Bond yields generally finished lower for the year, as declining U.S. Treasury yields offset widening credit spreads. The yield curve remained moderately steep at year-end with low short-term interest rates, making our annuity products competitive relative to bank-issued certificates of deposit. Strong liquidity and favorable corporate profitability continue to support fundamental credit quality. In the securitized markets, yields for asset-backed securities generally declined given continued strong investor demand amidst improving consumer fundamentals. Yields for residential mortgage-backed securities are moderately attractive, while yields on high quality commercial mortgage-backed securities declined during the year. Structured product yields, however, remain relatively attractive compared to corporate yields.
We periodically revise the key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired and unearned revenues for participating life insurance, variable and interest sensitive products, as applicable, through an "unlocking" process. Revisions are made based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually with different blocks of business unlocked each quarter. The impact in 2011, 2010 and 2009 was primarily due to updating the amortization models for assumptions relating to withdrawal rates, earned spreads, mortality and the current volume of business in force. See the "Segment Information" section that follows for additional discussion of our unlocking adjustments.
Net investment income also includes derivative income resulting from income or loss from interest rate swaps, call options and embedded derivatives included in our modified coinsurance contracts. Derivative income or loss will fluctuate based on market conditions. See Note 4 to our consolidated financial statements for additional details on our derivatives.
Traditional life insurance policy benefits increased 7.3% in 2011 to $166.0 million and 5.3% in 2010 to $154.8 million. The increases in 2011 and 2010 are primarily due to increased mortality experience and an increase in business in force. In addition, as discussed in "Results of Operations" above, we refined the calculation of traditional life reserve estimates resulting in a decrease to traditional life future policy benefits of $5.7 million in 2010.
of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of bond and equity securities held by the investment partnerships, timing and success of initial public offerings and other exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures.
Benefits and expenses increased in 2011 primarily due to increases in the volume of business in force and the amortization of deferred acquisition costs and the value of insurance in force, partially offset by the impact of decreases made to interest crediting rates. The volume of business in force also increased in 2010, however that impact was mostly offset by decreases in the amortization of deferred acquisition costs and the value of insurance in force, and the impact of decreases in interest crediting rates. Amortization of deferred acquisition costs and the value of insurance in force changed over the three year period primarily due to changes in earned spreads and expected profits on the underlying business. Excluding the impact of unlocking, amortization of these items totaled $13.5 million in 2011, $8.9 million in 2010 and $15.8 million in 2009. The impact of unlocking of decreased amortization $0.8 million in 2011, $1.3 million in 2010 and $4.2 million in 2009.
Other income and other expense primarily relates to fees and expenses from sales of brokered products and operating results of our non-insurance subsidiaries, which include management, advisory, marketing and distribution services and leasing activities. The net impact of these activities increased in 2011 primarily from increased sales of brokered variable products, and decreased in 2010 primarily due to a reduction in leasing activities. The changes in equity income are discussed in the "Equity Income" section above.
We earn mortality and expense fee income based on the value of our separate accounts at annual rates ranging from
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2011 and 2010, 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, 2011. 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.
Realized gains and losses on sales of investments are determined on the basis of specific identification. The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. 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 income (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 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.
During 2011, refinements were made to the methods and assumptions used to calculate the amortization of value of insurance in force and deferred acquisition costs, which increased net income from continuing operations $5.0 million ($0.16 per basic and diluted common share).
The sale allows us to exit the annuity business sold through the independent distribution channel, which represents a majority of EquiTrust Life's operations, focus on our core Farm Bureau Life operations and undertake certain capital management initiatives. While EquiTrust Life was sold in its entirety, Farm Bureau Life is assuming a limited portion of the EquiTrust Life business related to variable universal life and variable annuity products distributed through various unaffiliated third parties, as well as a small amount of fixed life and annuity products. The business component sold (herein described as “the EquiTrust Life Business”) encompassed our former Traditional Annuity - Independent segment and a smaller portion of our remaining Life Insurance and Corporate and Other segments.
We are not significantly involved in hedging activities and excluding the liability above, have limited exposure to derivatives. None of our derivatives are considered effective hedges for financial reporting purposes. Derivative assets totaled $3.7 million at December 31, 2011 and $3.3 million at December 31, 2010. Our derivative assets consist of derivatives embedded within our modified coinsurance agreements, collateralized debt obligation and call options which provide an economic hedge for a small block of index annuity contracts. Derivative liabilities, excluding the make-whole redemption feature, totaled $0.4 million at December 31, 2011 and $3.7 million at December 31, 2010 and included derivatives embedded within our index annuity contracts, derivatives embedded within our modified coinsurance agreements and an interest rate swap which matured during June 2011. The net income (loss) recognized on these derivatives was ($0.5) million in 2011, $0.5 million in 2010 and ($2.1) million in 2009.
Certain market sectors remain somewhat dislocated following periods of volatile and illiquid market conditions over the past two years, increasing the difficulty in valuing certain instruments, as trading has been less frequent and/or market data less observable. As a result, certain valuations require greater estimation and judgment as well as more complex valuation methods. These values may not ultimately be realizable in a market transaction, and such values may change 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. For those securities where no active market prices are available, we use the Level 2 or 3 valuation methodologies described below.
The weighted average grant-date fair value of options granted per common share was $14.90 for 2011, $9.47 for 2010 and $4.35 for 2009. The intrinsic value of options exercised during the year totaled $3.5 million for 2011, $1.5 million for 2010 and $0.2 million for 2009.
Unrecognized compensation expense related to nonvested share-based compensation granted under the stock option arrangement totaled $1.7 million as of December 31, 2011. This expense is expected to be recognized over a weighted-average period of 2.2 years.