10-K 1 fbl10k2013.htm 10-K FBL 10K 2013

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark one)
[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2013
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
(Exact name of registrant as specified in its charter)
Iowa
 
42-1411715
(State of incorporation)
 
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Class A common stock, without par value
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of June 30, 2013, the aggregate market value of the registrant's Class A and B Common Stock held by non-affiliates of the registrant was $416,478,677 based on the closing sale price as reported on the New York Stock Exchange.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date:
 Title of each class
 
Outstanding at February 18, 2014
Class A Common Stock, without par value
 
24,787,511
Class B Common Stock, without par value
 
11,413
DOCUMENTS INCORPORATED BY REFERENCE
Document
 
Parts Into Which Incorporated
Proxy statement for annual shareholders meeting on May 22, 2014
 
Part III




























(This page has been left blank intentionally.)



FBL FINANCIAL GROUP, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






















(This page has been left blank intentionally.)




Cautionary Statement Regarding Forward Looking Information

This Form 10-K includes statements relating to anticipated financial performance, business prospects, new products and similar matters. These statements and others, which include words such as "expect," "anticipate," "believe," "intend" and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. A variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include but are not limited to the following.

Difficult conditions in the financial markets and the economy may materially adversely affect our business and results of operations.
Adverse financial market conditions may significantly affect our liquidity, access to capital and cost of capital.
Our valuation of fixed maturity securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.
Our investment portfolio is subject to credit quality risks that may diminish the value of our invested assets and affect our profitability and reported book value per share.
Changing interest rates, market volatility and general economic conditions affect the risks and the returns on both our products and our investment portfolio.
We face competition from companies having greater financial resources, more advanced technology systems, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
As a holding company, we depend on our subsidiaries for funds to meet our obligations, but our life insurance subsidiaries' ability to make distributions to us is limited by law, and could be affected by minimum risk-based capital requirements.
A significant ratings downgrade may have a material adverse effect on our business.
All segments of our business are highly regulated and these regulations or changes in them could affect our profitability.
An inability to access Federal Home Loan Bank funding could adversely affect our profitability.
Actual experience which differs from our assumptions regarding future persistency, mortality and interest rates used in pricing our products and calculating reserve amounts and deferred acquisition costs could have a material adverse impact on our financial results.
We may be required to accelerate the amortization of deferred acquisition costs, which could adversely affect our results of operations or financial condition.
Our earnings are influenced by our claims experience, which is difficult to estimate for future periods. If our future claims experience does not match our pricing assumptions or past results, our earnings could be materially adversely affected.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
Our business is highly dependent on our relationships with Farm Bureau organizations and could be adversely affected if those relationships became impaired.
Our relationship with Farm Bureau organizations could result in conflicts of interests.
Changes in federal tax laws may affect sales of our products and profitability.
Our ability to maintain competitive costs is dependent upon the level of new sales and persistency of existing business.
If we are unable to attract and retain agents, sales of our products and services may be reduced.
Attracting and retaining employees who are key to our business is critical to our growth and success.
Success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements.
We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business.

See Part 1A, Risk Factors, for additional information.


1


PART I

ITEM 1. BUSINESS

General

FBL Financial Group, Inc. (we or the Company) sells individual life insurance and annuity products principally under the consumer brand name Farm Bureau Financial Services. This brand identity is represented by the distribution channel of our subsidiary Farm Bureau Life Insurance Company (Farm Bureau Life). In addition, in the state of Colorado, we offer life and annuity products through Greenfields Life Insurance Company (Greenfields Life). As of December 31, 2013, these distribution channels consisted of 1,801 exclusive agents and agency managers. These agents and agency managers sell our products in the Midwestern and Western sections of the United States.

FBL Financial Group, Inc. was incorporated in Iowa in October 1993. Its life insurance subsidiary, Farm Bureau Life, began operations in 1945 and Greenfields Life, a subsidiary of Farm Bureau Life, was launched in early 2013. Several other subsidiaries support various functional areas and affiliates by providing investment advisory and marketing and distribution services. In addition, we manage all aspects of two Farm Bureau affiliated property-casualty insurance companies (Farm Bureau Property & Casualty Insurance Company and Western Agricultural Insurance Company) which operate predominately in eight states in the Midwest and West.

FBL Financial Group, Inc. Business and Distribution Channels

FBL Financial Group, Inc.
COMPANY
Farm Bureau Life
Insurance Company
 
Greenfields Life Insurance Company
 
Farm Bureau Property & Casualty Insurance Company and Western Agricultural
Insurance Company
RELATIONSHIP
Wholly-owned subsidiary
 
Subsidiary of
Farm Bureau Life
 
Managed by FBL Financial Group. Underwriting results do not impact FBL Financial Group's results
BRAND
 
 
DISTRIBUTION
1,793 exclusive
Farm Bureau agents
and agency managers
 
New company in 2013;
8 exclusive agents and
agency managers
 
1,121 exclusive Farm Bureau agents and agency managers (included under the
1,793 Farm Bureau Life
agents)
PRODUCTS
A comprehensive line of life insurance, annuity and investment products
 
A comprehensive line of life insurance, annuity and investment products
 
A full line of personal and commercial property-casualty insurance products
TERRITORY
14 Midwestern and
 Western states
 
Colorado
 
Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah

Investor information, including electronic versions of periodic reports filed on Forms 10-K, 10-Q and 8-K, and proxy material, are available free of charge through the Investor Relations section of our website at www.fblfinancial.com. These documents are posted to our website immediately after they are filed. Also available on our website are many corporate governance documents including a code of ethics for the Chief Executive Officer and senior financial officers, committee charters, corporate governance guidelines, director profiles and more. Product information may be found on our consumer websites, www.fbfs.com and www.greenfieldslife.com.


2


Business Strategy

Our core business strategies leverage areas where we have competitive advantages. Our exclusive agent distribution channel enables deep customer engagement and long-term customer relationships. We benefit from close ties to the unique needs of the agricultural market and affinity with the Farm Bureau brand, and our cross-sell culture results in industry leading cross-sell rates.

Our 1,801 agents are multi-line agents who sell both property-casualty insurance products and life insurance and investment products. Having multi-line agents enhances our ability to develop a more comprehensive relationship with our customers and increases our ability to cross-sell our life insurance and annuity products to the pool of Farm Bureau property-casualty customers.

Our multi-line exclusive agent distribution channel is our foundation and we are defined by our service to the Farm Bureau niche marketplace. We capitalize on the Farm Bureau brand to grow our business and build upon our agricultural and rural market leadership. We focus on needs-based selling and have a broad portfolio of life insurance and annuity products so that we have products available to satisfy the needs of our agents and customers.

Because of their multi-line nature, our agents focus on cross-selling life insurance products to customers who already own a property-casualty policy issued by our property-casualty company partners. For example, in the eight-state region where we manage the affiliated property-casualty insurance companies and related field force (Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah), 24% of our property-casualty policyholders also own a Farm Bureau Life annuity or life product. We are considered among the best-in-industry in cross-sell rates. This percentage is and has historically been higher than the industry average for multi-line exclusive agents, which is 12% according to the most recent research by Life Insurance and Market Research Association (LIMRA). We believe there is further opportunity for growth from cross-selling as 71% of the Farm Bureau members in the eight-state region have a Farm Bureau property-casualty insurance product, while only 21% of Farm Bureau members in the eight-state region have a life insurance product with us.

We provide our agents with sales materials, the necessary training and a high level of sales support. In addition, throughout our marketing territory, certain agents are life and investment specialists who work as a resource to help their fellow agents with cross-selling techniques and client needs analysis.

Our sales model is designed so that our agents act like entrepreneurial business owners with a retail financial services business. Under this model our agents have sales and service associates who assist them and provide a variety of support for insurance sales and clients.

While we underwrite the majority of the products available for sale by our agents, we broker products sold by other carriers when we do not have the expertise, ratings or scale to compete efficiently in the marketplace. Examples of brokered products include variable products, long-term care insurance, health insurance and last survivor life policies. We earn fees from the sale of brokered products, a portion of which is passed on to the agents as commissions for the underlying sales.

Our growth has been augmented by our long and successful history of being a consolidator among Farm Bureau affiliated insurance companies. This has allowed us to grow to the operation we are today. While we believe further consolidation makes sense, this is a long-term strategy. By focusing on maintaining solid relationships with the leaders of these companies and the Farm Bureau organizations, we are prepared to react when opportunities arise.

Marketing and Distribution

Market Area

Sales through our distribution channels are currently conducted in 15 states which we characterize as follows: multi-line states (we own the Farm Bureau affiliated life company and manage the Farm Bureau affiliated property-casualty companies) - Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah; and life partner states (we own the Farm Bureau affiliated life company and non-owned/non-managed Farm Bureau affiliated property-casualty companies manage the exclusive multi-line agents) - Colorado, Idaho, Montana, North Dakota, Oklahoma, Wisconsin and Wyoming.



3


Our target market is Farm Bureau members and "Middle America." We traditionally have been very strong in rural and small town markets and also have a presence in many small and mid-metro markets. This target market represents a relatively financially conservative and stable customer base. The financial needs of our target market tend to focus on security, insurance needs and retirement savings.

Affiliation with Farm Bureau

Many of our customers are members of Farm Bureau organizations affiliated with the American Farm Bureau Federation (American Farm Bureau). The American Farm Bureau is the nation's largest grassroots farm and ranch organization and has a current membership of 6.1 million member families. In order to market insurance products in a given state using the "Farm Bureau" and "FB" designations, related trademarks and service marks, a company must have an agreement with the state's Farm Bureau organization. Generally, these marketing rights have only been granted to companies owned by or closely affiliated with Farm Bureau organizations. For each of the states in our Farm Bureau marketing territory, we have the right to use the "Farm Bureau" name and "FB" logo for marketing life insurance and investment products.

All of the state Farm Bureau organizations in our marketing area are associated with the American Farm Bureau. The primary goal of the American Farm Bureau is to be the unified national voice of agriculture, working through its grassroots organization to enhance and strengthen the lives of rural Americans and to build strong, prosperous agricultural communities. There are currently Farm Bureau organizations in all 50 states and Puerto Rico, each with their own distinctive mission and goals. Within each state, Farm Bureau is organized at the county level. Farm Bureau programs include policy development, government relations activities, leadership development and training, communications, market education classes, commodity conferences and young farmer activities. Member services provided by Farm Bureau vary by state but often include programs such as risk management, alternative energy development and guidance on enhancing profitability. Other benefits of membership include newspaper and magazine subscriptions, as well as savings in areas such as health care, entertainment and automobile rebates. In addition, members have access to accidental death insurance, banking services, credit card programs, computerized farm accounting services, electronic information networks, feeder cattle procurement services, health care insurance, property-casualty insurance and financial services.

The American Farm Bureau may terminate our right to use the "Farm Bureau" and "FB" designations in our states (i) in the event of a material breach of the trademark license that we do not cure within 60 days, (ii) immediately in the event of termination by the American Farm Bureau of the state Farm Bureau's membership in the American Farm Bureau or (iii) in the event of a material breach of the state Farm Bureau organization's membership agreement with the American Farm Bureau, including by reason of the failure of the state Farm Bureau to cause us to adhere to the American Farm Bureau's policies.

We have royalty agreements with each state Farm Bureau organization in our Farm Bureau marketing territory giving us the right to use the Farm Bureau and FB designations in that particular state. Each state Farm Bureau organization in our Farm Bureau territory could terminate our right to use the Farm Bureau designations in that particular state without cause at the conclusion of the royalty agreements. The royalties paid to a particular state Farm Bureau organization are based on the sale of our products in the respective state. For 2013, royalty expense totaled approximately $2.3 million.

Our relationship with Farm Bureau provides a number of advantages. Farm Bureau organizations in our marketing territory tend to be well known and long established, have active memberships and provide a number of member benefits other than financial services. The strength of these organizations provides enhanced prestige and brand awareness for our products and increased access to Farm Bureau members, which results in a competitive advantage for us.

Our life insurance and investment products are available for sale to both members and non-members. Property-casualty products sold by the property-casualty insurance companies affiliated with Farm Bureau are available for sale to Farm Bureau members. Annual Farm Bureau memberships in our marketing territory average $60 and are available to individuals, families, partnerships or corporations.

We have service agreements with all of our property-casualty company partners in our marketing area, pursuant to which the property-casualty companies provide certain services, which include recruiting and training the shared agency force that sells both property-casualty products for that company and life products for us. The service agreements have expiration dates through December 31, 2022. In 2013, we paid $9.7 million for the services provided under these agreements.

Our Advisory Committee, which consists of executives of the property-casualty insurance company partners in our marketing territory, assists us in our relationships with the property-casualty organizations and the Farm Bureau organization leaders in their respective states. The Advisory Committee meets on a regular basis to coordinate efforts and issues involving the agency

4


force and other matters. The Advisory Committee is an important contributor to our success in marketing products through our distribution system.

Royalty and property-casualty agreements vary in term and expiration date as shown below.

Royalty and Property-Casualty Service Agreements by State
 
 
State
Property-Casualty Service Agreement Expiration Date
 
Royalty Agreement
Expiration Date
 
Percent of 2013
First Year
Premiums Collected
Iowa
December 31, 2015
 
December 31, 2033
 
28.6
%
Kansas
December 31, 2015
 
December 31, 2033
 
17.0

Wyoming
December 31, 2021
 
December 31, 2021
 
8.3

Nebraska
December 31, 2015
 
December 31, 2033
 
7.5

Oklahoma
December 31, 2022
 
December 31, 2022
 
6.9

Idaho
December 31, 2021
 
December 31, 2021
 
5.4

Minnesota
December 31, 2015
 
December 31, 2033
 
5.1

Utah
December 31, 2015
 
December 31, 2033
 
3.9

New Mexico
December 31, 2015
 
December 31, 2033
 
3.4

Montana
December 31, 2021
 
December 31, 2021
 
3.2

Arizona
December 31, 2015
 
December 31, 2033
 
2.9

South Dakota
December 31, 2015
 
December 31, 2033
 
2.9

Wisconsin
December 31, 2020
 
December 31, 2020
 
2.3

North Dakota
December 31, 2021
 
December 31, 2021
 
1.8

Colorado
December 31, 2021
 
N/A
 
0.3

Other
N/A
 
N/A
 
0.5

 
 
 
 
 
100.0
%

Agency Force

Our agency force is one of our most important competitive advantages. Our priority is to ensure that we have best-in-class distribution systems and support, including agent recruiting and retention, training and leadership.

Our life insurance and annuity products are marketed throughout our marketing territory by our exclusive agents. We have a written contract with each member of our agency force. The contracts cover a number of topics including privacy, compensation payments and reserving our ownership of customer lists.

Sales activities of our agents focus on personal contact and on cross-selling life and annuity products to the existing property-casualty customers. The Farm Bureau name recognition and access to Farm Bureau membership leads to additional customers, cross-selling of additional insurance products and increased retention.

Our agents are independent contractors and exclusive agents. In the multi-line states where we manage the Farm Bureau affiliated property-casualty companies, our agents are supervised by agency managers employed by the property-casualty companies which are under our direction. There are 1,121 agents and managers in our multi-line states. These agents market a full range of our life insurance and annuity products. They also market products for the property-casualty companies that we manage.

In our life partner states, our life insurance and annuity products are marketed by agents that we share with our property-casualty company partners in that state. There are 680 agents and managers in our life partner states. These agents market our life and annuity products and market the property-casualty products of that state's affiliated property-casualty company.


5


We are responsible for product and sales training for all lines of business in our multi-line states, and for training the agency force in life insurance products and sales methods in our life partner states.

We structure our agents' life products compensation system to encourage production and persistency. Agents receive commissions for new life insurance and annuity sales and service fees on premium payments in subsequent years. Production bonuses are paid based on the premium level of new life business written in the prior 12 months and the persistency of the business written by the agent. Persistency is a common measure used in life insurance, which measures the quality and the consistent payment of premiums, and is included in calculating the bonus to either increase or decrease (or even eliminate) the agent's production bonus. We are willing to pay added incentives for higher volumes of business only as long as the business is profitable. Production bonuses allow agents to increase their compensation significantly.

The focus of agency managers is to recruit, train, supervise and retain agents to achieve high production levels of profitable business. Managers receive overwrite commissions on each agent's life insurance commissions which vary according to that agent's productivity level and persistency of business. Agent development is encouraged through a bonus structure that rewards goal attainment and agency growth. New agent development is also encouraged through financing arrangements and the annualization of commissions paid when a life policy is sold.

In order to further strengthen our distribution, current efforts are focused on making sure we have the systems and technology solutions in place to support our agents' sales and service processes. In addition, in order to increase an agent's opportunity for success, we have changed how we recruit and train new agents.

We have a variety of incentives and recognition programs to focus agents on production of quality life insurance business. Some recognition programs and incentives are jointly conducted with the property-casualty companies. These programs provide significant incentives for the most productive agents. Approximately 18% of our agents and agency managers qualify for our annual incentive trip. Agent recruiting, training, financing and compensation programs are designed to develop a productive agent for the long term. Our four-year agency force retention rate for 2013 was approximately 27%.

Business Segments

We analyze operations by reviewing financial information regarding our primary products that are aggregated into the Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company.

See Note 13 to our consolidated financial statements included in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Information" included in Item 7 for additional information regarding our financial results by operating segment. Included in the following discussion of our segments are details regarding premiums. We use premiums collected to measure the productivity of our exclusive agents. Premiums collected is not a measure used in financial statements prepared according to U.S. generally accepted accounting principles (GAAP). Note 13 to our consolidated financial statements also includes a discussion of the most comparable GAAP financial measures and, as applicable, a reconciliation to such GAAP measures.

Annuity Segment

We sell a variety of traditional annuity products through our exclusive agency force. The Annuity segment primarily consists of fixed rate and indexed annuities and supplementary contracts (some of which involve life contingencies). Traditional annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest.


6


Premiums Collected - Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
2013
 
2012
 
2011
 
(Dollars in thousands)
First year - individual
$
139,156

 
$
166,230

 
$
216,713

Renewal - individual
111,585

 
138,191

 
136,534

Group
8,725

 
11,923

 
15,909

Total Annuity
$
259,466

 
$
316,344

 
$
369,156


We intentionally decreased the amount of annuity sales beginning in 2012 by suspending sales of certain products and reducing agent commission rates on certain products where it was difficult to achieve profitability targets during this period of low interest rates. We expect modest increases in annuity sales due to the recent rise in market interest rates and a renewed emphasis placed on sales of products with low guaranteed crediting rates. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rates on our products and the perceived security of our products compared to those of competing products. Average crediting rates on our individual deferred annuity contracts were 2.97% in 2013, 3.15% in 2012 and 3.36% in 2011. Traditional annuity premiums collected in our Farm Bureau market territory in 2013 were concentrated primarily in the states of Iowa (29%), Kansas (26%) and Wyoming (8%).

Fixed Rate Annuities

We offer annuities that are marketed to individuals in anticipation of retirement. We offer traditional annuities in the form of flexible premium deferred annuities (FPDA) that allow policyholders to make contributions over a number of periods. For traditional annuity products, policyholder account balances are credited interest at rates that we determine. The annuitant may elect to take the proceeds of the annuity either in a single payment or in a series of payments for life, for a fixed number of years, for a fixed amount, or a combination of these options.

In addition to FPDAs, we also market single premium deferred annuities (SPDA) and single premium immediate annuity (SPIA) products which feature a single premium paid when the contract is issued. Benefit payments and the surrender charge structure on SPDA contracts are similar to other fixed rate annuities. Benefit payments on SPIAs begin immediately after the issuance of the contract. Sales of the single premium fixed rate annuities are currently suspended due to the low interest rate environment.

Approximately 36% of our existing individual traditional annuity business, based on account balances, is held in qualified retirement plans. For the deferred annuity products, to further encourage persistency, a surrender charge is imposed against the policyholders' account balance for early termination of the annuity contract within a specified period after its effective date. The surrender structure varies by product, but typically starts at 6% to 10% and decreases 1% per year until it reaches 0%.
 
We invest the premiums we receive from fixed rate annuities. The assets reside in our general account. Acquisition costs are paid from the general account as they arise. The difference between the yield we earn on our investment portfolio and the interest we credit on our fixed rate annuities is known as the spread. The spread is a major driver of the profitability for all of our traditional annuity products.

Withdrawal Rates

Withdrawal rates (excluding death benefits) for our individual deferred annuities were 5.1% for 2013, 4.8% for 2012 and 4.6% for 2011. We believe the competitive environment, due to the low level of market interest rates discussed above, has favorably impacted the level of withdrawal rates in these periods.

Interest Crediting Policy

We have a rate setting committee that meets monthly, or more frequently if required, to review and establish current period interest rates based upon existing and anticipated investment opportunities. This applies to new sales and to annuity products after an initial guaranteed period. We examine earnings on assets by portfolio. We then establish rates based on each product's target spread and competitive market conditions at the time. Most of our annuity contracts have guaranteed minimum crediting rates. These rates range from 1.00% to 5.50%, with a weighted average guaranteed crediting rate of 2.55% at December 31,

7


2013 and 2.59% at December 31, 2012. The weighted average interest rate guarantees on annuity contracts issued during 2013 was 1.00%.

Index Annuities

Our multi-line distribution channel began selling index annuities in late 2012. With an index annuity, the policyholder may choose from a traditional fixed rate strategy or an index strategy, with the underlying index being the S&P 500®. The product requires crediting of interest and a reset of the index annually. The computation of the index credit is based upon either a point-to-point calculation (i.e., the gain in the index from the beginning of the contract year to the next reset date) or a monthly averaging of the index during the period, subject to a cap. This product allows contract holders to transfer funds among the index accounts and a traditional fixed rate strategy at the end of each reset period. It automatically includes a guaranteed lifetime withdrawal benefit rider. If activated by the policyholder, the rider provides a minimum amount that is available for withdrawal at specified withdrawal rates even if the accumulated value goes to zero. There is an additional annual charge for the activated rider.

The index annuity contract value is equal to the premiums paid plus interest credited to the fixed portion of the contract and index credits on the indexed portion of the contract, less partial withdrawals taken from the contract.

The minimum guaranteed contract values are equal to 87.5% of the premium collected plus interest credited at an annual rate of 1.0% compounded annually.

We purchase one-year call options on the S&P 500 to fund the index credits due to the index annuity contract holders. On the respective anniversary dates of the index annuity contracts, the index used to compute the index credits is reset, and subsequently new call options are purchased to fund the next index credit. The cost of the options is managed through the terms of the index annuities, which permit changes to caps, subject to minimum guarantees.

We invest index premiums and the investments reside in our general account. We then purchase call options and pay acquisition costs from the general account. With respect to that portion of the index account value allocated to an index crediting strategy, our spread is measured as the difference between the aggregate yield on the relevant portion of our invested assets, less the aggregate option costs and the costs associated with minimum guarantees. If the minimum guaranteed value of an index product exceeds the index value (computed on a cumulative basis over the life of the contract), the general account earnings are available to satisfy the minimum guarantees. If there were little or no gains in the entire series of options purchased over the life of an index annuity, we would incur expenses for credited interest over and above our option costs. In addition, if we are not successful in matching the terms of call options purchased with the terms of the index annuities, index credits could exceed call option proceeds. This would cause our spreads to tighten and reduce our profits.

Interest Crediting Rates Compared to Guarantees - Annuity Segment
 
 
 
Liabilities at
 
December 31, 2013
 
(Dollars in thousands)
Fixed rate annuities:
 
Greater than or equal to 100 basis points over guarantee
$
762,531

50 basis points to 99 basis points over guarantee
121,229

1 basis point to 49 basis points over guarantee
112,969

At guaranteed rate
1,617,063

Other annuities
45,395

Non-discretionary rate setting products
513,411

Total interest sensitive product liabilities
$
3,172,598



8


In Force - Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2013
 
2012
 
2011
 
(Dollars in thousands)
Number of contracts
53,252

 
53,757

 
53,894

Interest sensitive reserves
$
3,172,598

 
$
3,048,797

 
$
2,812,666

Other insurance reserves
376,879

 
383,340

 
378,319


Life Insurance Segment

We sell a variety of traditional and universal life insurance products through our exclusive agency force. The Life Insurance segment consists of whole life, term life and universal life policies. These policies provide benefits upon the death of the insured and may also allow the customer to build cash value on a tax-deferred basis.

Premiums Collected - Life Insurance Segment
 
 
 
 
 
 
 
For the year ended December 31,
 
2013
 
2012
 
2011
 
(Dollars in thousands)
Universal life:
 
 
 
 
 
First year
$
70,470

 
$
30,217

 
$
14,888

Renewal
57,693

 
51,325

 
47,311

Total
128,163

 
81,542

 
62,199

Participating whole life:
 
 
 
 
 
First year
11,909

 
11,202

 
11,463

Renewal
96,532

 
96,738

 
96,242

Total
108,441

 
107,940

 
107,705

Term life and other:
 
 
 
 
 
First year
11,352

 
11,242

 
11,244

Renewal
79,941

 
74,292

 
68,623

Total
91,293

 
85,534

 
79,867

Total Life Insurance
327,897

 
275,016

 
249,771

Reinsurance ceded
(20,423
)
 
(19,307
)
 
(20,303
)
Total Life Insurance, net of reinsurance
$
307,474

 
$
255,709

 
$
229,468


Life premiums collected were higher in 2013 and 2012 compared to prior years, reflecting the attractiveness of enhanced universal life and term life product offerings and the strong farm and energy subsectors of the economy in our marketplace, as well as our emphasis on life insurance product sales. Life insurance premiums collected in our market territory in 2013 were concentrated primarily in the states of Iowa (27%), Kansas (15%) and Oklahoma (9%).

Traditional Life Insurance

We offer traditional participating whole life insurance products. Participating whole life insurance provides benefits for the life of the insured. It provides level premiums and a level death benefit and requires payments in excess of mortality costs in early years to offset increasing mortality costs in later years. Under the terms of these policies, policyholders have a right to participate in our surplus to the extent determined by the Board of Directors, generally through annual dividends. Participating business accounted for 34% of life receipts from policyholders during 2013 and represented 13% of life insurance in force at December 31, 2013.

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We also market non-participating term insurance policies that provide life insurance protection for a specified period. Term insurance is mortality based and generally has no cash value. However, we also offer a return of premium term product, which returns a percentage of premiums after a set number of years. For a portion of our business, we may change the premium scales at any time but may not increase rates above guaranteed levels.

Universal Life Insurance

Our universal life policies provide permanent life insurance protection with a flexible or fixed premium structure which allows the customer to pre-fund future insurance costs and accumulate savings on a tax-deferred basis. Premiums received, less policy assessments for administration expenses and mortality costs, are credited to the policyholder's account balance. Interest is credited to the cash value at rates that we periodically set.

Underwriting

We follow formal underwriting standards and procedures designed to properly assess and quantify life insurance risks before issuing policies to individuals. To implement these procedures, we employ an underwriting staff of 14 underwriters who have an average of 21 years of experience in the insurance industry. Our underwriters review each applicant's application, which is prepared under the supervision of our agents, and any required medical records. We generally employ blood, oral fluid or urine testing (including HIV antibody testing) to provide additional information whenever the applicant is age 18 or older and the face amount is $100,000 or greater. Based on the results of these tests, we may adjust the mortality charge or decline coverage completely. We also have an automated process for handling term policies for ages 18 to 60 with face amounts of $20,000 to $100,000 and whole life policies for ages 18 to 80 with face amounts of $25,000 to $50,000. We use our automated underwriting guidelines to evaluate the medical history provided by the applicant and information received from three service providers. Based on the evaluation against our automated underwriting guidelines, we may adjust the mortality charge or decline coverage. Generally, tobacco use by a life insurance applicant within the preceding one-year period results in a substantially higher mortality charge. In accordance with industry practice, material misrepresentation on a policy application can result in the cancellation of the policy upon the return of any premiums paid.

Interest Crediting and Participating Dividend Policy

The interest crediting policy for our life insurance products is the same as for our traditional annuity products in the Annuity segment. See "Interest Crediting Policy" under the Annuity Segment discussion. We pay dividends, credit interest and determine other nonguaranteed elements on the individual insurance policies depending on the type of product. Some elements, such as dividends, are generally declared for a year at a time. Interest rates and other nonguaranteed elements are determined based on experience as it emerges and with regard to competitive factors. Weighted average contractual credited rates on our universal life contracts were 4.11% in 2013, 4.14% in 2012 and 4.19% in 2011. Our universal life contracts have guaranteed minimum crediting rates that range from 3.00% to 4.50%, with a weighted average guaranteed crediting rate of 3.72% at December 31, 2013 and 3.79% at December 31, 2012.
Interest Crediting Rates of Interest Sensitive Life Products Compared to Guarantees - Life Insurance Segment
 
 
 
Liabilities at
 
December 31, 2013
 
(Dollars in thousands)
Discretionary rate setting products with minimum guarantees:
 
Greater than or equal to 100 basis points over guarantee
$
93,743

At guaranteed rate
648,038

Non-discretionary rate setting products
35,790

Total interest sensitive product liabilities
$
777,571


Policyholder dividends are currently being paid and will continue to be paid as declared on participating policies. Policyholder dividend scales are generally established annually and are based on the performance of assets supporting these policies, the mortality experience of the policies and expense levels. Other factors, such as changes in tax law, may be considered as well. Our participating business does not have minimum guaranteed dividend rates.


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In Force - Life Insurance Segment
 
 
 
 
 
 
 
December 31,
 
2013
 
2012
 
2011
 
(Dollars in thousands, except face amounts in millions)
Number of policies - traditional life
358,924

 
355,519

 
352,274

Number of policies - universal life
61,250

 
59,833

 
58,115

Face amounts - traditional life
$
42,866

 
$
40,333

 
$
38,235

Face amounts - universal life
6,190

 
5,807

 
5,482

Traditional insurance reserves
1,679,942

 
1,615,088

 
1,549,886

Interest sensitive reserves
777,571

 
686,067

 
647,711

 
Corporate and Other Segment

The Corporate and Other segment includes (i) advisory services for the management of investments and other companies; (ii) marketing and distribution services for the sale of mutual funds and insurance products not issued by us; (iii) leasing services with affiliates; (iv) closed blocks of variable annuity, variable life and accident and health products; (v) interest expense and (vi) investments and related investment income not specifically allocated to our product segments.

We discontinued underwriting new sales of variable products during 2010 and terminated new sales with our variable alliance partners in 2010 and 2011. We continue to receive premiums from sales that occurred prior to this change. Variable premiums collected were $68.3 million in 2013, $73.8 million in 2012 and $79.9 million in 2011. During 2010, we began selling variable products underwritten by a large well-known insurance company with variable product expertise. We earn fees from the sale of brokered products, which are reported as other income. A portion of these revenues are passed on to the agents as commissions for the underlying sales. The decision to discontinue underwriting variable products was made because we lacked the scale necessary to generate acceptable returns and be competitive in this product line over time. The existing in force business remains on our books and we continue to administer this business.

Reinsurance

We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance agreements. New sales of life products are reinsured above prescribed limits and do not require the reinsurer's prior approval within certain guidelines. We do not use financial or surplus relief reinsurance. We enter into indemnity reinsurance arrangements to assist in diversifying our risks and to limit our maximum loss on risks that exceed our policy retention limits. Our maximum retention limit on an insured life ranges up to $1.5 million depending on when the policy was issued.

Reinsurance contracts do not fully discharge our obligation to pay claims on the reinsured business. As the ceding insurer, we remain responsible for policy claims to the extent the reinsurer fails to pay claims. No reinsurer of business ceded by us has failed to pay any material policy claims (either individually or in the aggregate) with respect to our ceded business. We continually evaluate the financial strength of our reinsurers and monitor concentrations of credit risk. If for any reason reinsurance coverages would need to be replaced, we believe that replacement coverages from financially responsible reinsurers would be available.


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Primary Reinsurers as of December 31, 2013
Reinsurer
A.M. Best
Rating
 
Amount of
In Force Ceded
 
Reserve Credit
 
 
 
(Dollars in millions)
Swiss Re Life & Health America Inc.
A+
 
$
5,497.2

 
$
19.0

RGA Reinsurance Company
A+
 
4,022.5

 
26.4

SCOR Global Life USA Reinsurance Company
A
 
2,519.0

 
10.9

All other (11 reinsurers)*
A- to A++
 
1,181.3

 
6.6

Total
 
 
$
13,220.0

 
$
62.9


* All other includes Scottish Re, which is not rated by A.M. Best. New business with Scottish Re was terminated in early 2007, following difficulties at that company and related ratings downgrades. As of December 31, 2013, $331.5 million of in force was ceded to Scottish Re. Scottish Re continues to meet its reinsurance obligation with us in a normal fashion.

In addition, we have 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 by us of $13.0 million.

Ratings and Competition

Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Insurer financial strength ratings represent the opinions of rating agencies regarding the ability of an insurance company to meet its financial obligations to policyholders and contract holders. Credit ratings represent the opinions of rating agencies regarding an issuer's ability to repay its indebtedness. Ratings are subject to revision or withdrawal at any time by the rating agency, and therefore, no assurance can be given that a rating will be maintained.

As of the date of this filing, Farm Bureau Life's A.M. Best financial strength rating is A- (Excellent) with a positive outlook and FBL Financial Group's A.M. Best issuer credit rating is bbb- with a positive outlook.

A.M. Best has 16 financial strength ratings assigned to insurance companies, which currently range from A++ (Superior) to S (Suspended). A.M. Best's long-term credit ratings range from aaa (exceptional) to d (in default). A + or - may be appended to ratings from aa to ccc to indicate relative position within a category. A rating of bbb- or above is considered investment grade. As of the date of this filing, A.M. Best has the life/annuity industry on a stable rating outlook.

We operate in a highly competitive industry. Insurers compete based primarily upon price, service level and the financial strength of the company. The operating results of companies in the insurance industry historically have been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings from rating agencies and other factors. We believe our ability to compete with other insurance companies is dependent upon, among other things, our ability to attract and retain agents to market our insurance products, our ability to develop competitive and profitable products and our ability to maintain good or better ratings from rating agencies. In connection with the development and sale of our products, we encounter significant competition from other insurance companies, and other financial institutions, such as banks and broker/dealers, many of which have financial resources substantially greater than ours.


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Regulation

Our insurance subsidiaries are subject to state and federal government regulation in each of the states in which they are authorized to do business. The regulation of insurance companies is vested primarily in state agencies having broad administrative power dealing with all aspects of the insurance business such as agent licensing, policy rates, policy forms, insurer solvency and capital adequacy, and focuses on protecting and balancing the interests of policyholders and the insurance companies. Our variable insurance products, investment advisors, broker/dealer and certain licensed agents are also subject to regulation by the Securities and Exchange Commission (SEC), state securities regulators (in each state where they are authorized to do business) and the Financial Industry Regulatory Authority (FINRA). Our companies are subject to various state corporate statutes, as well as federal statutes and regulations dealing with such matters as taxes, retirement benefits, compliance and fraud and statutes that deal with the companies as employers.

While legislation has been introduced in Congress in the past which could result in the federal government assuming regulation of all or part of the insurance industry, there is currently no pending legislation and no serious effort to bring such legislation forward. In light of ongoing legislative developments, the National Association of Insurance Commissioners (NAIC) and state insurance regulators have begun to focus discussions on increased uniformity of insurance laws and regulations, which involves continuous evaluation of law and regulations, which include some of the following topics: accounting policies and procedures, investments, insurer solvency, insurance holding company regulation, market conduct, reinsurance, risk-adjusted capital guidelines, enterprise risk management, agent and company licensing and new products. We do not believe the adoption of any of the current NAIC initiatives will have a material adverse impact on us; however, we cannot predict the form of any future proposals or regulation.

The Dodd-Frank Act established the Federal Insurance Office (FIO) within the Department of Treasury to collect information about the insurance industry, recommend prudential standards and represent the U.S. in dealings with foreign insurance regulators. The FIO recently released its long overdue report titled "How to Modernize and Improve the System of Insurance Regulation in the United States." The report includes recommendations for changes in several areas, including capital adequacy, safety and soundness, and marketplace regulation. We continue to monitor the activities of the FIO, NAIC and the state insurance regulators.

The Dodd-Frank Act has also resulted in certain insurance companies (but not ours) being designated as non-bank systemically important financial institutions by the Financial Services Oversight Committee, which will result in their capital plans being regulated by both the states and the Federal Reserve. As part of the Dodd-Frank Act, many key rules have yet to be formalized, some of which might have an impact on insurers.

Portions of the Affordable Care Act became effective in 2014, and while the act has a substantial impact on the health insurance and health care industries, it does not directly affect our life insurance and annuity business as we no longer underwrite or administer any health insurance products. The Act will likely have an impact on our exclusive agents as most of our agents sell medical insurance through a brokerage arrangement with third parties. Some of our exclusive agents who have a substantial number of health insurance customers are likely to see some changes in their income in future years, but the nature of any such change is impossible to determine at this time. The Act also applies to us as an employer, but to date, the impact on our organization in this area has been minimal.
Employees

At December 31, 2013, we had 1,589 employees. A majority of our employees, including the executive officers, also provide services to Farm Bureau Property & Casualty Insurance Company and other affiliates pursuant to management agreements. None of our employees are members of a collective bargaining unit.

ITEM 1A. RISK FACTORS

Risk Factors

The performance of our company is subject to a variety of risks which you should review. Occurrence of these risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company.

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Difficult conditions in the financial markets and the economy may materially adversely affect our business and results of operations.

Our results of operations are materially affected by conditions in the economy and financial markets. Slow growth and low market rates continue to challenge the life insurance and annuity industries. While recent economic data indicates growth, future growth could be impacted by U.S. fiscal policies to address significant national budget deficits and debt levels. In the financial markets, strong liquidity, strong corporate profitability and modest economic growth continue to support fundamental credit quality. However, low economic growth and low inflation has restrained interest rates, challenging growth in investment income and resulting in declining portfolio investment yields across the insurance industry.
Our business benefits from moderate to strong economic expansion. Conversely, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact such actions could have on our business, results of operations, cash flows or financial condition.
Adverse financial market conditions may significantly affect our liquidity, access to capital and cost of capital.
As described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" of this Form 10-K, Farm Bureau Life has historically generated positive cash flow as measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. At December 31, 2013, we believe the probability we would have to sell investments in an unrealized loss position to meet cash flow needs is remote. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition" and Note 2 to our consolidated financial statements included in Item 8 for details regarding the unrealized gains and losses on our fixed maturity securities.
Capital requirements depend on factors including Farm Bureau Life's accumulated statutory earnings, statutory capital and surplus, the rate of sales growth of our products, aggregate reserve levels and the levels of credit risk and/or interest rate risk in our invested assets. In order to support these capital requirements, we may need to increase or maintain Farm Bureau Life's statutory capital and surplus through additional financings, which could include debt, equity or other transactions.
Adverse capital market conditions may affect the availability and cost of borrowed funds and could impact our ability to refinance existing borrowings, thereby ultimately impacting our profitability and ability to support or grow our businesses. Without sufficient capital, we could be forced to curtail certain of our operations, and our business could suffer. Actions we might take to access financing may in turn cause rating agencies to reevaluate our ratings.
We manage our capital level to be consistent with statutory and rating agency requirements. As of December 31, 2013, we estimate that Farm Bureau Life has sufficient capital to meet our rating objectives. However, this capital may not be sufficient if significant future losses are incurred and access to additional capital is limited.

Our valuation of fixed maturity securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.
During periods of market disruption, it may be difficult to value certain securities if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the financial environment or market conditions.
Certain market sectors may become dislocated following periods of volatile and illiquid market conditions, as has occurred during the recent financial crisis, 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.
The decision on whether to record an other-than-temporary impairment is determined in part by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability of the particular security as well as an evaluation of our intent to sell and whether it is more likely than not that we would be required to sell prior to recovery. Our conclusions regarding the recoverability of a particular security's fair value may ultimately prove to be incorrect as facts and circumstances change.

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Our investment portfolio is subject to credit quality risks that may diminish the value of our invested assets and affect our profitability and reported book value per share.

Particularly in the event of a major downturn in economic activity, we are subject to the risk that issuers of fixed maturity securities, other debt securities and commercial mortgage borrowers, will default on principal and interest payments. As of December 31, 2013, we held $6.1 billion of fixed income securities, $0.3 billion of which represented below-investment grade holdings. Of these below-investment grade holdings, 93.2% were acquired as investment grade holdings but, as of December 31, 2013, had been downgraded to below investment grade. An increase in defaults on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability.

Although we seek to diversify the investment portfolio across multiple asset classes, industries and geographies, the concentration of our investment portfolio in any particular industry, group of related industries or geographic sector could have an adverse effect on our investment portfolios and, consequently, on our results of operations and financial position. As of December 31, 2013, we held $0.4 billion of fixed income securities in European countries, representing 6.9% of our total fixed maturities. Our largest European exposures are in the United Kingdom and the Netherlands, with 44% and 15% of the balance, respectively.

Changing interest rates, market volatility and general economic conditions affect the risks and the returns on both our products and our investment portfolio.

The fair value of our investments and our investment performance, including yields and realization of gains or losses, may vary depending on economic and market conditions. The shape of the yield curve and the level of interest rates can impact the profitability of our products. Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can materially affect the profitability of our products, the fair value of our investments and the reported value of stockholders' equity.
A key component of our financial results is the spread earned (the investment yield we earn less the crediting rates we pay to our policyholders). A narrowing of spreads would adversely affect operating results. Although we have the right to adjust interest crediting rates on a portion of our business in force, changes to crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. Our ability to lower crediting rates is subject to minimum crediting rates filed with and approved by state regulators. In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid the narrowing of spreads under certain market conditions.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risks of Financial Instruments" for further discussion of our interest rate risk exposure and information regarding our asset-liability management program to help mitigate our exposure to interest rate risk.
We face competition from companies having greater financial resources, more advanced technology systems, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
See "Item 1. Business - Ratings and Competition" for information regarding risks relating to competition.
As a holding company, we depend on our subsidiaries for funds to meet our obligations, but our life insurance subsidiaries' ability to make distributions to us is limited by law, and could be affected by minimum risk-based capital requirements.
As a holding company, we rely on dividends from subsidiaries to assist in meeting our obligations. The ability of our subsidiaries to pay dividends or to make other cash payments in the future may materially affect our ability to satisfy our parent company payment obligations, including debt service and dividends on our common stock.
The amount of dividends we have available to pay our common shareholders is limited to a certain extent by the amount of dividends our primary operating subsidiary, Farm Bureau Life, is able to pay to its parent, FBL Financial Group, Inc. Farm Bureau Life's ability to pay dividends to FBL Financial Group, Inc. is limited by Iowa law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa. Further, Farm Bureau Life’s dividends are required to be approved by the Insurance Division, Department of Commerce, State of Iowa (Iowa Insurance Division) if the dividend plus all dividend distributions for the preceding twelve months exceed the greater of 10% of its statutory surplus or its statutory net gain from

15


operations for the 12-month period ended December 31st of the preceding year. At December 31, 2013 Farm Bureau Life’s statutory unassigned surplus was $359.0 million. Due to the $120.0 million extraordinary dividend paid by Farm Bureau Life to FBL Financial Group, Inc. during the third quarter of 2013, we have exceeded the annual approval limit through the third quarter of 2014; accordingly, any dividends made prior to the fourth quarter of 2014 will require approval of the Iowa Insurance Division.
 
In addition, Farm Bureau Life is subject to the risk-based capital (RBC) requirement of the NAIC set forth in the Risk-Based Capital for Insurers Model Act (the Model Act). The main purpose of the Model Act is to provide insurance regulators a method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. U.S. insurers and reinsurers are required to report the results of their RBC calculations as part of the statutory annual statements filed with state insurance regulatory authorities. State laws specify regulatory actions if an insurer's risk-based capital ratio, a measure of solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against certain minimums, with an RBC ratio of 200% or lower resulting in an increasing severity of regulatory actions with an RBC ratio of 70% being the point at which the regulators will assume control over the insurance company.

Failure to maintain adequate capital levels could lead to ratings downgrades and liquidity issues which could adversely affect our business and financial condition. Our current capital levels are well above any action level required by insurance company regulation. As of December 31, 2013, our total adjusted capital was $558.4 million, resulting in a RBC ratio of 499%, compared with authorized capital of $111.8 million required for an RBC of 200%.
A significant ratings downgrade may have a material adverse effect on our business.
Ratings are an important factor in establishing the competitive position of insurance companies. If our ratings were lowered, our ability to access reinsurance and market products to new customers could be harmed and existing policyholders might cancel their policies or withdraw the cash values of their policies. These events, in turn, could have a material adverse effect on our financial results and liquidity. Our ratings reflect the agency's opinions as to our financial strength, operating performance and ability to meet obligations to Farm Bureau Life's policyholders. There is no assurance that a rating will remain in effect for any given period of time or that a rating will not be reduced, suspended or withdrawn entirely by the rating agency, if in the rating agency's judgment, circumstances so warrant. See "Item 1. Business - Ratings and Competition" for a summary of our current ratings.
All segments of our business are highly regulated and these regulations or changes in them could affect our profitability.
We are subject to statutes and regulations in various states in which our life subsidiaries operate. Insurance regulation is different in each state, but is similar in that it is intended to provide safeguards for policyholders, agents, insurance companies and their holding companies. State insurance regulators oversee matters relating to the business of life insurance and annuities, such as sales practices, policy forms, claims practices, types and amounts of investments, reserve adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of dividends. They continually examine existing laws and regulations, and may recommend or make changes as they see appropriate.
As noted above, through adoption by law in states where we do business, our life subsidiaries are subject to the NAIC's RBC requirements. These guidelines are used by state insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. Our life subsidiaries also may be required, under solvency or guarantee laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities for insolvent insurance companies.
Although the federal government does not directly regulate the business of insurance, our company is subject to the same federal laws as other corporations, including, but not limited to pension regulation, discrimination, financial services regulation, securities regulation and federal taxation. Any one of these regulatory schemes can significantly affect the insurance business. In addition, various forms of direct and indirect federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies. The Dodd-Frank Act established the Federal Insurance Office within the Department of Treasury to collect information about the insurance industry, recommend prudential standards and represent the U.S. in dealings with foreign insurance regulators. The FIO recently released its long overdue report titled "How to Modernize and Improve the System of Insurance Regulation in the United States." The report includes recommendations for changes in several areas, including capital adequacy, safety and soundness, and marketplace regulation. We continue to monitor the activities of the FIO, NAIC and the state insurance regulators.

16


The Dodd-Frank Act has also resulted in certain other insurance companies (but not ours) being designated as non-bank systemically important financial institutions by the Financial Services Oversight Committee, which will result in their capital plans being regulated by both the states and the Federal Reserve. As part of the Dodd-Frank Act, many key rules have yet to be formalized, some of which might have an impact on insurers. The regulatory framework at the state and federal level applicable to our insurance products is evolving and could affect the design of our products and our ability to sell certain products. Any changes in these laws and regulations could materially and adversely affect our business, financial condition or results of operations.

Portions of the Affordable Care Act became effective in 2014, and while the act has a substantial impact on the health insurance and health care industries, it does not directly affect our life insurance and annuity business as we no longer underwrite or administer any health insurance products. The Act will likely have an impact on our exclusive agents as most of our agents sell medical insurance through a brokerage arrangement with third parties. Some of our exclusive agents who have a substantial number of health insurance customers are likely to see some changes in their income in future years, but the nature of any such change is impossible to determine at this time. The Act also applies to us as an employer, but to date, the impact on our organization in this area has been minimal.

Exclusive agents who are also registered representatives of our affiliated broker-dealer may be affected by rules required by Dodd-Frank that would create an as-yet undefined fiduciary relationship between the registered representative and their customers. It is too early to tell what effect there will be until the rule making process has been completed.

Our investment management subsidiary is an SEC-registered investment adviser. This entity manages funds primarily for affiliated companies, but also manages funds for a few non-affiliated organizations. It also provides administrative services to our separate accounts, which are registered as investment companies under the Investment Company Act. Our registered separate accounts are themselves highly regulated under the Investment Company Act.

In addition, our broker-dealer subsidiary is registered with the SEC and is subject to regulation under the Exchange Act and various state securities laws, and is a member of and subject to regulation by FINRA. Registered representatives sell variable products and mutual funds through our affiliated broker/dealer and are regulated by FINRA and state securities regulators. We are not aware of any proposed or future legislation or rule making by any regulator that is likely to have a material adverse impact on our financial condition or operational flexibility.

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. From time to time, we are required to adopt new or revised accounting standards. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our financial condition and results of operations. This includes the current work by accounting standards setting bodies on a project evaluating the accounting for insurance contracts. It is uncertain what the outcome of that project will be or when it will be completed. The impact of accounting pronouncements that have been issued but not yet implemented is discussed in Note 1 to our consolidated financial statements included in Item 8.

An inability to access Federal Home Loan Bank (FHLB) funding could adversely affect our profitability.

The Federal Housing Finance Agency (FHFA) in 2010 issued an Announced Notice of Proposed Rulemaking (ANPR). The purpose of the ANPR is to seek comment on several possible changes to the requirements applicable to members of the FHLB. Any changes to such requirements that eliminate our eligibility for continued FHLB membership or limit our FHLB borrowing capacity could have an adverse effect on us. The FHFA also released an advisory bulletin on the particular risks associated with lending to insurance companies as opposed to banks, which includes standards for evaluating lending to an insurance company member. These standards are broad and raise concerns about the insurance regulatory framework and of FHLB creditor status in the event of insurer insolvency. The recommended standards could result in stricter regulation of, or a reduced incidence of, FHLB-insurer lending. In response to these initiatives, Iowa and certain other states are reviewing amendments to legislation which would alter the status of insurance company collateral used in FHLB loans. Any event that adversely affects FHLB lending to us could have an adverse effect on our profitability.

Actual experience which differs from our assumptions regarding future persistency, mortality and interest rates used in pricing our products and calculating reserve amounts and deferred acquisition costs could have a material adverse impact on our financial results.
The process of pricing products and calculating reserve amounts and deferred acquisition costs for an insurance organization involves the use of a number of assumptions including those related to persistency (how long a contract stays with the

17


company), mortality (the relative incidence of death in a given time) and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts). Actual results could differ significantly from those assumed. Actual experience which differs from one or more of these assumptions could have a material adverse impact on our results of operations.
We may be required to accelerate the amortization of deferred acquisition costs, which could adversely affect our results of operations or financial condition.
Deferred acquisition costs (DAC) include certain direct costs of successfully acquiring new insurance business, including commissions and other expenses related to the production of new business, to the extent recoverable from future policy revenues and gross profits. Also included are premium bonuses and bonus interest credited to contracts during the first contract year only. We amortize these costs over the expected lives of the contracts. We test the DAC recorded on our consolidated balance sheet to determine if these amounts are recoverable under current assumptions. In addition, we regularly review the estimates and assumptions underlying DAC for those products for which we amortize DAC in proportion to gross profits. Given changes in facts and circumstances, these tests and reviews could lead to reductions in DAC that could have an adverse effect on the results of our operations and our financial condition. Increases in actual or expected future withdrawals or surrenders and investment losses, which are more likely in a severe economic recession, would result in an acceleration of DAC amortization. In addition, significant or sustained equity and bond market declines could result in an acceleration of DAC amortization related to variable annuity and variable universal life contracts.

Our earnings are influenced by our claims experience, which is difficult to estimate for future periods. If our future claims experience does not match our pricing assumptions or past results, our earnings could be materially adversely affected.

Our earnings are significantly influenced by the claims paid under our insurance contracts and will vary from period to period depending upon the amount of claims incurred. There is only limited predictability of claims experience within any given quarter or year. The liability that we have established for future insurance and annuity policy benefits is based on assumptions concerning a number of factors, including interest rates, expected claims, persistency and expenses. In the event our future experience does not match our pricing assumptions or our past results, our operating results could be materially adversely affected.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance agreements. New sales of life products are reinsured above prescribed limits and do not require the reinsurer's prior approval within certain guidelines. We enter into indemnity reinsurance arrangements to assist in diversifying our risks and to limit our maximum loss on risks that exceed our policy retention limits. Our maximum retention limit on an insured life ranges up to $1.5 million depending upon when the policy was issued.
Indemnity reinsurance does not fully discharge our obligation to pay claims on the reinsured business. As the ceding insurer, we remain responsible for policy claims to the extent the reinsurer fails to pay claims. Should any reinsurer fail to meet the obligations assumed under such reinsurance, we remain liable, and payment of these obligations could result in losses. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk.
Our business is highly dependent on our relationships with Farm Bureau organizations and could be adversely affected if those relationships became impaired.
Farm Bureau Life's business relies significantly upon the maintenance of our right to use the Farm Bureau and FB trade names and related trademarks and service marks which are controlled by the American Farm Bureau Federation and state Farm Bureau organizations. See discussion under "Item 1. Business - Marketing and Distribution - Affiliation with Farm Bureau" for information regarding these relationships and circumstances under which our access to the Farm Bureau membership base and use of the Farm Bureau and FB designations could be terminated. We believe our relationship with the Farm Bureau organizations provides a number of advantages. Farm Bureau organizations in our marketing territory tend to be well known and long established, have active memberships and provide a number of member benefits other than financial services. The strength of these organizations provides enhanced prestige and brand awareness for our products and increased access to Farm Bureau members. The loss of the right to use these designations in a key state or states could have a material adverse effect on operating results.

18


Our relationship with Farm Bureau organizations could result in conflicts of interests.
Our business and operations are interrelated to a degree with that of the American Farm Bureau Federation, its affiliates, and state Farm Bureau organizations. The overlap of the business, including service of certain common executive officers and directors of the Company and the state Farm Bureau organizations, may give rise to conflicts of interest among these parties. Conflicts could arise, for example, with respect to business dealings among the parties, the use of a common agency force, the sharing of employees, space and other services and facilities under intercompany agreements, and the allocation of business opportunities between them. Conflicts of interest could also arise between the Company and the various state Farm Bureau organizations in our life-only states, some of whose presidents serve as directors of the Company, and which control their state affiliated property-casualty insurance company, with respect to the use of the common agency force. We have adopted a conflict of interest policy which requires a director to disclose to the Board of Directors and any appropriate committee of the Board, the existence of any transaction or proposed transaction in which the Director has a direct or indirect interest, and the material facts relating thereto.
Changes in federal tax laws may affect sales of our products and profitability.
The annuity and life insurance products that we market generally offer income tax advantages to policyholders as compared to other savings instruments, such as certificates of deposit and taxable bonds. Current federal income tax law allows for the deferral of income tax on the earnings during the accumulation period of certain annuity or insurance policies, as opposed to the current taxation of other savings instruments. In addition, life insurance death benefits are generally exempt from the income tax. Legislation eliminating this tax deferral or tax exemption for death benefits, or changes to reduce the taxation of competing products, could adversely affect our financial position and results of operations.
Congress has from time to time considered legislation that would increase the amount of income tax expense incurred by insurance companies, including proposals to reduce the deduction for dividends received on assets held in separate accounts to support variable products. Reduction or elimination of federal tax credits for low-income housing has also been discussed as a potential means to reduce federal budget deficits. To the extent legislation were enacted that includes either of these items, we would incur additional income tax expense, thereby reducing earnings.
Our ability to maintain competitive costs is dependent upon the level of new sales and persistency of existing business.
Maintaining competitive costs depends upon numerous factors, including the level of new sales, persistency of existing business and expense management. A decrease in sales or persistency without a corresponding reduction in expenses could affect our business and results of operations.
If we are unable to attract and retain agents, sales of our products and services may be reduced.
We compete to attract and retain exclusive agents for Farm Bureau Life. Intense competition exists for persons with demonstrated ability. We compete primarily on the basis of our reputation, products, compensation, support services, rating agency ratings and financial position. Sales and our results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining agents.
Attracting and retaining employees who are key to our business is critical to our growth and success.
The success of our business and the ability to reach goals is dependent, to a large extent, on our ability to attract and retain key employees. Competition is intense in the job market for certain positions, such as actuaries and other insurance professionals with demonstrated ability, particularly with our headquarters being located in central Iowa, a hub of insurance company home offices, where we compete with other insurance and financial institutions.
Our employees are not subject to employment contracts, except for a retention agreement with our Chief Executive Officer. There can be no certainty regarding the length of time any of our named executive officers will remain with us. To mitigate the risk following the loss of any named executive, we have succession and leadership development plans in place for all executive management positions. Our inability to retain our key employees, or attract and retain additional qualified employees, could materially adversely affect our sales, results of operations and financial condition.
Success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements.
Our business is dependent upon effective technology for interacting with employees, agents, policyholders, vendors, agents, third parties and investors. It is crucial to our business to reach a large number of people and secure, store and provide sizable

19


amounts of information. If we do not maintain adequate systems to reflect technological advancements, we could experience adverse consequences including inadequate pricing, underwriting and reserving decisions, regulatory problems, security breaches or litigation exposure. This could adversely affect our relationships and ability to do business with our clients and make it difficult to attract new customers.
Our business strategy involves providing customers with easy-to-use products and systems to meet their needs, and our information systems require an ongoing commitment of resources to maintain current standards. We are continuously enhancing and updating our systems to keep pace with changes in information processing technology, evolving industry and regulatory standards, threats and customer demands. Our success is dependent on protecting, maintaining and enhancing the effectiveness of existing systems, as well as continuing to buy or build information systems that support our business processes in a cost-effective manner.
A technology failure could occur and potentially disrupt our business, damage our reputation and adversely affect our profitability. Disruptions or breaches could occur as a result of natural disasters, man-made disasters, epidemic/pandemic, industrial accident, blackout, computer virus, criminal activity, technological changes or events, terrorism or other unanticipated events beyond our control. While the company has obtained insurance and has implemented a variety of preventative security measures such as risk management, information protection, disaster recovery and business continuity plans, no predictions of specific scenarios can be made. Unanticipated problems with our systems or recovery plans could have a material adverse impact on our ability to conduct business, our results and financial position.
We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulators such as the Iowa Insurance Division, and federal regulators such as the SEC, FINRA, the Department of Labor and the Internal Revenue Service, regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, tax laws, the Employee Retirement Income Security Act of 1974 and laws governing the activities of broker-dealers. Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. Moreover, we are subject to the risks of errors and misconduct by our exclusive agents, such as fraud, non-compliance with policies and recommending transactions that are not suitable. While we are not a party to any lawsuit that we believe will have a material adverse effect on our business, financial condition or results of operations, there can be no assurance that such litigation, or any future litigation, will not have such an effect, whether financially, through distraction of our management or otherwise.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal operations are conducted from property leased from a subsidiary of the Iowa Farm Bureau Federation under a 10 year operating lease that expires in 2021, with automatic five-year extensions unless terminated by one of the parties at least six months prior to the expiration date. Currently, the property leased primarily consists of approximately 156,000 square feet of a 400,000 square foot office building in West Des Moines, Iowa. We consider the current facilities to be adequate for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Information required for Item 3 is incorporated by reference from the discussion in Note 10 to our consolidated financial statements included in Item 8.

ITEM 4. MINE AND SAFETY DISCLOSURES

None.


20


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Market and Dividend Information

The Class A common stock of FBL Financial Group, Inc. is traded on the New York Stock Exchange under the symbol FFG. The following table sets forth the cash dividends per common share and the high and low prices of FBL Financial Group Class A common stock as reported in the consolidated transaction reporting system for each quarter of 2013 and 2012.

Class A Common Stock Data (per share)
1st Qtr.
 
2nd Qtr.
 
3rd Qtr.
 
4th Qtr.
2013
 
 
 
 
 
 
 
High
$
39.16

 
$
43.51

 
$
46.28

 
$
46.82

Low
33.25

 
37.31

 
42.58

 
42.49

Dividends declared and paid
0.11

 
0.11

 
2.15

 
0.15

2012
 
 
 
 
 
 
 
High
$
36.65

 
$
33.93

 
$
35.05

 
$
34.59

Low
32.23

 
24.70

 
27.60

 
29.27

Dividends declared and paid
0.10

 
0.10

 
0.10

 
0.10


Special Dividend

On August 21, 2013, the Board of Directors approved a special cash dividend on Class A common stock of $2.00 per share, which was paid on September 13, 2013, to shareholders of record as of September 6, 2013. The aggregate dividend was $51.4 million.

Tender Offer of Class B Shares

There is no established market for purchasing our Class B common stock, although it is convertible upon demand into Class A common stock on a share for share basis. As part of a comprehensive capital management program, the Board of Directors authorized the repurchase of Class B common shares through a tender offer for 99 percent of all Class B shares outstanding. The tender offer was conditioned upon all the Class B shareholders either tendering their shares or converting their shares to Class A. The tender price of $45.33 was based upon the average of the closing price of FBL’s Class A common stock for the seven consecutive business days preceding the tender closing date of September 25, 2013. All Class B shareholders participated with 1,023,948 Class B common shares repurchased for $46.4 million and 105,930 shares of Class B common stock converted to Class A common stock.

Other Information

As of January 17, 2014, there were approximately 5,400 holders of Class A common stock and 21 holders of record of Class B common stock.

Class B common stockholders receive dividends at the same rate as that declared on Class A common stock. We intend to declare regular quarterly cash dividends in the future, subject to the discretion of the Board of Directors, which depends in part upon general business conditions, legal restrictions and other factors the Board of Directors deems relevant. It is anticipated that the quarterly dividend rate for 2014 will increase to $0.35 per share.

For restrictions on dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources" included in Item 7.


21


Comparison of Five-Year Total Return

 
Period Ending
 
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/31/2011

 
12/31/2012
 
12/31/2013
FBL Financial Group, Inc.
$
100.00

 
$
127.04

 
$
198.65

 
$
237.95

 
$
242.32

 
$
335.93

S&P 500 Index
100.00

 
126.46

79.6

145.51

 
148.59

 
172.37

 
228.19

S&P 500 Life & Health Insurance Index
100.00

 
115.57

 
144.76

 
114.78

 
131.53

 
215.02


Source: SNL Financial LC

The performance graph shows a comparison of the cumulative total return over the past five years of our Class A common stock, the S&P 500 Index and the S&P 500 Life and Health Insurance Index. The graph plots the changes in value of an initial $100 investment, assuming reinvestment of dividends.


22


Issuer Purchases of Equity Securities

There were no issuer purchases of equity securities for the quarter ended December 31, 2013 and $20.3 million remains to be purchased under the repurchase plan announced on November 15, 2012. The plan authorizes us to make up to $30.0 million in repurchases of Class A common stock in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Completion of the program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.



 
 
 
 
 
 
 
 
 

 

23


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

 
As of or for the year ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(Dollars in thousands, except per share data)
Consolidated Statement of Income Data
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
111,575

 
$
101,410

 
$
97,103

 
$
93,881

 
$
88,757

Traditional life insurance premiums
180,944

 
175,086

 
168,519

 
162,056

 
154,154

Net investment income
370,651

 
361,324

 
343,310

 
324,540

 
303,486

Realized gains (losses) on investments
13,555

 
452

 
(8,296
)
 
11,576

 
(30,660
)
Total revenues
691,231

 
655,540

 
618,337

 
606,342

 
533,209

 
 
 
 
 
 
 
 
 
 
Income from continuing operations
108,393

 
82,796

 
52,209

 
80,993

 
46,285

Income (loss) from discontinued operations

 
(2,939
)
 
(11,464
)
 
34,587

 
18,375

Net income
$
108,393

 
$
79,857

 
$
40,745

 
$
115,580

 
$
64,660

 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
4.25

 
$
3.01

 
$
1.69

 
$
2.66

 
$
1.54

Income (loss) from discontinued operations

 
(0.11
)
 
(0.37
)
 
1.14

 
0.61

Earnings per common share
$
4.25

 
$
2.90

 
$
1.32

 
$
3.80

 
$
2.15

Earnings per common share - assuming dilution:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
4.21

 
$
2.97

 
$
1.67

 
$
2.63

 
$
1.53

Income (loss) from discontinued operations

 
(0.10
)
 
(0.37
)
 
1.13

 
0.61

Earnings per common share - assuming dilution
$
4.21

 
$
2.87

 
$
1.30

 
$
3.76

 
$
2.14

 
 
 
 
 
 
 
 
 
 
Cash dividends (1)
$
2.5200

 
$
0.4000

 
$
0.2875

 
$
0.2500

 
$
0.3125

Weighted average common shares outstanding - assuming dilution
25,774,415

 
27,838,548

 
31,215,023

 
30,718,616

 
30,201,476

 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data (1)
 
 
 
 
 
 
 
 
 
Total investments
$
7,040,002

 
$
7,160,650

 
$
6,397,195

 
$
5,853,341

 
$
5,024,876

Assets held in separate accounts
693,955

 
618,809

 
603,903

 
675,586

 
630,094

Total assets
8,461,323

 
8,417,726

 
8,109,368

 
15,177,657

 
14,079,220

Long-term debt
97,000

 
147,000

 
146,968

 
271,168

 
371,084

Total liabilities
7,416,532

 
7,205,479

 
6,906,939

 
14,132,931

 
13,325,024

Total stockholders' equity (2)
1,044,791

 
1,212,247

 
1,202,429

 
1,044,725

 
754,198

Book value per common share (2)
42.08

 
47.47

 
39.13

 
33.66

 
24.64


Notes to Selected Consolidated Financial Data
(1)
Dividends in 2013 include a special $2.00 per share cash dividend to Class A and B common shareholders.
(2)
Amounts are impacted by accumulated other comprehensive income (loss) totaling $119.1 million in 2013, $289.9 million in 2012, $177.8 million in 2011, $51.6 million in 2010 and ($127.4) million in 2009. These amounts are net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, unearned revenue reserve, value of insurance in force acquired and policyholder liabilities.


24


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When reading the following Management's Discussion and Analysis of Financial Condition and Results of Operations, please refer to our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data," of this report. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its insurance subsidiaries Farm Bureau Life Insurance Company (Farm Bureau Life) and Greenfields Life Insurance Company (Greenfields Life).

In this discussion and analysis, we explain our consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance, including:

factors which affect our business,
our revenues and expenses in the periods presented,
changes in revenues and expenses between periods,
sources of earnings and changes in stockholders' equity,
impact of these items on our overall financial condition and
expected sources and uses of cash.

We have organized our discussion and analysis as follows:

First, we discuss our business and drivers of profitability.
We then describe the business environment in which we operate including factors that affect operating results.
We highlight significant events that are important to understanding our results of operations and financial condition.
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.
Finally, we discuss critical accounting policies and recently issued accounting standards. The critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult or complex judgment.

Overview and Profitability

We operate predominantly in the life insurance industry through our principal subsidiary, Farm Bureau Life. Farm Bureau Life markets individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in the Midwestern and Western sections of the United States through an exclusive agency force. Several subsidiaries support various functional areas of Farm Bureau Life and other affiliates by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.

We analyze operations by reviewing financial information regarding our primary products that are aggregated in Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company. We analyze our segment results based on pre-tax operating income, which excludes the impact of certain items that are included in net income. See Note 13 to our consolidated financial statements for further information regarding how we define our segments and operating income.

We also include within our analysis “premiums collected” which is not a measure used in financial statements prepared in accordance with GAAP, but is a common industry measure of agent productivity. See Note 13 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.

On December 30, 2011, we completed the sale of our wholly-owned subsidiary, EquiTrust Life Insurance Company (EquiTrust Life). As a result of the sale, certain lines of business are considered discontinued operations, and unless otherwise indicated, have been removed from the discussion that follows. See Note 15 to our consolidated financial statements for additional information related to the sale.



25


Our profitability is primarily a factor of:

The volume of our life insurance and annuity business in force, which is driven by the level of our sales and the persistency of the business written.
The amount of spread (excess of net investment income earned over interest credited) we earn on contract holders' general account balances.
Our ability to price our life insurance products to earn acceptable margins over the cost of providing benefits and the expenses of acquiring and administering the products. Competitive conditions, mortality experience, persistency, investment results and our ability to maintain expenses in accordance with pricing assumptions drive our margins on the life products. On many products, we have the ability to mitigate adverse experience through adjustments to credited interest rates, policyholder dividends or cost of insurance charges.
Our ability to manage our investment portfolio to maximize investment returns while providing adequate liquidity for obligations to policyholders and minimizing the risk of defaults or impairments of invested assets.
Our ability to manage the level of our operating expenses.
Actual experience and changes in assumptions for expected surrender and withdrawal rates, mortality and spreads used in the amortization of deferred acquisition costs.

Our profitability is also impacted by changes in accounting guidance that impact the timing of profit recognition. During the first quarter of 2012, we adopted new guidance that reduced the deferral of costs associated with the issuance of life insurance and annuity products which increased the amount of such expenses recognized in the current year and reduced the amount of amortization in future years. See Note 1 to our Consolidated Financial Statements for more information on this change.

In addition to the impact from the adoption of the guidance above, the accounting standards setting bodies are currently working on a project evaluating the accounting for insurance contracts, which may significantly impact the timing of profit emergence for those products. It is uncertain what the outcome of that project will be or when it will be completed.

Impact of Recent Business Environment

Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations, cash flows or financial condition.

While there were positive economic signs during 2013, the U.S. economy continues to face a number of challenges. Pertinent recent economic events include, but are not limited to the following:

Gross Domestic Product increased approximately 1.9% during 2013 based on early estimates.
U.S. unemployment remains high at 6.7% through December 2013.
Growth in personal income generally remains below average.
Based on USDA estimates, U.S. net farm income is forecasted to have grown 15.1% and farm real estate value is forecasted to have grown 7.5% during 2013.
The European debt crisis continues to cause intermittent stress within the markets.
Continued uncertainty as to actions the United States Congress will take to address the national debt, including potential actions to change the tax advantages of life insurance.

An increase in market interest rates during 2013 has reduced the fair value of our fixed maturity investment portfolio. The benchmark 10-year U.S. Treasury yield rose during 2013, while credit spreads decreased. Strong liquidity and favorable corporate profitability continue to support fundamental credit quality. In the securitized markets, spreads on agency residential mortgage-backed securities and commercial mortgage-backed securities declined but rose for asset-backed securities. The yield curve remained moderately steep at year end, but low current interest rates create a challenging environment for sales of new money fixed annuity products.

We intentionally decreased the amount of annuity sales beginning in 2012 by suspending sales of certain products and reducing agent commission rates on certain products where it was difficult to achieve profitability targets during this period of low interest rates. We expect modest increases in annuity sales due to the recent rise in market interest rates and a renewed emphasis placed on sales of products with low guaranteed crediting rates. Our life sales have increased, reflecting the attractiveness of

26


enhanced universal life and term life product offerings and the strong farm and energy subsectors of the economy in our marketplace, as well as Farm Bureau Life's emphasis on life insurance product sales.
 
Results of Operations for the Three Years Ended December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2013
 
2012
 
2011
 
2013
 
2012
 
 
 
 
 
 
 
 
Pre-tax operating income:
 
 
 
 
 
 
 
 
 
Annuity segment
$
63,592

 
$
55,910

 
$
58,263

 
14
 %
 
(4
)%
Life Insurance segment
48,814

 
43,741

 
50,502

 
12
 %
 
(13
)%
Corporate and Other segment
22,172

 
16,856

 
2,293

 
32
 %
 
635
 %
Total pre-tax operating income
134,578

 
116,507

 
111,058

 
16
 %
 
5
 %
Income taxes on operating income
(33,985
)
 
(33,748
)
 
(32,240
)
 
1
 %
 
5
 %
Operating income
100,593

 
82,759

 
78,818

 
22
 %
 
5
 %
 
 
 
 
 
 
 
 
 
 
Realized gains/losses on investments (1)
8,206

 
(477
)
 
(5,983
)
 
(1,820
)%
 
(92
)%
Change in net unrealized gains/losses on derivatives (1)
(241
)
 
619

 
932

 
(139
)%
 
(34
)%
Loss on debt redemption (1)

 
(22
)
 
(21,564
)
 
NA
 
(100
)%
Net impact of discontinued operations (1)

 
(2,939
)
 
(11,464
)
 
NA
 
(74
)%
Net income attributable to FBL Financial Group, Inc.
$
108,558

 
$
79,940

 
$
40,739

 
36
 %
 
96
 %
 
 
 
 
 
 
 
 
 
 
Operating income per common share - assuming dilution
$
3.90

 
$
2.97

 
$
2.52

 
31
 %
 
18
 %
 
 
 
 
 
 
 
 
 
 
Earnings per common share - assuming dilution:
 
 
 
 
 
 
 
 
 
Continuing operations
$
4.21

 
$
2.97

 
$
1.67

 
 
 
 
Discontinued operations

 
(0.10
)
 
(0.37
)
 
 
 
 
Earnings per common share - assuming dilution
$
4.21

 
$
2.87

 
$
1.30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate on operating income
25
%
 
29
%
 
29
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average invested assets, at amortized cost
$
6,723,601

 
$
6,343,284

 
$
5,887,520

 
6
 %
 
8
 %
Annualized yield on average invested assets
5.74
%
 
5.87
%
 
6.01
%
 
 
 
 
Impact on operating income of unlocking deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve, net of tax
$
231

 
$
(3,413
)
 
$
(1,201
)
 
(107
)%
 
184
 %

(1)
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired and income taxes attributable to these items.

Our operating income increased in 2013, compared to 2012, primarily due to the impact of an increase in the volume of business in force, higher corporate segment net investment income and the impact of unlocking assumptions used in the calculation of amortization of deferred acquisition costs and the value of insurance in force. These increases were partially offset by an increase in death benefits. Operating income increased in 2012, compared to 2011, primarily due to the impact of an increase in the volume of business in force, partially offset by increases in the amortization of deferred acquisition costs and the value of insurance in force. Earnings in 2011benefited from refining actuarial estimates that reduced the value of insurance in force and deferred acquisition costs by $7.4 million.

The increase in operating income during 2013, along with increased realized gains from investment sales and a reduction in losses from discontinued operations, contributed to higher net income compared to 2012. The increase in operating income during 2012,

27


along with a reduction in losses from discontinued operations and the loss on debt redemption, contributed to higher net income compared to 2011.

Earnings per share from continuing operations and operating income per common share benefited from the repurchase of Class A common shares in 2013 and 2012, as well as a tender offer of Class B common shares completed in the third quarter of 2013. Details regarding the share repurchases are included in Note 7 to the consolidated financial statements.

We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve for participating life insurance, variable and interest sensitive products, as applicable, through an “unlocking” process. These assumptions typically consist of withdrawal and lapse rates, earned spreads and mortality with revisions based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually. See the discussion that follows for further details of the unlocking impact to our operating segments.

Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2013
 
2012
 
2011
 
2013
 
2012
 
(Dollars in thousands)
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
1,236

 
$
790

 
$
666

 
56
 %
 
19
 %
Net investment income
196,303

 
191,211

 
181,974

 
3
 %
 
5
 %
Total operating revenues
197,539

 
192,001

 
182,640

 
3
 %
 
5
 %
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
102,308

 
102,961

 
100,487

 
(1
)%
 
2
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
Commissions net of deferrals
2,554

 
2,504

 
3,428

 
2
 %
 
(27
)%
Amortization of deferred acquisition costs
9,422

 
9,327

 
8,916

 
1
 %
 
5
 %
Amortization of value of insurance in force
907

 
2,473

 
244

 
(63
)%
 
914
 %
Other underwriting expenses
18,756

 
18,826

 
11,302

 
 %
 
67
 %
Total underwriting, acquisition and insurance expenses
31,639

 
33,130

 
23,890

 
(5
)%
 
39
 %
Total benefits and expenses
133,947

 
136,091

 
124,377

 
(2
)%
 
9
 %
Pre-tax operating income
$
63,592

 
$
55,910

 
$
58,263

 
14
 %
 
(4
)%

28


Annuity Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2013
 
2012
 
2011
 
2013
 
2012
 
(Dollars in thousands)
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
Annuity premiums collected, direct
$
259,466

 
$
316,344

 
$
369,156

 
(18
)%
 
(14
)%
Policy liabilities and accruals, end of period
3,549,477

 
3,432,137

 
3,190,985

 
3
 %
 
8
 %
Average invested assets, at amortized cost
3,576,316

 
3,435,090

 
3,184,619

 
4
 %
 
8
 %
Investment fee income included in net investment income (1)
5,544

 
4,355

 
4,283

 
27
 %
 
2
 %
Average individual annuity account value
2,399,395

 
2,260,801

 
2,078,753

 
6
 %
 
9
 %
 
 
 
 
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
5.83
%
 
6.06
%
 
6.24
%
 
 
 
 
Weighted average interest crediting rate
2.95
%
 
3.15
%
 
3.36
%
 
 
 
 
Spread
2.88
%
 
2.91
%
 
2.88
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
5.1
%
 
4.8
%
 
4.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact on pre-tax income of unlocking deferred acquisition costs and value of insurance in force acquired
1,436

 
234

 
631

 
514
 %
 
(63
)%

(1)
Includes prepayment fee income and net discount of accretion on mortgage and asset-backed securities resulting from changing payment speed assumptions at the end of the period.

Pre-tax operating income for the Annuity segment increased in 2013 and decreased in 2012 compared to prior periods. The increase in 2013 was primarily due to higher spread income earned from an increase in the volume of business in force, higher investment fee income and the impact of unlocking. The decrease in 2012 was primarily due an increase in expense allocations as discussed in the Corporate and Other segment and an increase in the amortization of the value of insurance in force, partially offset by an increase in spread income earned from a larger volume of business in force.

Amortization of deferred acquisition costs and the value of insurance in force changed over the three year period primarily due to changes in actual profits on the underlying business and the impact of unlocking from updating the withdrawal rate and earned spread assumptions within our amortization models. During 2012, the increase to amortization was more significant as a result of adjusting our assumptions based on an analysis of the possible impact of a continued low interest rate environment, as well as the impact of refining our projected credited rate assumption.

The average aggregate account value for individual annuity contracts in force increased in 2013 and 2012 due to continued sales and the crediting of interest. Premiums collected were lower in 2013 and 2012 as we decreased our emphasis on annuity sales and suspended sales of certain products in the third quarter of 2011 due to the low interest rate environment. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rate and perceived security of our products compared to those of competing products.

The Annuity segment also includes advances on our funding agreements with the Federal Home Loan Bank (FHLB). Outstanding funding agreements totaled $322.3 million at December 31, 2013, $328.5 million at December 31, 2012 and $268.0 million at December 30, 2011.
The weighted average yield on cash and invested assets for individual annuities decreased in 2013 and 2012 primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by continued higher investment fee income. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Decreases in the weighted average interest crediting rates are due to crediting rate actions taken on a significant portion of our annuity portfolio during 2012 and 2011 in response to the declining portfolio yield.


29


Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2013
 
2012
 
2011
 
2013
 
2012
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
63,871

 
$
54,691

 
$
49,438

 
17
 %
 
11
 %
Traditional life insurance premiums
180,944

 
175,086

 
168,519

 
3
 %
 
4
 %
Net investment income
140,510

 
138,076

 
134,999

 
2
 %
 
2
 %
Total operating revenues
385,325

 
367,853

 
352,956

 
5
 %
 
4
 %
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits:
 
 
 
 
 
 
 
 
 
Interest credited
31,329

 
29,252

 
29,719

 
7
 %
 
(2
)%
Death benefits and other
40,070

 
33,324

 
32,645

 
20
 %
 
2
 %
Total interest sensitive product benefits
71,399

 
62,576

 
62,364

 
14
 %
 
 %
Traditional life insurance benefits:
 
 
 
 
 
 
 
 
 
Death benefits
70,705

 
67,331

 
69,479

 
5
 %
 
(3
)%
Surrender and other benefits
35,118

 
36,554

 
35,860

 
(4
)%
 
2
 %
Increase in traditional life future policy benefits
54,639

 
52,395

 
43,627

 
4
 %
 
20
 %
Total traditional life insurance benefits
160,462

 
156,280

 
148,966

 
3
 %
 
5
 %
Distributions to participating policyholders
13,319

 
14,275

 
17,030

 
(7
)%
 
(16
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
20,995

 
17,476

 
16,074

 
20
 %
 
9
 %
Amortization of deferred acquisition costs
15,760

 
21,216

 
18,042

 
(26
)%
 
18
 %
Amortization of value of insurance in force
1,593

 
2,984

 
(4,948
)
 
(47
)%
 
(160
)%
Other underwriting expenses
52,983

 
49,305

 
44,926

 
7
 %
 
10
 %
Total underwriting, acquisition and insurance expenses
91,331

 
90,981

 
74,094

 
 %
 
23
 %
Total benefits and expenses
336,511

 
324,112

 
302,454

 
4
 %
 
7
 %
Pre-tax operating income
$
48,814

 
$
43,741

 
$
50,502

 
12
 %
 
(13
)%


30


Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2013
 
2012
 
2011
 
2013
 
2012
 
(Dollars in thousands)
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
Life premiums collected, net of reinsurance
$
307,474

 
$
255,709

 
$
229,468

 
20
 %
 
11
 %
Policy liabilities and accruals, end of period
2,454,556

 
2,301,155

 
2,197,597

 
7
 %
 
5
 %
Life insurance in force, end of period
49,055,900

 
46,139,999

 
43,717,077

 
6
 %
 
6
 %
Average invested assets, at amortized cost
2,396,368

 
2,258,593

 
2,187,603

 
6
 %
 
3
 %
Investment fee income included in net investment income (1)
1,854

 
2,831

 
548

 
(35
)%
 
417
 %
Average interest sensitive life account value
703,538

 
650,821

 
631,443

 
8
 %
 
3
 %
 
 
 
 
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
6.04
%
 
6.36
%
 
6.49
%
 
 
 
 
Weighted average interest crediting rate
4.11
%
 
4.14
%
 
4.19
%
 
 
 
 
Spread
1.93
%
 
2.22
%
 
2.30
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
5.5
%
 
6.1
%
 
6.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Death benefits, net of reinsurance and reserves released
$
72,824

 
$
65,624

 
$
67,284

 
11
 %
 
(2
)%
Impact on pre-tax income of unlocking deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve
(595
)
 
(3,762
)
 
(1,554
)
 
(84
)%
 
142
 %

(1)
Includes prepayment fee income and net discount accretion on mortgage and asset-backed securities resulting from changing payment speed assumptions at the end of the period.

Pre-tax operating income for the Life Insurance segment increased in 2013 and decreased in 2012 compared to prior periods. The increase in 2013 was primarily due to an increase in the volume of business in force and the impact of unlocking, partially offset by increased death benefits. The decrease in 2012 was primarily due to the impact of refinements to valuation estimates during 2011 and an increase in expense allocations as discussed in the Corporate and Other segment, partially offset by increases in the volume of business in force and investment fee income.

Premiums collected were higher in 2013 and 2012 compared to the prior years due to the relative attractiveness of life insurance products. The increased sales activity, along with the overall increase in business in force, is contributing to the increase in revenues and expenses, including non-deferrable underwriting and commission related expenses.

Results for 2013 were favorably impacted by the correction of an immaterial error which increased pre-tax operating earnings by $2.8 million. The error arose and accumulated over several years, with no prior year significantly impacted. As a result of the correction, interest sensitive product charges were increased $6.3 million, interest sensitive death benefits were increased $2.5 million and amortization of deferred acquisition costs was increased $1.0 million. Results for 2012 were negatively impacted by the impact of reserve refinements which increased traditional life future policy benefits $1.8 million as a result of the impact of updates to mortality tables and lapse assumptions. The impact of refining methods and assumptions in 2011 relating to the value of insurance in force, deferred acquisition costs and certain traditional life insurance reserves decreased benefits and expenses $7.4 million.

Unlocking of deferred acquisition costs, value of insurance in force and unearned revenue reserve resulted in an increase in 2013 operating income compared to 2012, and a decrease in 2012 operating income compared to 2011. Unlocking for each year reflected changes in projected policy lapses and mortality assumptions used in the estimate of future expected gross profits. During 2012, we incurred additional amortization through unlocking as a result of our analysis of the impact of a continued low interest rate environment on projected investment and spread income, as well as withdrawal rates.


31



Death benefits, net of reinsurance and reserves released, increased in 2013 primarily due to an increase in the average size of claims.

The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in 2013 and 2012 due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by an increase in investment fee income in 2012. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our interest sensitive life insurance products were impacted by crediting rate decreases taken on various products in 2013, 2012 and 2011 in response to the declining portfolio yield, partially offset by sales of products with higher crediting rates.

Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2013
 
2012
 
2011
 
2013
 
2012
 
(Dollars in thousands)
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
46,093

 
$
45,722

 
$
47,283

 
1
 %
 
(3
)%
Net investment income
35,843

 
30,259

 
25,890

 
18
 %
 
17
 %
Other income
14,839

 
17,462

 
17,407

 
(15
)%
 
 %
Total operating revenues
96,775

 
93,443

 
90,580

 
4
 %
 
3
 %
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
30,183

 
30,721

 
29,229

 
(2
)%
 
5
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
3,861

 
3,732

 
4,449

 
3
 %
 
(16
)%
Amortization of deferred acquisition costs
5,170

 
5,326

 
7,967

 
(3
)%
 
(33
)%
Other underwriting expenses
6,638

 
6,850

 
17,846

 
(3
)%
 
(62
)%
Total underwriting, acquisition and insurance expenses
15,669

 
15,908

 
30,262

 
(2
)%
 
(47
)%
Interest expense
6,863

 
7,952

 
8,532

 
(14
)%
 
(7
)%
Other expenses
18,414

 
20,513

 
20,652

 
(10
)%
 
(1
)%
Total benefits and expenses
71,129

 
75,094

 
88,675

 
(5
)%
 
(15
)%
 
25,646

 
18,349

 
1,905

 
40
 %
 
863
 %
Net (income) loss attributable to noncontrolling interest
165

 
83

 
(6
)
 
99
 %
 
(1,483
)%
Equity income (loss), before tax
(3,639
)
 
(1,576
)
 
394

 
131
 %
 
(500
)%
Pre-tax operating income
$
22,172

 
$
16,856

 
$
2,293

 
32
 %
 
635
 %


32