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Section 1: 10-Q (10-Q)

Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

(Mark one)
 
 
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended September 30, 2017
 
 
 
or
 
 
 
[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from____________________ to____________________
 
 
 
Commission File Number: 1-11917
390921739_ffglogoa01.jpg
(Exact name of registrant as specified in its charter)
 
 
 
Iowa
 
42-1411715
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5400 University Avenue, West Des Moines, Iowa
 
50266-5997
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(515) 225-5400
(Registrant's telephone number, including area code)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 Title of each class
 
Outstanding at October 31, 2017
Class A Common Stock, without par value
 
24,922,097
Class B Common Stock, without par value
 
11,413


















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FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS


PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
 
Consolidated Statements of Operations
 
Consolidated Statements of Comprehensive Income
 
Consolidated Statements of Changes in Stockholders' Equity
 
Consolidated Statements of Cash Flows
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES
 
    



1


ITEM 1. FINANCIAL STATEMENTS

FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)

 
September 30,
2017
 
December 31,
2016
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2017 - $6,694,051; 2016 - $6,661,711)
$
7,203,335

 
$
7,008,790

Equity securities - available for sale, at fair value (cost: 2017 - $122,435; 2016 - $130,479)
130,890

 
132,968

Mortgage loans
923,938

 
816,471

Real estate
1,543

 
1,955

Policy loans
190,252

 
188,254

Short-term investments
25,399

 
16,348

Other investments
14,099

 
9,874

Total investments
8,489,456

 
8,174,660

 
 
 
 
Cash and cash equivalents
28,713

 
33,583

Securities and indebtedness of related parties
133,786

 
137,422

Accrued investment income
84,960

 
78,437

Amounts receivable from affiliates
5,050

 
3,790

Reinsurance recoverable
104,270

 
105,290

Deferred acquisition costs
302,847

 
330,324

Value of insurance in force acquired
5,536

 
9,226

Current income taxes recoverable

 
4,309

Other assets
99,431

 
92,021

Assets held in separate accounts
637,746

 
597,072

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,891,795

 
$
9,566,134


 


2




FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)

 
September 30,
2017
 
December 31,
2016
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
5,204,910

 
$
5,100,625

Traditional life insurance and accident and health products
1,736,777

 
1,698,792

Other policy claims and benefits
44,157

 
43,395

Supplementary contracts without life contingencies
324,475

 
330,232

Advance premiums and other deposits
265,838

 
265,221

Amounts payable to affiliates
1,108

 
862

Long-term debt payable to non-affiliates
97,000

 
97,000

Current income taxes payable
5,819

 

Deferred income taxes
206,515

 
163,495

Other liabilities
88,812

 
81,182

Liabilities related to separate accounts
637,746

 
597,072

Total liabilities
8,613,157

 
8,377,876

 
 
 
 
Stockholders' equity:
 
 
 
FBL Financial Group, Inc. stockholders' equity:
 
 
 
Preferred stock, without par value, at liquidation value - authorized 10,000,000 shares, issued and outstanding 5,000,000 Series B shares
3,000

 
3,000

Class A common stock, without par value - authorized 88,500,000 shares, issued and outstanding 24,922,097 shares in 2017 and 24,882,542 shares in 2016
153,547

 
152,903

Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 11,413 shares in 2017 and 2016
72

 
72

Accumulated other comprehensive income
223,869

 
149,555

Retained earnings
898,108

 
882,672

Total FBL Financial Group, Inc. stockholders' equity
1,278,596

 
1,188,202

Noncontrolling interest
42

 
56

Total stockholders' equity
1,278,638

 
1,188,258

Total liabilities and stockholders' equity
$
9,891,795

 
$
9,566,134


See accompanying notes.


3




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Interest sensitive product charges
$
28,004

 
$
25,851

 
$
86,661

 
$
82,989

Traditional life insurance premiums
47,087

 
47,682

 
145,783

 
147,425

Net investment income
102,950

 
103,514

 
307,852

 
302,621

Net realized capital gains (losses) on sales of investments
81

 
646

 
599

 
(33
)
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
(67
)
 
(25
)
 
(133
)
 
(3,769
)
Non-credit portion in other comprehensive income

 

 

 
1,522

Net impairment losses recognized in earnings
(67
)
 
(25
)
 
(133
)
 
(2,247
)
Other income
3,501

 
3,616

 
11,711

 
11,480

Total revenues
181,556

 
181,284

 
552,473

 
542,235

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Interest sensitive product benefits
67,206

 
65,882

 
188,217

 
178,860

Traditional life insurance benefits
42,633

 
42,121

 
128,197

 
130,059

Policyholder dividends
2,487

 
2,459

 
7,597

 
8,014

Underwriting, acquisition and insurance expenses
27,535

 
25,785

 
98,229

 
102,437

Interest expense
1,213

 
1,213

 
3,638

 
3,638

Other expenses
4,971

 
3,854

 
13,862

 
12,647

Total benefits and expenses
146,045

 
141,314

 
439,740

 
435,655

 
35,511

 
39,970

 
112,733

 
106,580

Income taxes
(11,220
)
 
(13,091
)
 
(35,844
)
 
(34,637
)
Equity income, net of related income taxes
2,804

 
3,128

 
8,959

 
8,393

Net income
27,095

 
30,007

 
85,848

 
80,336

Net loss (income) attributable to noncontrolling interest
9

 
10

 
(20
)
 
7

Net income attributable to FBL Financial Group, Inc.
$
27,104

 
$
30,017

 
$
85,828

 
$
80,343

 
 
 
 
 
 
 
 
Earnings per common share
$
1.08

 
$
1.20

 
$
3.42

 
$
3.21

Earnings per common share - assuming dilution
$
1.08

 
$
1.20

 
$
3.42

 
$
3.21

 
 
 
 
 
 
 
 
Cash dividend per common share
$
0.44

 
$
0.42

 
$
1.32

 
$
1.26

Special cash dividend per common share
$

 
$

 
$
1.50

 
$
2.00


See accompanying notes.


4




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
27,095

 
$
30,007

 
$
85,848

 
$
80,336

Other comprehensive income (1)
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses
11,320

 
16,557

 
73,751

 
178,815

Non-credit impairment losses

 

 

 
(952
)
Change in underfunded status of postretirement benefit plans
192

 
149

 
563

 
433

Total other comprehensive income, net of tax
11,512

 
16,706

 
74,314

 
178,296

Total comprehensive income, net of tax
38,607

 
46,713

 
160,162

 
258,632

Comprehensive income attributable to noncontrolling interest
9

 
10

 
(20
)
 
7

Total comprehensive income applicable to FBL Financial Group, Inc.
$
38,616

 
$
46,723

 
$
160,142

 
$
258,639


(1)
Other comprehensive income is recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities.


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
 
FBL Financial Group, Inc. Stockholders' Equity
 
 
 
 
 
Series B Preferred Stock
 
Class A and Class B Common Stock
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Non-
controlling Interest
 
Total Stockholders' Equity
Balance at January 1, 2016
$
3,000

 
$
149,320

 
$
114,532

 
$
867,574

 
$
48

 
$
1,134,474

Net income - nine months ended September 30, 2016

 

 

 
80,343

 
(7
)
 
80,336

Other comprehensive income

 

 
178,296

 

 

 
178,296

Issuance of common stock under compensation plans

 
2,917

 

 

 

 
2,917

Purchase of common stock

 
(63
)
 

 
(523
)
 

 
(586
)
Dividends on preferred stock

 

 

 
(112
)
 

 
(112
)
Dividends on common stock

 

 

 
(80,997
)
 

 
(80,997
)
Receipts related to noncontrolling interest

 

 

 

 
12

 
12

Balance at September 30, 2016
$
3,000

 
$
152,174

 
$
292,828

 
$
866,285

 
$
53

 
$
1,314,340

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
3,000

 
$
152,975

 
$
149,555

 
$
882,672

 
$
56

 
$
1,188,258

Net income - nine months ended September 30, 2017

 

 

 
85,828

 
20

 
85,848

Other comprehensive income

 

 
74,314

 

 

 
74,314

Issuance of common stock under compensation plans

 
644

 

 

 

 
644

Dividends on preferred stock

 

 

 
(112
)
 

 
(112
)
Dividends on common stock

 

 

 
(70,280
)
 

 
(70,280
)
Receipts related to noncontrolling interest

 

 

 

 
(34
)
 
(34
)
Balance at September 30, 2017
$
3,000

 
$
153,619

 
$
223,869

 
$
898,108

 
$
42

 
$
1,278,638


See accompanying notes.


5




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

 
Nine months ended September 30,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
85,848

 
$
80,336

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
121,028

 
114,046

Charges for mortality, surrenders and administration
(86,975
)
 
(83,311
)
Net realized (gains) losses on investments
(466
)
 
2,280

Change in fair value of derivatives
(5,450
)
 
1,846

Increase in liabilities for life insurance and other future policy benefits
67,802

 
69,127

Deferral of acquisition costs
(31,819
)
 
(31,279
)
Amortization of deferred acquisition costs and value of insurance in force
15,984

 
21,869

Change in reinsurance recoverable
(488
)
 
(3,146
)
Provision for deferred income taxes
3,005

 
74

Other
5,922

 
(694
)
Net cash provided by operating activities
174,391

 
171,148

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
444,130

 
445,158

Equity securities - available for sale
9,168

 
4,885

Mortgage loans
39,880

 
61,959

Derivative instruments
9,054

 
1,309

Policy loans
27,092

 
26,642

Securities and indebtedness of related parties
6,262

 
8,194

Real estate
717

 

Other long-term investments
14

 

Acquisitions:
 
 
 
Fixed maturities - available for sale
(457,988
)
 
(610,152
)
Equity securities - available for sale
(1,102
)
 
(9,259
)
Mortgage loans
(147,200
)
 
(106,455
)
Derivative instruments
(6,556
)
 
(4,943
)
Policy loans
(29,090
)
 
(29,394
)
Securities and indebtedness of related parties
(11,565
)
 
(12,826
)
Short-term investments, net change
(9,051
)
 
19,291

Purchases and disposals of property and equipment, net
(7,889
)
 
(8,857
)
Net cash used in investing activities
(134,124
)
 
(214,448
)




6




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)

 
Nine months ended September 30,
 
2017
 
2016
Financing activities
 
 
 
Contract holder account deposits
$
358,211

 
$
431,264

Contract holder account withdrawals
(333,261
)
 
(257,907
)
Dividends paid
(70,392
)
 
(81,109
)
Repayments of debt

 
(15,000
)
Issuance or repurchase of common stock, net
305

 
1,360

Other financing activities

 
588

Net cash provided by (used in) financing activities
(45,137
)
 
79,196

Increase (decrease) in cash and cash equivalents
(4,870
)
 
35,896

Cash and cash equivalents at beginning of period
33,583

 
29,490

Cash and cash equivalents at end of period
$
28,713

 
$
65,386

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
(3,638
)
 
$
(3,641
)
Income taxes
(10,302
)
 
(7,701
)

See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2017

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of FBL Financial Group, Inc. (we or the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Our financial statements include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our financial position and results of operations.

Operating results for the three- and nine-month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. We encourage you to refer to the notes to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2016 for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgments and estimates and other information necessary to understand our financial position and results of operations.

New Accounting Pronouncements

Description
Date of adoption
Effect on our consolidated financial statements or other significant matters
Standards adopted:

Share-based compensation
In March 2016, the Financial Accounting Standards Board (FASB) issued guidance that impacted the accounting for share-based compensation, including the accounting for excess tax benefits and deficiencies, classification of excess tax benefits within the consolidated statement of cash flows and the accounting for forfeitures. 

January 1, 2017

The guidance was adopted prospectively. Adoption resulted in a federal income tax benefit of $0.6 million ($0.02 per basic and diluted common share) for the nine months ended September 30, 2017 and $0.1 million (less than $0.01 per basic and diluted common share) for the quarter ended September 30, 2017. Prior year periods were not restated.
Standards not yet adopted:
Financial instruments - recognition and measurement
In January 2016, the FASB issued guidance that amends certain aspects of the recognition and measurement of financial instruments. The new guidance primarily affects the accounting for equity investments, the presentation and disclosure requirements for financial instruments and the methodology for assessing the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale fixed maturity securities. The new standard requires the use of a modified retrospective method at adoption.
January 1, 2018
We expect the primary impact of this guidance on us will be in the recognition of gains or losses from changes in the fair value of our equity security investments through the statement of operations, rather than as unrealized gains or losses reflected in other comprehensive income. Additionally, there will no longer be a requirement for us to assess equity securities for other-than-temporary impairments, as such securities will be measured at fair value through net income. Note 2 provides further information as to our current level of unrealized gains or losses on these securities.


8

Table of Contents

Revenue recognition
In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance, including industry-specific guidance. Although insurance contracts are specifically excluded from the scope of this guidance, almost all entities will be affected to some extent by an increase in required disclosures. The new guidance is based on the principle that an entity should recognize revenue to reflect the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. We have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard.
January 1, 2018
We currently expect the impact of this new guidance to be related to non-insurance contract revenues, primarily net commissions on products we broker, which are insignificant to the consolidated financial statements.
Leases
In February 2016, the FASB issued a new lease accounting standard, which, for most lessees, will result in a gross-up of the balance sheet. Under the new standard, lessees will recognize the leased assets on the balance sheet and will recognize a corresponding liability for the present value of lease payments over the lease term. The new standard requires the application of judgment and estimates. Also, there are accounting policy elections that may be taken both at transition and for the accounting post-transition, including whether to adopt a short-term lease recognition exemption. The new standard will be applied as of the beginning of the earliest comparative period presented in the financial statements (date of initial application).
January 1, 2019
We are currently evaluating the impact of this guidance on our consolidated financial statements.
Financial instruments - credit impairment
In June 2016, the FASB issued guidance amending the accounting for the credit impairment of financial instruments. Under the new guidance, impairment losses will be estimated using an expected loss model under which a valuation allowance is established and adjusted over time. The valuation allowance will be based on the probability of loss over the life of the instrument, considering historical, current and forecasted information. The new guidance differs significantly from the incurred loss model used today, and will result in the earlier recognition of impairment losses. The new guidance may also increase the volatility of earnings to the extent actual results differ from the assumptions used in the establishment of the valuation allowance. The financial instruments for which we will be required to use the new model include but are not limited to, mortgage loans and reinsurance recoverables. Our available-for-sale fixed maturities will continue to apply the incurred loss model. However, rather than impairment losses resulting in a permanent reduction of carrying value as they do today, such losses will be in the form of a valuation allowance, which can be increased in the case of future credit losses or decreased should conditions improve. The new standard requires the use of a modified retrospective method at adoption.
January 1, 2020
We are currently evaluating the impact of this new guidance on our consolidated financial statements. We believe the most significant impact upon adoption will be the establishment of a valuation allowance for our mortgage loan investments.



9

Table of Contents

2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,453,472

 
$
302,308

 
$
(18,090
)
 
$
3,737,690

 
$
20

Residential mortgage-backed
439,818

 
37,979

 
(1,921
)
 
475,876

 
429

Commercial mortgage-backed
628,934

 
38,208

 
(2,027
)
 
665,115

 

Other asset-backed
762,634

 
18,863

 
(1,839
)
 
779,658

 
2,368

United States Government and agencies
26,188

 
1,679

 
(23
)
 
27,844

 

State and political subdivisions
1,383,005

 
136,264

 
(2,117
)
 
1,517,152

 

Total fixed maturities
$
6,694,051

 
$
535,301

 
$
(26,017
)
 
$
7,203,335

 
$
2,817

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
92,952

 
$
8,258

 
$
(231
)
 
$
100,979

 
 
Common stocks
29,483

 
428

 

 
29,911

 
 
Total equity securities
$
122,435

 
$
8,686

 
$
(231
)
 
$
130,890

 
 
 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,529,997

 
$
228,601

 
$
(49,943
)
 
$
3,708,655

 
$
(1,082
)
Residential mortgage-backed
396,110

 
29,121

 
(2,931
)
 
422,300

 
(983
)
Commercial mortgage-backed
546,446

 
33,645

 
(4,137
)
 
575,954

 

Other asset-backed
771,570

 
8,846

 
(9,766
)
 
770,650

 
2,544

United States Government and agencies
30,575

 
1,629

 
(132
)
 
32,072

 

State and political subdivisions
1,387,013

 
119,298

 
(7,152
)
 
1,499,159

 

Total fixed maturities
$
6,661,711

 
$
421,140

 
$
(74,061
)
 
$
7,008,790

 
$
479

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
100,042

 
$
4,050

 
$
(1,675
)
 
$
102,417

 
 
Common stocks
30,437

 
114

 

 
30,551

 
 
Total equity securities
$
130,479

 
$
4,164

 
$
(1,675
)
 
$
132,968

 
 

(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for corporate, residential mortgage-backed, and other asset-backed securities at September 30, 2017 and other asset-backed securities at December 31, 2016 were in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2)
Corporate securities include hybrid preferred securities with a fair value of $24.5 million at September 30, 2017 and $23.3 million at December 31, 2016. Corporate securities also include redeemable preferred stock with a fair value of $22.9 million at September 30, 2017 and $24.5 million at December 31, 2016.



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Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
September 30, 2017
 
Amortized
Cost
 

Fair Value
 
(Dollars in thousands)
Due in one year or less
$
182,411

 
$
186,444

Due after one year through five years
650,439

 
697,790

Due after five years through ten years
720,753

 
765,931

Due after ten years
3,309,062

 
3,632,521

 
4,862,665

 
5,282,686

Mortgage-backed and other asset-backed
1,831,386

 
1,920,649

Total fixed maturities
$
6,694,051

 
$
7,203,335


Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed maturities not due at a single maturity date have been included in the above table in the year of final contractual maturity.

Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income
 
September 30,
2017
 
December 31,
2016
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
509,284

 
$
347,079

Equity securities - available for sale
8,455

 
2,489

 
517,739

 
349,568

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(142,109
)
 
(95,647
)
Value of insurance in force acquired
(14,438
)
 
(12,382
)
Unearned revenue reserve
10,652

 
4,215

Adjustments for assumed changes in policyholder liabilities
(16,421
)
 
(3,795
)
Provision for deferred income taxes
(124,397
)
 
(84,684
)
Net unrealized investment gains
$
231,026

 
$
157,275


Net unrealized investment gains and losses are recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities. Subsequent changes in the fair value of securities for which a previous non-credit OTTI loss was recognized in accumulated other comprehensive income, are reported along with changes in fair value for which no OTTI losses were previously recognized.



11

Table of Contents

Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
September 30, 2017
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 

Fair Value
 
Unrealized Losses
 

Fair Value
 
Unrealized Losses
 
 Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
142,004

 
$
(2,278
)
 
$
186,461

 
$
(15,812
)
 
$
328,465

 
$
(18,090
)
 
69.5
%
Residential mortgage-backed
 
49,211

 
(674
)
 
27,385

 
(1,247
)
 
76,596

 
(1,921
)
 
7.4

Commercial mortgage-backed
 
120,022

 
(1,661
)
 
4,981

 
(366
)
 
125,003

 
(2,027
)
 
7.8

Other asset-backed
 
140,185

 
(1,211
)
 
36,180

 
(628
)
 
176,365

 
(1,839
)
 
7.1

United States Government and agencies
 
3,598

 
(23
)
 

 

 
3,598

 
(23
)
 
0.1

State and political subdivisions
 
49,397

 
(737
)
 
13,727

 
(1,380
)
 
63,124

 
(2,117
)
 
8.1

Total fixed maturities
 
$
504,417

 
$
(6,584
)
 
$
268,734

 
$
(19,433
)
 
$
773,151

 
$
(26,017
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$

 
$

 
$
4,769

 
$
(231
)
 
$
4,769

 
$
(231
)
 
 
Total equity securities
 
$

 
$

 
$
4,769

 
$
(231
)
 
$
4,769

 
$
(231
)
 
 

 
 
December 31, 2016
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
742,626

 
$
(23,142
)
 
$
220,939

 
$
(26,801
)
 
$
963,565

 
$
(49,943
)
 
67.3
%
Residential mortgage-backed
 
51,873

 
(1,014
)
 
22,744

 
(1,917
)
 
74,617

 
(2,931
)
 
4.0

Commercial mortgage-backed
 
95,690

 
(3,590
)
 
6,610

 
(547
)
 
102,300

 
(4,137
)
 
5.6

Other asset-backed
 
371,829

 
(5,810
)
 
95,740

 
(3,956
)
 
467,569

 
(9,766
)
 
13.2

United States Government and agencies
 
6,438

 
(132
)
 

 

 
6,438

 
(132
)
 
0.2

State and political subdivisions
 
150,052

 
(7,152
)
 

 

 
150,052

 
(7,152
)
 
9.7

Total fixed maturities
 
$
1,418,508

 
$
(40,840
)
 
$
346,033

 
$
(33,221
)
 
$
1,764,541

 
$
(74,061
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
12,774

 
$
(150
)
 
$
13,438

 
$
(1,525
)
 
$
26,212

 
$
(1,675
)
 
 
Total equity securities
 
$
12,774

 
$
(150
)
 
$
13,438

 
$
(1,525
)
 
$
26,212

 
$
(1,675
)
 
 

Fixed maturities in the above tables include 236 securities from 178 issuers at September 30, 2017 and 516 securities from 404 issuers at December 31, 2016.

Unrealized losses decreased during the nine months ended September 30, 2017 primarily due to a decrease in treasury rates as well as a general decrease in credit spreads. We do not consider securities to be OTTI when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality when recovery of all amounts due under the contractual terms of the security is anticipated. Based on our intent not to sell or our belief that we will not be required to sell these securities before recovery of their amortized cost basis, we do not consider these investments to be OTTI at September 30, 2017. We will continue to monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified.

Our largest unrealized loss was from a retailer and totaled $2.4 million at September 30, 2017.



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Table of Contents

As described more fully in Note 1 to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2016, we perform a regular evaluation of all investment classes for impairment, including fixed maturity securities and equity securities, in order to evaluate whether such investments are OTTI.

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
Nine months ended September 30,
 
2017

2016
 
(Dollars in thousands)
Balance at beginning of period
$
(14,500
)
 
$
(11,498
)
Increases to previously impaired investments

 
(2,172
)
Reductions due to investments sold or paid down
1,154

 
1,054

Reduction for credit loss that no longer has a portion of the OTTI loss recognized in other comprehensive income
587

 

Balance at end of period
$
(12,759
)
 
$
(12,616
)

The table above sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which a portion of the OTTI was recognized in other comprehensive income and corresponding changes in such amounts. Credit loss impairments with no portion of the loss recognized in other comprehensive income, such as securities for which OTTI was measured at fair value, are excluded from the table.
Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Gross gains
$
221

 
$

 
$
1,426

 
$
7,379

Gross losses
(140
)
 

 
(1,082
)
 
(8,378
)
Equity securities

 
529

 
(90
)
 
529

Other long-term investments

 

 
40

 

Real estate

 

 
305

 

Securities and indebtedness of related parties

 
117

 

 
437

 
81

 
646

 
599

 
(33
)
Impairment losses recognized in earnings:
 
 
 
 
 
 
 
Credit-related portion of fixed maturity losses (1)

 

 

 
(2,172
)
Other credit-related (2)
(67
)
 
(25
)
 
(133
)
 
(75
)
Net realized losses on investments recorded in income
$
14

 
$
621

 
$
466

 
$
(2,280
)

(1)
Amount represents the credit-related losses recognized for fixed maturities that were impaired through income but not written down to fair value. As discussed above, the non-credit portion of the losses have been recognized in other comprehensive income (loss).
(2)
Amount represents credit-related losses for other investments and fixed maturities written down to fair value through income.

Proceeds from sales of fixed maturities totaled $57.7 million during the nine months ended September 30, 2017 and $104.7 million during the nine months ended September 30, 2016.

Realized gains and losses on sales of investments are determined on the basis of specific identification.

Mortgage Loans

Our mortgage loan portfolio consists of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to-value ratio that


13

Table of Contents

provides sufficient collateral to absorb losses should we be required to foreclose and take possession of the collateral. In order to identify impairment losses, management maintains and regularly reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and recognize a loss through an allowance for each loan for which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements.

Any loan delinquent on contractual payments is considered non-performing. At September 30, 2017 and December 31, 2016, there were no non-performing loans over 90 days past due on contractual payments. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely. At September 30, 2017, we had committed to provide additional funding for mortgage loans totaling $43.4 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.

Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
393,731

 
42.6
%
 
$
361,088

 
44.2
%
Retail
 
287,093

 
31.1

 
240,602

 
29.5

Industrial
 
185,348

 
20.1

 
154,005

 
18.9

Other
 
57,766

 
6.2

 
60,776

 
7.4

Total
 
$
923,938

 
100.0
%
 
$
816,471

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
September 30, 2017
 
December 31, 2016
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
274,396

 
29.7
%
 
$
266,019

 
32.6
%
Pacific
 
139,703

 
15.1

 
104,337

 
12.8

West North Central
 
128,600

 
13.9

 
105,753

 
12.9

East North Central
 
94,237

 
10.2

 
91,550

 
11.2

Mountain
 
89,036

 
9.6

 
79,707

 
9.8

West South Central
 
86,589

 
9.4

 
74,258

 
9.1

Other
 
111,377

 
12.1

 
94,847

 
11.6

Total
 
$
923,938

 
100.0
%
 
$
816,471

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Loan-to-Value Ratio
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
321,301

 
34.8
%
 
$
274,953

 
33.7
%
51% - 60%
 
258,085

 
27.9

 
210,555

 
25.8

61% - 70%
 
251,142

 
27.2

 
233,216

 
28.5

71% - 80%
 
63,530

 
6.9

 
67,607

 
8.3

81% - 90%
 
29,880

 
3.2

 
30,140

 
3.7

Total
 
$
923,938

 
100.0
%
 
$
816,471

 
100.0
%



14

Table of Contents

The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically when there is indication of a possible significant collateral decline or there are loan modifications or refinance requests.

Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2017
 
$
146,053

 
15.8
%
 
$

 
%
2016
 
155,559

 
16.8

 
158,817

 
19.4

2015
 
146,311

 
15.8

 
149,302

 
18.3

2014
 
78,605

 
8.5

 
80,771

 
9.9

2013
 
67,840

 
7.4

 
69,887

 
8.6

2012 and prior
 
329,570

 
35.7

 
357,694

 
43.8

Total
 
$
923,938

 
100.0
%
 
$
816,471

 
100.0
%

 Impaired Mortgage Loans
 
September 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Unpaid principal balance
$
19,126

 
$
21,459

Less:
 
 
 
Related allowance
(566
)
 
(713
)
Carrying value of impaired mortgage loans
$
18,560

 
$
20,746

 Allowance on Mortgage Loans
 
Nine months ended September 30,
 
2017
 
2016
 
(Dollars in thousands)
Balance at beginning of period
$
713

 
$
851

Recoveries
(147
)
 
(85
)
Balance at end of period
$
566

 
$
766


Mortgage Loan Modifications

Our commercial mortgage loan portfolio includes loans that have been modified. We assess loan modifications on a loan-by-loan basis to evaluate whether a troubled debt restructuring has occurred. Generally, the types of concessions include: reduction of the contractual interest rate to a below-market rate, extension of the maturity date and/or a reduction of accrued interest. The amount, timing and extent of the concession granted is considered in determining if an impairment loss is needed for the restructuring. There were no loan modifications during the nine months ended September 30, 2017 or 2016.

Low Income Housing Tax Credit Investments (LIHTC)

We invest in non-guaranteed federal LIHTC, which are included in securities and indebtedness of related parties on the balance sheet. The carrying value of these investments totaled $86.0 million at September 30, 2017 and $91.3 million at December 31, 2016. There were no impairment losses recorded on these investments during the first nine months of 2017 or 2016. We use the equity method of accounting for these investments and reported the following in our consolidated statement of operations.


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Table of Contents

LIHTC Equity Income (Loss), Net of Related Income Taxes
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Equity losses from LIHTC
 
$
(1,918
)
 
$
(1,811
)
 
$
(6,661
)
 
$
(5,858
)
Income tax benefits:
 
 
 
 
 
 
 
 
Tax benefits from equity losses
 
671

 
634

 
2,331

 
2,050

Investment tax credits
 
3,563

 
3,581

 
10,660

 
10,583

Equity income from LIHTC, net of related income tax benefits
 
$
2,316

 
$
2,404

 
$
6,330

 
$
6,775


At September 30, 2017, we had committed to provide additional funds for limited partnerships and limited liability companies in which we invest. The amounts of these unfunded commitments totaled $54.3 million, including $2.4 million for LIHTC commitments, which are summarized by year in the following table.

LIHTC Commitments by Year
 
 
September 30, 2017
 
(Dollars in thousands)
2017
$
1,226

2018
320

2019-2025
857

Total
$
2,403


Variable Interest Entities

We evaluate our variable interest entity (VIE) investees to determine whether the level of our direct ownership interest, our rights to manage operations, or our obligation to provide ongoing financial support are such that we are the primary beneficiary of the entity, and would therefore be required to consolidate it for financial reporting purposes. After determining that VIE status exists, we review our involvement in the VIE to determine whether we have both the power to direct activities that most significantly impact the economic performance of the VIE, and the obligation to absorb losses or the rights to receive benefits that could be potentially significant to the VIE. This analysis includes a review of the purpose and design of the VIE as well as the role that we played in the formation of the entity and how that role could impact our ability to control the VIE. We also review the activities and decisions considered significant to the economic performance of the VIE and assess what power we have in directing those activities and decisions. Finally, we review the agreements in place to determine if there are any guarantees that would affect our maximum exposure to loss.

We have reviewed the circumstances surrounding our investments in VIEs, which are classified as securities and indebtedness of related parties and consist of LIHTC, limited partnerships or limited liability companies accounted for under the equity method. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carrying value and any unfunded commitments that exist for each particular VIE. We also have not provided additional support or other guarantees that was not previously contractually required (financial or otherwise) to any of the VIEs as of September 30, 2017 or December 31, 2016. Based on this analysis, none of our VIEs were required to be consolidated for any reporting periods presented in this Form 10-Q.




16

Table of Contents

VIE Investments by Category
 
 
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value
 
Maximum Exposure to Loss
 
(Dollars in thousands)
LIHTC
$
85,964

 
$
88,367

 
$
91,255

 
$
95,058

Investment companies
24,246

 
63,778

 
23,379

 
45,569

Real estate limited partnerships
10,042

 
21,992

 
10,790

 
14,558

Other
959

 
1,409

 
429

 
2,034

Total
$
121,211

 
$
175,546

 
$
125,853

 
$
157,219


In addition, we make passive investments in the normal course of business in structured securities issued by VIEs for which we are not the investment manager. These structured securities include all of the residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities included in our fixed maturities. Our maximum exposure to loss on these securities is limited to our carrying value in the investment. We have determined that we are not the primary beneficiary of these structured securities because we do not have the power to direct the activities that most significantly impact the entities' economic performance.

Derivative Instruments

Our primary derivative exposures relate to our indexed products, including both the embedded derivatives in the liability for future policy benefits on those products and purchased call options, which provide an economic hedge against those embedded derivatives. We also have embedded derivatives within our modified coinsurance agreements as well as an interest-only fixed maturity investment. We do not apply hedge accounting to any of our derivative positions, and they are held at fair value.

Derivatives Instruments by Type
 
 
September 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Assets
 
 
 
Freestanding derivatives:
 
 
 
Call options (reported in other investments)
$
13,108

 
$
9,360

Embedded derivatives:
 
 
 
Modified coinsurance (reported in reinsurance recoverable)
2,101

 
3,411

Interest-only security (reported in fixed maturities)
2,420

 
3,374

Total assets
$
17,629

 
$
16,145

 
 
 
 
Liabilities
 
 
 
Embedded derivatives:
 
 
 
Indexed annuity and universal life products (reported in liability for future policy benefits)
$
24,074

 
$
15,778

Modified coinsurance agreements (reported in other liabilities)
312

 
114

Total liabilities
$
24,386

 
$
15,892






17

Table of Contents

Derivative Income (Loss)
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Call options
$
2,482

 
$
1,622

 
$
6,247

 
$
1,511

Change in fair value of embedded derivatives:
 
 
 
 
 
 
 
Modified coinsurance agreements
(86
)
 
270

 
(1,508
)
 
1,097

Interest-only security
28

 
14

 
(167
)
 
(451
)
Indexed annuity and universal life products
560

 
(669
)
 
878

 
(3,358
)
Total income (loss) from derivatives
$
2,984

 
$
1,237

 
$
5,450

 
$
(1,201
)

Derivative income (loss) is reported in net investment income except for the change in fair value of the embedded derivatives on our indexed annuity and universal life products, which is reported in interest sensitive product benefits.

We are exposed to credit losses in the event of nonperformance of the derivative counterparties. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings (currently rated A- or better by nationally recognized statistical rating organizations). We have also entered into credit support agreements with the counterparties requiring them to post collateral when net exposures exceed pre-determined thresholds that vary by counterparty. The net amount of such exposure is essentially the market value less collateral held for such agreements with each counterparty. The call options are supported by securities collateral received of $7.9 million at September 30, 2017, which is held in a separate custodial account. Subject to certain constraints, we are permitted to sell or re-pledge this collateral, but do not have legal rights to the collateral; accordingly, it has not been recorded on our balance sheet. At September 30, 2017, none of the collateral had been sold or re-pledged. As of September 30, 2017, our net derivative exposure was $5.5 million.


3. Fair Values

The carrying and estimated fair values of our financial instruments are as follows:
Fair Values and Carrying Values
 
September 30, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturities - available for sale
$
7,203,335

 
$
7,203,335

 
$
7,008,790

 
$
7,008,790

Equity securities - available for sale
130,890

 
130,890

 
132,968

 
132,968

Mortgage loans
923,938

 
951,137

 
816,471

 
840,337

Policy loans
190,252

 
234,938

 
188,254

 
230,656

Other investments
14,047

 
15,174

 
9,809

 
11,272

Cash, cash equivalents and short-term investments
54,112

 
54,112

 
49,931

 
49,931

Reinsurance recoverable
2,101

 
2,101

 
3,411

 
3,411

Assets held in separate accounts
637,746

 
637,746

 
597,072

 
597,072


Liabilities