.
See Note 9, "Retirement and Compensation Plans," for additional details on these plans.
Unrealized gains and losses on our available-for-sale securities and certain interest rate swaps are included in accumulated other comprehensive loss in stockholders' equity. Comprehensive income (loss) excludes net investment gains and losses included in net income (loss) which represent transfers from unrealized to realized gains and losses, which totaled ($19.9) million in 2009, ($75.3) million in 2008 and $2.7 million in 2007. These amounts, which have been measured through the date of sale, are net of income taxes and adjustments to deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and unearned revenue reserve totaling $3.8 million in 2009, $73.3 million in 2008 and ($0.3) million in 2007. Comprehensive income (loss) also includes the initial recognition and subsequent changes in the underfunded status of our single employer health and medical postretirement benefit plans totaling less than $0.1 million in 2009 and 2008
Certain amounts in the 2008 and 2007 consolidated financial statements have been reclassified to conform to the current financial statement presentation.
The changes in net unrealized investment gains and losses are recorded net of deferred income taxes and other adjustments for assumed changes in the amortization pattern of deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and unearned revenue reserve totaling ($542.4) million in 2009, $796.8 million in 2008 and $115.9 million in 2007. Subsequent changes in fair value of securities for which a previous non-credit other-than-temporary impairment loss was recognized in accumulated other comprehensive loss are reported along with changes in fair value for which no other-than-temporary impairment losses were previously recognized.
length of time the security has been in an unrealized loss position; and
our intent to sell and whether it is more likely than not that we would be required to sell prior to recovery.
Included in the above table are 953 securities from 651 issuers at December 31, 2009 and 1,442 securities from 937 issuers at December 31, 2008. The unrealized losses are primarily due to wider spreads between the risk-free and corporate and other bond yields relative to the spreads when the securities were purchased. The following summarizes the more significant unrealized losses by investment category as of December 31, 2009.
The other sector containing our largest unrealized loss is basic industrial ($135.7 million carrying value and $20.0 million unrealized loss). The unrealized loss in this sub-sector is due to spread widening that is the result of weaker operating results. The unrealized losses in the remaining corporate sectors are also primarily attributable to spread widening generally due to a decrease in market liquidity, an increase in market volatility and concerns about the general health of the economy.
Commercial mortgage-backed securities: The unrealized losses on commercial mortgage-backed securities represent 11.8% of our total unrealized losses, and were caused primarily by spread widening and industry concerns regarding the potential for future commercial mortgage defaults. There were also concerns regarding current and future downgrades by major rating agencies for tranches below the super senior AAA level. The contractual cash flows of these investments are based on mortgages backing the securities. Because we do not intend to sell or believe we will be required to sell these investments before their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at December 31, 2009.
We have a common stock investment in American Equity Investment Life Holding Company (AEL), valued at $0.4 million at December 31, 2009 and December 31, 2008. American Equity underwrites and markets life insurance and annuity products throughout the United States. We sold a portion of our investment in AEL and realized gains totaling $4.1 million in 2008 and $6.1 million in 2007. We also coinsure a closed block of annuity business from a subsidiary of AEL.
At December 31, 2009, affidavits of deposits covering investments with a carrying value totaling $11,371.9 million were on deposit with state agencies to meet regulatory requirements. Fixed maturity securities with a carrying value of $78.7 million were on deposit with the Federal Home Loan Bank as collateral for funding agreements. Also, fixed maturity securities with a carrying value of $2.6 million were on deposit as collateral for an operating lease on software.
At December 31, 2009, we had committed to provide additional funding for mortgage loans on real estate totaling $2.7 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.
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, 2009.
We have entered into interest rate swaps to manage interest rate risk associated with a portion of our flexible premium deferred annuity contracts. Under the interest rate swaps, we pay a fixed rate of interest and receive a floating rate of interest on a notional amount which totaled $100.0 million at December 31, 2009 and December 31, 2008. These interest rate swaps effectively fix the interest crediting rate on a portion of our flexible premium deferred annuity contract liabilities, thereby hedging our exposure to increases in market interest rates. Effective April 1, 2007, we adopted an accounting interpretation which clarified that the only permitted benchmarks for cash flow hedges are the risk-free rate and rates based on the LIBOR swap curve. Upon adoption, we were required to undesignate these hedging relationships and begin recording the net interest rate settlements on the interest rate swaps as a component of derivative income rather than in interest sensitive product benefits. The interest rate settlements decreased derivative income $4.8 million in 2009 and $2.5 million in 2008 and increased derivative income $2.9 million in 2007. The interest rate settlements decreased interest sensitive product benefits $1.0 million in 2007. The change in unrealized loss on these swaps increased derivative income $3.3 million in 2009, and decreased derivative income $1.4 million in 2008 and $4.8 million in 2007. In 2008, we experienced nonperformance by a counterparty on an interest rate swap agreement that was originally scheduled to mature on December 1, 2010. We terminated this agreement and realized a loss totaling $0.5 million.
At December 31, 2009, we had master netting agreements with counterparties covering cash collateral payable totaling $77.4 million and cash collateral receivable totaling $6.3 million. At December 31, 2008, we had master netting agreements with counterparties covering cash collateral payable totaling $10.9 million and cash collateral receivable totaling $9.7 million. Any excess collateral that remains after netting these amounts with derivative assets and liabilities is included in the collateral held or payable for securities lending and other transactions on our consolidated balance sheets. We did not have any excess collateral or off-balance sheet collateral at December 31, 2009 or 2008.
GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP also establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of instrument and the characteristics specific to the instrument. Financial instruments with readily available active quoted prices or those for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. For some investments, little market activity may exist and management's determination of fair value is then based on the best information available in the circumstances, and may incorporate management's own assumptions of what a market participant would consider for the fair value, which involves a significant degree of judgment.
market data was less observable. As a result, certain valuations require greater estimation and judgment as well as valuation methods which are more complex. These values may not ultimately be realizable in a market transaction, and such values may change very rapidly as market conditions change and valuation assumptions are modified.
Fixed maturity securities: Fair values of fixed maturity securities are based on quoted market prices in active markets when available. We have valued our investments using the valuation methodologies described below.
Equity securities: Fair values for equity securities are based on quoted market prices, where available. For equity securities that are not actively traded, estimated fair values are based on values of comparable issues.
Mortgage loans on real estate: Fair values are estimated by discounting expected cash flows of each loan at an interest rate equal to a spread above the U.S. Treasury bond yield that corresponds to the loan's expected life. These spreads are based on overall market pricing of commercial mortgage loans at the time of valuation.
Derivative instruments: Fair values for call options are based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral received. Prices are verified internally using analytical tools.
Policy loans: Fair values are estimated by discounting expected cash flows using a risk-free interest rate based on the U.S. Treasury curve.
Reinsurance recoverable: The fair value of our portion of the call options used to fund index credits on the index annuities assumed from a reinsurer is determined using quoted market prices, less an adjustment for credit risk. Fair values for the embedded derivatives in our modified coinsurance contracts under which we cede or assume business are based on the difference between the fair value and the cost basis of the underlying fixed maturity securities. We are not required to estimate fair value for the remainder of the reinsurance recoverable balance.
Collateral payable for securities lending and other transactions: Fair values are obtained from an independent pricing source and evaluated internally.
Liabilities related to separate accounts: Separate account liabilities are estimated at cash surrender value, the cost we would incur to extinguish the liability.
Level 1 - Quoted prices are available in active markets for identical financial instruments as of the reporting date. The types of financial instruments included in Level 1 are listed equities, mutual funds, money market funds, non-interest bearing cash and U.S. Treasury securities. As required by GAAP, we do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
Level 2 - Pricing inputs are other than quoted prices in active markets which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methods. Financial instruments which are generally included in this category include fixed maturity securities (including public and private bonds), less liquid and restricted equity securities and over-the-counter derivatives that are priced by third-party pricing services or internal systems using observable inputs.
Level 3 - Pricing inputs are unobservable for the financial instrument and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Included in the net transfers in (out) line is $540.8 million of securities that were priced using a broker only quote at December 31, 2008 that were transferred to a pricing service that uses observable market data in the prices and $16.3 million that were transferred into Level 3 that did not have enough observable data to include in Level 2 at December 31, 2009.
The change in unrealized gains(losses) on Level 3 investments held at December 31, 2009 was $53.7 million and at December 31, 2008 was ($193.2) million.
In the normal course of business, we seek to limit our exposure to loss on any single insured or event and to recover a portion of benefits paid by ceding a portion of our exposure to other insurance enterprises or reinsurers. Our reinsurance coverage for life insurance varies according to the age and risk classification of the insured with retention limits ranging up to $1.1 million of coverage per individual life. New sales of certain term life products are reinsured on a first dollar quota share basis. We do not use financial or surplus relief reinsurance.
We participate in a reinsurance pool with various unaffiliated life insurance companies to mitigate the impact of a catastrophic event on our financial position and results of operations. Members of the pool share in the eligible catastrophic losses based on their size and contribution to the pool. Under the pool arrangement, we will be able to cede approximately 63% of catastrophic losses after other reinsurance and a deductible of $0.9 million. Pool losses are capped at $18.3 million per event and the maximum loss we could incur as a result of losses assumed from other pool members is $6.8 million per event. As of the date of this filing, there have been no claims on the reinsurance pool.
Farm Bureau Life also has an annual 100% quota share accidental death reinsurance agreement. Coverage includes all acts of terrorism including those of a nuclear, chemical or biological origin. Coverage is subject to an annual aggregate retention, which was increased from $11.0 million to $12.0 million effective January 1, 2010. A maximum occurrence limit of $50.0 million applies to policies written on agents of the company who are participating in company-sponsored incentive trips. All other occurrence catastrophes are unlimited in amount.
In addition to the cession of risks described above, we also have reinsurance agreements with variable alliance partners to cede a specified percentage of risks associated with variable universal life and variable annuity contracts. Under these agreements, we pay the alliance partners their reinsurance percentage of charges and deductions collected on the reinsured polices. The alliance partners in return pay us their reinsurance percentage of benefits in excess of related account balances. In addition, the
Life insurance in force ceded on a consolidated basis totaled $9,489.1 million (20.6% of direct life insurance in force) at December 31, 2009 and $9,144.2 million (21.0% of direct life insurance in force) at December 31, 2008. Insurance premiums and product charges have been reduced by $31.2 million in 2009, $31.8 million in 2008 and $30.8 million in 2007 and insurance benefits have been reduced by $16.7 million in 2009, $19.1 million in 2008 and $13.7 million in 2007 as a result of cession agreements.
We have assumed closed blocks of certain annuity business through coinsurance agreements. In addition, we assume variable annuity and variable life business from alliance partners through modified coinsurance arrangements.
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 $0.9 million at December 31, 2009 and $1.4 million at December 31, 2008. The weighted average age of the contract holders with GMDB, IDB or GMIB rider exposure was 54 years at December 31, 2009 and 53 years at December 31, 2008. Paid benefits for GMDBs, IDBs and GMIBs totaled $0.7 million for 2009, $0.4 million for 2008 and $0.1 million for 2007.
Taxes related to the reclassification of non-credit impairment losses in the consolidated statements of changes in stockholders' equity totaled $8.4 million in 2009.
We recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses. We are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2003.
In April 2004, we issued $75.0 million of 5.85% Senior Notes due April 15, 2014 (2014 Senior Notes). Interest on the Senior Notes due 2014 is payable semi-annually on April 15 and October 15 each year. The 2014 Senior Notes are redeemable in whole or in part at any time at our option at a make-whole redemption price equal to the greater of 100% of their principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semiannual basis at the treasury rate plus 25 basis points. We received net proceeds of approximately $75.5 million from the issuance of the 2014 Senior Notes after underwriting fees, offering expenses, original issue discount and the impact of a rate lock, which are being amortized over the term of the 2014 Senior Notes, using the effective interest method.
The IFBF owns our Series B preferred stock. Each share of Series B preferred stock has a liquidation preference of $0.60 and voting rights identical to that of Class A common stock with the exception that each Series B share is entitled to two votes while each Class A share is entitled to one vote. The Series B preferred stock pays cumulative annual cash dividends of $0.03 per share, payable quarterly, and is redeemable by us, at our option, at $0.60 per share plus unpaid dividends if the stock ceases to be beneficially owned by a Farm Bureau organization.
expected to be contributed by us. Expected benefits to be paid for all employers are as follows: 2010 - $30.1 million, 2011 - $23.2 million, 2012 - $19.6 million, 2013 - $22.6 million, 2014 - $22.2 million and 2015 through 2019 - $107.9 million.
Net periodic pension cost recorded in our consolidated statements of operations totaled $8.5 million in 2009, $5.4 million in 2008 and $5.9 million in 2007. In 2008, we also recorded a portion of the net periodic pension costs as a charge to retained earnings totaling $0.8 million as a result changing the measurement date due to adopting accounting guidance mentioned above.
Our expected long-term return on plan assets represents the rate of earnings expected in the funds invested to provide for anticipated benefit payments. We have analyzed the expected rates of return on assets and determined that a long-term return of 7% is reasonable based on the current and expected asset allocations and on the plans' historical investment performance and best estimates for future investment performance.
Level 3 - Unobservable inputs for the assets, which require management's judgment about the assumptions that market participants would use in pricing the assets.
Group and funded annuity contracts - contract value is equivalent to fair value, as the interest-crediting rates are periodically reset to market at the discretion of the issuer.
Pooled separate accounts - the value is based on the latest quoted market price of the investments held within the fund.
We participate with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. Through October 2008, we contributed FBL Financial Group, Inc. stock in an amount equal to 100% of an employee's contributions up to 2% of the annual salary contributed by the employee and an amount equal to 50% of an employee's contributions between 2% and 4% of the annual salary contributed by the employee. Beginning in November 2008, and continuing throughout 2009, we made cash contributions at the same contribution levels noted above. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Expense related to the plan totaled $1.1 million in 2009 and 2008 and $1.0 million in 2007.
We grant stock options for Class A common stock to officers and employees, which have a contractual term of 10 years and generally vest over a period up to five years, contingent upon continued employment with us. Prior to 2009, we also granted stock options for Class A common stock to directors, which were fully vested upon grant and had a contractual term that varied with the length of time the director remained on the Board, up to 10 years. The share price for all options is equal to the fair value of the common stock on the grant date. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. We use the historical realized volatility of our stock for the expected volatility assumption within the valuation model. For options granted in 2009 and 2008, the weighted average expected term for the majority of our options was calculated using average historical behavior. For options granted in 2007 and earlier, the weighted-average expected term for the majority of our options was presumed to be the mid-point between the vesting date and the end of the contractual term, also known as the shortcut method.
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, 2009.
Beginning in 2009, directors were awarded Class A common shares that are not restricted. During 2009, 54,976 shares were awarded. The value of the stock was based on the fair value on the date of the grant. The tax benefit realized from the shares awarded to directors was $0.1 million at December 31, 2009.
At December 31, 2009, shares of Class A common stock available for grant as additional awards under the Class A Common Stock Compensation Plan totaled 3,362,016.
EquiTrust Life is a defendant in two cases seeking class action status, including (i) Tabares v. EquiTrust Life Insurance Company, et al, filed in Los Angeles Superior Court on May 5, 2008, Case No. BC390195 ("Tabares") and (ii) Eller, et al. v. EquiTrust Life Insurance Company, et al, field in United States District Court, District of Arizona, on January 12, 2009, Case No. 4:09-cv-00029 DCB ("Eller"). Tabares is a purported California class action on behalf of all persons who purchased the following deferred annuities from EquiTrust Life: MarketValue Index, MarketPower Bonus Index, MarketBooster Index, and the MarketTen Bonus Index. The complaint asserts a sub-class of purchasers that were age 60 or older at the time of purchase. Plaintiffs seek injunctive relief on behalf of all class members under California Business & Professions Code Section 17200 et seq.; compensatory damages for breach of contract; and punitive damages under a common law cause of action for fraud.
In 2008, the jury from a trial in Federal District Court in Utah involving an agency matter awarded Farm Bureau Life and Farm Bureau Property & Casualty actual damages totaling $3.6 million and punitive damages totaling $62.7 million. Approximately 25% of the award is allocable to Farm Bureau Life with the remaining 75% allocable to Farm Bureau Property & Casualty. In 2009, the court ruled on various post trial motions, upholding the actual damages, but reducing the punitive damages to $3.6 million. The defendants have appealed this decision and Farm Bureau Life and Farm Bureau Property & Casualty have cross-appealed. All briefs must be submitted to the 10th Circuit Court of Appeals by the end of February 2010, and we expect the appeal will be argued in the middle or latter part of 2010. Recoveries from third parties are required to be accounted for as gain contingencies and are not recorded in our financial statements until the lawsuit is resolved.
We lease our home office properties under a 15-year operating lease from a wholly-owned subsidiary of the IFBF. Future remaining minimum lease payments under this lease, as of December 31, 2009, are as follows: 2010 - $2.7 million; 2011 - $2.7 million; 2012 - $2.7 million; and 2013 - $0.7 million. Rent expense for the lease totaled $3.3 million in 2009, $3.4 million in 2008 and $3.1 million in 2007. These amounts are net of $1.4 million in 2009, 2008 and 2007 in amortization of a deferred gain on the exchange of our home office properties for common stock in 1998. The remaining unamortized deferred gain totaled $4.5 million at December 31, 2009 and $5.9 million at December 31, 2008.
From time to time, assessments are levied on our insurance subsidiaries by guaranty associations in most states in which the subsidiaries are licensed. These assessments, which are accrued for, are to cover losses of policyholders of insolvent or rehabilitated companies. In some states, these assessments can be partially recovered through a reduction in future premium taxes. Expenses incurred for guaranty fund assessments, net of related premium tax offsets, totaled $0.2 million in 2009 and less than $0.1 million in 2008 and 2007.
Options to purchase outstanding shares of common stock are excluded from the computation of diluted earnings (loss) per share if the options are antidilutive.
The financial statements of the Life Companies included herein differ from related statutory-basis financial statements principally as follows: (a) the bond portfolio is classified as available-for-sale and carried at fair value rather than generally being carried at amortized cost; (b) beginning in 2008, call options that provide an economic hedge for the growth in interest credited to an index annuity policy are accounted at fair value rather than at amortized cost; (c) acquisition costs of acquiring new business are deferred and amortized over the life of the policies rather than charged to operations as incurred; (d) future policy benefit reserves for participating traditional life insurance products are based on net level premium methods and
State laws specify regulatory actions if an insurer's risk-based capital (RBC), a measure of an solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. At December 31, 2009, both of the Life Companies exceeded the minimum RBC requirements. In addition, excluding the impact of the prescribed practice above would not have reduced the total adjusted capital to levels subjecting the Life Companies to any regulatory action.
We analyze our segment results based on pre-tax operating income (loss). Accordingly, income taxes are not allocated to the segments. In addition, operating results are generally reported net of any transactions between the segments. Operating income (loss) for the three years ended December 31, 2009 represents net income (loss) excluding, as applicable, the impact of: (1) realized and unrealized gains and losses on investments, (2) changes in net unrealized gains and losses on derivatives and (3) the cumulative effect of changes in accounting principles.
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and income taxes attributable to these items.
Net statutory premiums collected, which include premiums collected from annuities and universal life-type products that are not included in revenues for GAAP reporting, totaled $1,231.0 million in 2009, $2,156.9 million in 2008 and $2,078.4 million in 2007.
Net income for the fourth quarter of 2009 increased $7.2 million due to the gain on the reinsurance recapture transaction with EMCNL and $7.2 million due to the impact of refining certain reserve estimates and related items such as deferred policy acquisition costs. See Note 5, "Reinsurance and Policy Provisions," for additional details on the reinsurance transaction and Note 1, "Significant Accounting Policies - Future Policy Benefits," for discussion on the reserve refinements.
The differences between the derivative income (loss) by quarter primarily correspond to the performance of the indices upon which our call options are based and the timing of option settlements. These differences are partially offset by changes to the embedded derivatives in index contracts included in benefits and expenses.