XNYS:FFG FBL Financial Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:FFG Fair Value Estimate
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XNYS:FFG Consider Buying
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XNYS:FFG Consider Selling
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XNYS:FFG Fair Value Uncertainty
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XNYS:FFG Economic Moat
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q

(Mark one)
 
 
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended June 30, 2012
 
 
 
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)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [X] No
 
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 July 31, 2012
Class A Common Stock, without par value
 
25,092,137
Class B Common Stock, without par value
 
1,192,990



FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
TABLE OF CONTENTS


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


1


ITEM 1. FINANCIAL STATEMENTS

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

 
June 30,
2012
 
December 31,
2011
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2012 - $5,506,440; 2011 - $5,189,994)
$
6,015,884

 
$
5,570,550

Equity securities - available for sale, at fair value (cost: 2012 - $67,437; 2011 - $55,697)
69,541

 
57,432

Mortgage loans
545,951

 
552,359

Real estate
4,672

 
2,541

Policy loans
175,200

 
172,368

Short-term investments
28,697

 
41,756

Other investments
337

 
189

Total investments
6,840,282

 
6,397,195

 
 
 
 
Cash and cash equivalents
168,688

 
296,339

Restricted debt defeasance trust assets

 
211,627

Securities and indebtedness of related parties
81,299

 
64,516

Accrued investment income
68,959

 
67,200

Amounts receivable from affiliates
2,806

 
3,942

Reinsurance recoverable
95,987

 
94,685

Deferred acquisition costs
226,180

 
260,256

Value of insurance in force acquired
21,828

 
25,781

Current income taxes recoverable
5,481

 
16,334

Other assets
62,954

 
67,590

Assets held in separate accounts
617,538

 
603,903

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
8,192,002

 
$
8,109,368


 

2




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

 
June 30,
2012
 
December 31,
2011
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
3,986,542

 
$
3,744,857

Traditional life insurance and accident and health products
1,432,989

 
1,401,995

Other policy claims and benefits
35,521

 
40,488

Supplementary contracts without life contingencies
361,733

 
359,663

Advance premiums and other deposits
221,856

 
211,573

Amounts payable to affiliates
163

 
713

Short-term debt payable to non-affiliates

 
174,258

Long-term debt payable to affiliates
49,973

 
49,968

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

 
97,000

Deferred income taxes
132,637

 
100,341

Other liabilities
97,261

 
122,180

Liabilities related to separate accounts
617,538

 
603,903

Total liabilities
7,033,213

 
6,906,939

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

 
3,000

Class A common stock, without par value - authorized 88,500,000 shares, issued and outstanding 25,559,881 shares in 2012 and 29,457,644 shares in 2011
118,060

 
129,684

Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 1,192,990 shares
7,522

 
7,522

Accumulated other comprehensive income
233,110

 
177,845

Retained earnings
797,100

 
884,263

Total FBL Financial Group, Inc. stockholders' equity
1,158,792

 
1,202,314

Noncontrolling interest
(3
)
 
115

Total stockholders' equity
1,158,789

 
1,202,429

Total liabilities and stockholders' equity
$
8,192,002

 
$
8,109,368
















See accompanying notes.

3


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

 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Interest sensitive product charges
$
24,190

 
$
24,046

 
$
49,422

 
$
48,175

Traditional life insurance premiums
45,908

 
44,139

 
89,031

 
85,526

Net investment income
89,423

 
88,066

 
176,311

 
171,851

Net realized capital gains on sales of investments
4,411

 
2,071

 
5,290

 
4,331

 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
(3,679
)
 
(7,192
)
 
(14,980
)
 
(12,919
)
Non-credit portion in other comprehensive income

 
5,111

 
9,779

 
8,686

Net impairment losses recognized in earnings
(3,679
)
 
(2,081
)
 
(5,201
)
 
(4,233
)
Other income
5,729

 
3,980

 
10,734

 
8,979

Total revenues
165,982

 
160,221

 
325,587

 
314,629

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Interest sensitive product benefits
49,328

 
48,220

 
98,410

 
94,841

Traditional life insurance benefits
40,341

 
37,717

 
79,452

 
74,315

Policyholder dividends
3,370

 
4,356

 
7,614

 
8,656

Underwriting, acquisition and insurance expenses
34,374

 
27,252

 
67,101

 
60,503

Interest expense
1,983

 
2,153

 
3,965

 
4,541

Loss on debt redemption

 

 
33

 

Other expenses
6,683

 
6,001

 
12,473

 
10,882

Total benefits and expenses
136,079

 
125,699

 
269,048

 
253,738

 
29,903

 
34,522

 
56,539

 
60,891

Income taxes
(10,256
)
 
(10,355
)
 
(19,014
)
 
(18,673
)
Equity income, net of related income taxes
630

 
57

 
2,251

 
788

Net income from continuing operations
20,277

 
24,224

 
39,776

 
43,006

Discontinued operations:
 
 
 
 
 
 
 
Loss on sale of subsidiary

 

 
(2,252
)
 

Income (loss) from discontinued operations, net of tax
(84
)
 
11,997

 
(764
)
 
18,264

Total income (loss) from discontinued operations
(84
)
 
11,997

 
(3,016
)
 
18,264

Net income
20,193

 
36,221

 
36,760

 
61,270

Net loss attributable to noncontrolling interest
98

 
18

 
118

 
20

Net income attributable to FBL Financial Group, Inc.
$
20,291

 
$
36,239

 
$
36,878

 
$
61,290

 
 
 
 
 
 
 
 
Comprehensive income
$
72,464

 
$
87,872

 
$
92,025

 
$
129,667

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.74

 
$
0.79

 
$
1.37

 
$
1.40

Income (loss) from discontinued operations

 
0.39

 
(0.10
)
 
0.60

Earnings per common share
$
0.74

 
$
1.18

 
$
1.27

 
$
2.00

Earnings per common share - assuming dilution:
 
 
 
 
 
 
 
Income from continuing operations
$
0.73

 
$
0.78

 
$
1.35

 
$
1.38

Income (loss) from discontinued operations

 
0.38

 
(0.10
)
 
0.58

Earnings per common share - assuming dilution
$
0.73

 
$
1.16

 
$
1.25

 
$
1.96

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.1000

 
$
0.0625

 
$
0.2000

 
$
0.1250




See accompanying notes.

4


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
 
FBL Financial Group, Inc. Stockholders' Equity
 
 
 
 
 
Series B Preferred Stock
 
Class A and Class B Common Stock (a)
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Non-
controlling Interest
 
Total Stockholders' Equity
Balance at January 1, 2011    
$
3,000

 
$
125,687

 
$
51,644

 
$
864,303

 
$
92

 
$
1,044,726

Comprehensive income
 
 
 
 
 
 
 
 
 
 

Net income - six months ended June 30, 2011

 

 

 
61,290

 
(20
)
 
61,270

Change in net unrealized investment gains/losses

 

 
74,900

 

 

 
74,900

Non-credit impairment losses

 

 
(6,498
)
 

 

 
(6,498
)
Change in underfunded status of other postretirement benefit plans

 

 
(5
)
 

 

 
(5
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
129,667

Stock-based compensation, including the net issuance of 264,338 common shares under compensation plans

 
7,940

 

 

 

 
7,940

Dividends on preferred stock

 

 

 
(75
)
 

 
(75
)
Dividends on common stock

 

 

 
(3,812
)
 

 
(3,812
)
Receipts related to noncontrolling interest

 

 

 

 
1

 
1

Balance at June 30, 2011
$
3,000

 
$
133,627

 
$
120,041

 
$
921,706

 
$
73

 
$
1,178,447

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2012    
$
3,000

 
$
137,206

 
$
177,845

 
$
884,263

 
$
115

 
$
1,202,429

Total comprehensive income
 
 
 
 
 
 
 
 
 
 

Net income - six months ended June 30, 2012

 

 

 
36,878

 
(118
)
 
36,760

Change in net unrealized investment gains/losses

 

 
61,717

 

 

 
61,717

Non-credit impairment losses

 

 
(6,356
)
 

 

 
(6,356
)
Change in underfunded status of other postretirement benefit plans

 

 
(96
)
 

 

 
(96
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
92,025

Stock-based compensation, including the net issuance of 204,833 common shares under compensation plans

 
6,627

 

 

 

 
6,627

Purchase of 4,102,596 shares of common stock

 
(18,251
)
 

 
(118,215
)
 

 
(136,466
)
Dividends on preferred stock

 

 

 
(75
)
 

 
(75
)
Dividends on common stock

 

 

 
(5,751
)
 

 
(5,751
)
Balance at June 30, 2012
$
3,000

 
$
125,582

 
$
233,110

 
$
797,100

 
$
(3
)
 
$
1,158,789


(a)
All activity for the periods shown relates to Class A Common Stock.




















See accompanying notes.

5


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

 
Six months ended June 30,
 
2012
 
2011
Operating activities (1)
 
 
 
Net income
$
36,760

 
$
61,270

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
70,323

 
230,867

Charges for mortality, surrenders and administration
(47,420
)
 
(56,844
)
Net realized (gains) losses on investments
(89
)
 
6,011

Change in fair value of derivatives
274

 
(27,878
)
Increase in traditional life and accident and health benefit liabilities
30,995

 
16,967

Deferral of acquisition costs
(25,985
)
 
(59,695
)
Amortization of deferred acquisition costs and value of insurance in force
18,144

 
47,534

Change in reinsurance recoverable
(1,302
)
 
4,800

Provision for deferred income taxes
3,420

 
(2,392
)
Loss on sale of subsidiary
2,252

 

Loss on debt redemption
33

 

Other
(40,573
)
 
(18,849
)
Net cash provided by operating activities
46,832

 
201,791

 
 
 
 
Investing activities (1)
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
306,850

 
592,334

Equity securities - available for sale
7,079

 

Mortgage loans
28,878

 
41,784

Derivative instruments

 
52,433

Policy loans
16,941

 
20,653

Acquisitions:
 
 
 
Fixed maturities - available for sale
(595,177
)
 
(1,149,646
)
Equity securities - available for sale
(18,510
)
 
(2,364
)
Mortgage loans
(23,880
)
 
(29,740
)
Derivative instruments
(120
)
 
(29,109
)
Policy loans
(19,773
)
 
(20,941
)
Securities and indebtedness of related parties
(17,899
)
 
(11,694
)
Short-term investments, net change
13,059

 
329,375

Purchases and disposals of property and equipment, net
(855
)
 
(3,130
)
Net cash used in investing activities
(303,407
)
 
(210,045
)



6


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

 
Six months ended June 30,
 
2012
 
2011
Financing activities (1)
 
 
 
Contract holder account deposits
$
422,809

 
$
789,831

Contract holder account withdrawals
(197,375
)
 
(613,212
)
Transfer from restricted debt defeasance trusts
211,627

 

Repayments of debt
(174,258
)
 

Receipts related to noncontrolling interests, net

 
1

Excess tax deductions on stock-based compensation
2,251

 
339

Issuance (repurchase) of common stock, net
(130,304
)
 
4,800

Dividends paid
(5,826
)
 
(3,887
)
Net cash provided by financing activities
128,924

 
177,872

Increase (decrease) in cash and cash equivalents
(127,651
)
 
169,618

Cash and cash equivalents at beginning of period
296,339

 
4,794

Cash and cash equivalents at end of period
$
168,688

 
$
174,412

 
 
 
 
Supplemental disclosures of cash flow information (1)
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
7,433

 
$
11,691

Income taxes
(1,556
)
 
20,577

Non-cash operating activity:
 
 
 
Deferral of sales inducements
1,064

 
27,278

Non-cash financing activity:
 
 
 
Refinancing of debt payable to affiliates

 
100,000


(1)
Our consolidated statements of cash flows combine the cash flows from discontinued operations with the cash flows from continuing operations within each major category (operating, investing and financing) of the statement and supplemental disclosures.























See accompanying notes.

7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2012

1. Significant Accounting Policies

Basis of Presentation

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

Operating results for the three and six-month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgments and estimates and other information necessary to understand our financial position and results of operations.

See Note 2 for information on the recent sale of our former subsidiary, EquiTrust Life Insurance Company (EquiTrust Life). Financial results of this business component have been reclassified in the prior period financial statements and excluded from the notes to the consolidated financial statements, unless otherwise noted.

Adoption of Recent Accounting Pronouncements

Effective January 1, 2012, we adopted guidance issued by the Financial Accounting Standards Board (FASB) related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance defines allowable deferred acquisition costs as the incremental direct cost of contract acquisition and certain costs related directly to underwriting, policy issuance and processing. This guidance also allows for the deferral of advertising costs if directly linked to a sale. We have applied the guidance retrospectively, resulting in a reduction to stockholders' equity of $75.8 million at January 1, 2012 and $101.7 million at January 1, 2011. Income from continuing operations for the second quarter of 2011 was reduced by $0.6 million ($0.02 per basic and diluted common share), and $1.5 million ($0.05 per basic and diluted common share) for the six months ended June 30, 2011. Income from discontinued operations for the second quarter of 2011 was reduced by $0.7 million ($0.02 per basic and diluted common share) and $1.3 million ($0.04 per basic and diluted common share) for the six months ended June 30, 2011. The following tables present the effect of the change on financial statement line items for prior periods that were retrospectively adjusted:
Consolidated Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 Prior to Adoption
 
Currently Reported
 
Impact
 
(Dollars in thousands)
Assets:
 
 
 
 
 
Deferred acquisition costs
$
376,797

 
$
260,256

 
$
(116,541
)
Liabilities:
 
 
 
 
 
Deferred income taxes
141,130

 
100,341

 
(40,789
)
Stockholders' equity:
 
 
 
 
 
Accumulated other comprehensive income
149,622

 
177,845

 
28,223

Retained earnings
988,238

 
884,263

 
(103,975
)
Impact to stockholders' equity
 
 
 
 
$
(75,752
)


8

June 30, 2012

Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2011
 
Six months ended June 30, 2011
 
 Prior to Adoption
 
Currently Reported
 
Impact
 
 Prior to Adoption
 
Currently Reported
 
Impact
 
(Dollars in thousands)
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
Underwriting, acquisition and insurance expenses
$
26,314

 
$
27,252

 
$
(938
)
 
$
58,253

 
$
60,503

 
$
(2,250
)
Income taxes
10,683

 
10,355

 
328

 
19,460

 
18,673

 
787

Income from continuing operations
 
 
 
 
(610
)
 
 
 
 
 
(1,463
)
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations
12,696

 
11,997

 
(699
)
 
19,551

 
18,264

 
(1,287
)
Net income attributable to FBL Financial Group, Inc.
 
 
 
 
$
(1,309
)
 
 
 
 
 
$
(2,750
)

Effective January 1, 2012, we adopted guidance issued by the FASB related to the presentation of comprehensive income. This guidance requires us to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance removes the presentation option allowing comprehensive income disclosures in the statement of changes in stockholders' equity, but does not change the items that must be reported in other comprehensive income. We have elected to present a single continuous statement for the 2012 interim reporting periods and expect to present a separate statement of comprehensive income immediately following our consolidated statements of operations for annual periods. Other than this presentation change, the adoption of this guidance did not have any impact on our consolidated financial statements.

Reclassifications

The 2011 consolidated financial statements have been reclassified to conform to the current financial statement presentation.

2. Discontinued Operations

On December 30, 2011, we sold our wholly-owned subsidiary, EquiTrust Life. The loss on sale of subsidiary recorded during 2012 includes a $3.5 million pre-tax reduction in the preliminary purchase price due to post-closing adjustments based on a final statutory net worth reconciliation. The adoption of new accounting guidance related to deferred acquisition costs discussed in Note 1 reduced the loss on sale reported in the fourth quarter of 2011 by $14.4 million, after tax. The total after-tax loss on the sale of EquiTrust Life after these adjustments was $56.4 million.

As a result of the sale, our consolidated financial statements are presented to reflect the operations of the component sold as discontinued operations. A summary of income (loss) from discontinued operations is as follows:

Condensed Statements of Income (Loss) from Discontinued Operations
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in thousands)
Revenues
$

 
$
107,997

 
$

 
$
244,892

Benefits and expenses
(129
)
 
(86,035
)
 
(320
)
 
(210,011
)
Interest expense allocation

 
(3,477
)
 
(855
)
 
(7,199
)
Equity income

 
534

 

 
1,563

Income taxes
45

 
(7,022
)
 
411

 
(10,981
)
Income (loss) from discontinued operations
$
(84
)
 
$
11,997

 
$
(764
)
 
$
18,264


Charges recorded in connection with the disposal of business included estimates that are subject to subsequent adjustment. Interest expense in 2012 relates to unaffiliated debt extinguished on January 30, 2012 as discussed below.

Notes Redemptions

In connection with the EquiTrust Life sale, we redeemed $225.0 million of our long-term debt in accordance with the mandatory redemption provisions of the underlying notes. This included $50.0 million Senior Notes with our affiliate, Farm

9

June 30, 2012

Bureau Property & Casualty Insurance Company (Farm Bureau Property & Casualty), which was extinguished on December 30, 2011. The remaining $175.0 million of unaffiliated debt was extinguished on January 30, 2012, at the make-whole redemption price of $210.9 million. On December 30, 2011, we exercised the provisions of the trust indentures and deposited $211.6 million into two irrevocable defeasance trusts for the principal, accrued interest and estimated make-whole premium. The trust funds were not withdrawable by us, and consisted of $126.4 million in cash and $85.2 million in short-term investments at December 31, 2011. The note holders were paid from assets in the trusts on January 30, 2012.
 
The make-whole redemption premium was based on U.S. Treasury yields and considered an embedded derivative. Due to the EquiTrust Life sale, this derivative liability had a fair value of $33.1 million at December 31, 2011. The change in fair value during the first quarter of 2012 was offset by the write-off of deferred debt issuance costs and reported as loss on debt redemption in the consolidated statements of comprehensive income.

3. Investment Operations

Fixed Maturity and Equity Securities
 
Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
June 30, 2012
 
Amortized
 Cost
 
Gross
 Unrealized
 Gains
 
Gross
 Unrealized
 Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
2,768,789

 
$
339,359

 
$
(22,628
)
 
$
3,085,520

 
$
(5,979
)
Residential mortgage-backed
685,036

 
40,791

 
(13,201
)
 
712,626

 
(10,914
)
Commercial mortgage-backed
473,628

 
48,195

 
(8,588
)
 
513,235

 

Other asset-backed
486,935

 
8,281

 
(22,239
)
 
472,977

 
(8,153
)
Collateralized debt obligation (3)
20

 

 

 
20

 

United States Government and agencies
43,545

 
7,433

 

 
50,978

 

State, municipal and other governments
1,048,487

 
135,121

 
(3,080
)
 
1,180,528

 

Total fixed maturities
$
5,506,440

 
$
579,180

 
$
(69,736
)
 
$
6,015,884

 
$
(25,046
)
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
41,014

 
$
2,461

 
$
(814
)
 
$
42,661

 
$

Common stocks
26,423

 
457

 

 
26,880

 

Total equity securities
$
67,437

 
$
2,918

 
$
(814
)
 
$
69,541

 
$


10

June 30, 2012

 
December 31, 2011
 
Amortized
 Cost
 
Gross
 Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities :
 
 
 
 
 
 
 
 
 
Corporate (2)
$
2,650,113

 
$
290,688

 
$
(42,654
)
 
$
2,898,147

 
$
(6,592
)
Residential mortgage-backed
652,585

 
39,789

 
(16,435
)
 
675,939

 
(2,028
)
Commercial mortgage-backed
452,980

 
46,935

 
(9,020
)
 
490,895

 

Other asset-backed
392,182

 
2,058

 
(26,080
)
 
368,160

 
(10,205
)
Collateralized debt obligation (3)
270

 

 

 
270

 

United States Government and agencies
45,231

 
7,446

 

 
52,677

 

State, municipal and other governments
996,633

 
92,968

 
(5,139
)
 
1,084,462

 

Total fixed maturities
$
5,189,994

 
$
479,884

 
$
(99,328
)
 
$
5,570,550

 
$
(18,825
)
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
33,149

 
$
1,777

 
$
(524
)
 
$
34,402

 
$

Common stocks
22,548

 
482

 

 
23,030

 

Total equity securities
$
55,697

 
$
2,259

 
$
(524
)
 
$
57,432

 
$


(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairments are included in the gross unrealized gains and losses columns above.
(2)
Corporate securities include hybrid preferred securities with a carrying value of $122.3 million at June 30, 2012 and $116.7 million at December 31, 2011. Corporate securities also include redeemable preferred stock with a carrying value of $5.9 million at June 30, 2012 and $5.5 million at December 31, 2011.
(3)
The collateralized debt obligation includes an embedded credit derivative; accordingly, changes in its fair value are realized as derivative income (loss) which is included within net investment income in the consolidated statements of comprehensive income.

Short-term investments have been excluded from the above schedules as amortized cost approximates fair value for these securities.

Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
 
 
 
 
June 30, 2012
 
Amortized
 Cost
 
Estimated
Fair Value
 
(Dollars in thousands)
Due in one year or less
$
67,372

 
$
68,838

Due after one year through five years
522,332

 
555,188

Due after five years through ten years
1,243,533

 
1,395,835

Due after ten years
2,027,604

 
2,297,185

 
3,860,841

 
4,317,046

Mortgage-backed and other asset-backed
1,645,599

 
1,698,838

Total fixed maturities
$
5,506,440

 
$
6,015,884


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



11

June 30, 2012

Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income
 
 
 
 
 
June 30,
2012
 
December 31,
2011
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
509,444

 
$
380,556

Equity securities - available for sale
2,104

 
1,735

 
511,548

 
382,291

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(150,069
)
 
(104,875
)
Value of insurance in force acquired
(14,017
)
 
(12,281
)
Unearned revenue reserve
11,177

 
8,312

Provision for deferred income taxes
(125,519
)
 
(95,688
)
 
233,120

 
177,759

Proportionate share of net unrealized investment losses of equity investees
(13
)
 
(13
)
Net unrealized investment gains
$
233,107

 
$
177,746


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

Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Estimated
 Fair Value
 
Unrealized Losses
 
Estimated
 Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
134,895

 
$
(3,570
)
 
$
131,827

 
$
(19,058
)
 
$
266,722

 
$
(22,628
)
 
32.5
%
Residential mortgage-backed
 
59,923

 
(600
)
 
56,226

 
(12,601
)
 
116,149

 
(13,201
)
 
18.9

Commercial mortgage-backed
 
23,471

 
(233
)
 
57,050

 
(8,355
)
 
80,521

 
(8,588
)
 
12.3

Other asset-backed
 
82,135

 
(2,009
)
 
53,945

 
(20,230
)
 
136,080

 
(22,239
)
 
31.9

State, municipal and other governments
 
26,470

 
(98
)
 
15,323

 
(2,982
)
 
41,793

 
(3,080
)
 
4.4

Total fixed maturities
 
$
326,894

 
$
(6,510
)
 
$
314,371

 
$
(63,226
)
 
$
641,265

 
$
(69,736
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
2,994

 
$
(6
)
 
$
7,191

 
$
(808
)
 
$
10,185

 
$
(814
)
 
 
Total equity securities
 
$
2,994

 
$
(6
)
 
$
7,191

 
$
(808
)
 
$
10,185

 
$
(814
)
 
 


12

June 30, 2012

 
 
December 31, 2011
 
 
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Estimated
 Fair Value
 
Unrealized Losses
 
Estimated
 Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
248,879

 
$
(9,787
)
 
$
134,913

 
$
(32,867
)
 
$
383,792

 
$
(42,654
)
 
42.9
%
Residential mortgage-backed
 
19,923

 
(293
)
 
56,309

 
(16,142
)
 
76,232

 
(16,435
)
 
16.5

Commercial mortgage-backed
 
44,732

 
(3,872
)
 
39,790

 
(5,148
)
 
84,522

 
(9,020
)
 
9.1

Other asset-backed
 
82,801

 
(3,632
)
 
49,580

 
(22,448
)
 
132,381

 
(26,080
)
 
26.3

State, municipal and other governments
 
2,932

 
(45
)
 
50,328

 
(5,094
)
 
53,260

 
(5,139
)
 
5.2

Total fixed maturities
 
$
399,267

 
$
(17,629
)
 
$
330,920

 
$
(81,699
)
 
$
730,187

 
$
(99,328
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
2,878

 
$
(122
)
 
$
7,598

 
$
(402
)
 
$
10,476

 
$
(524
)
 
 
Total equity securities
 
$
2,878

 
$
(122
)
 
$
7,598

 
$
(402
)
 
$
10,476

 
$
(524
)
 
 

Included in the above tables are 208 securities from 166 issuers at June 30, 2012 and 249 securities from 204 issuers at December 31, 2011. The unrealized losses in fixed maturities are primarily due to wider spreads between the risk-free and corporate and other bond yields relative to the spreads when the securities were purchased. We do not intend to sell or believe we will be required to sell any of our impaired fixed maturity securities before recovery of their amortized cost basis. The following summarizes the more significant unrealized losses of fixed maturities and equity securities by investment category as of June 30, 2012.

Corporate securities: The largest losses remain in the finance sector ($135.2 million carrying value and $15.3 million unrealized loss). The largest unrealized losses in the finance sector were in the banking ($85.6 million carrying value and $12.3 million unrealized loss) and the insurance ($20.7 million carrying value and $1.3 million unrealized loss) sub-sectors. The unrealized losses across the finance sector are primarily attributable to a general widening in spread levels relative to the spreads at which we acquired the securities. Finance sector spreads have narrowed but remain historically wide in comparison to the narrowing experienced in the remaining sectors, contributing to the proportionately larger amount of unrealized losses for this sector. Unrealized losses on the remaining corporate securities are generally due to spread widening among several individual issuers.

Residential mortgage-backed securities: The unrealized losses on residential mortgage-backed securities were caused primarily by continued uncertainty regarding mortgage defaults on Alt-A loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.

Commercial mortgage-backed securities: The unrealized losses on commercial mortgage-backed securities were caused primarily by spread widening and industry concerns regarding the potential for future commercial mortgage defaults. The contractual cash flows of these investments are based on mortgages backing the securities. Unrealized losses on military housing bonds were mainly attributed to a limited number of investors and negative publicity regarding this sector. The military housing bonds are also impacted by lack of printed underlying ratings on insured bonds.

Other asset-backed securities: The unrealized losses on other asset-backed securities were caused primarily by concerns regarding defaults on subprime mortgages and home equity loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.

State, municipal and other governments: The unrealized losses on state, municipal and other governments were primarily caused by general spread widening relative to spreads at which we acquired the bonds. The decline in fair value is primarily attributable to increased spreads on lower-rated bonds and market concerns regarding specific areas of the sector.

Equity securities: Our gross unrealized losses were on investment grade non-redeemable perpetual preferred securities within the finance sector. These securities provide periodic cash flows, contain call features and are similarly rated and priced like other long-term callable bonds and are evaluated for other-than-temporary impairment similar to fixed maturities. The decline in fair value is primarily attributable to market concerns regarding the sector. We have evaluated the near-term prospects of our

13

June 30, 2012

equity securities in relation to the severity and duration of their impairment and based on that evaluation have the ability and intent to hold these investments until recovery of fair value.

Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $4.5 million at June 30, 2012, with the largest unrealized loss from hybrid Tier 1 capital bonds in the financial sector. With respect to mortgage and asset-backed securities not backed by the United States Government, no securities from the same issuer had an aggregate unrealized loss in excess of $9.0 million at June 30, 2012, which consists of three different securities from the same issuer that are backed by different pools of Alt-A residential mortgage loans. All three of the securities are rated non-investment grade and the largest unrealized loss totaled $5.2 million.

The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. When our review indicates a decline in fair value for a fixed maturity security is other-than-temporary and we do not intend to sell or believe we will be required to sell the security before recovery of our amortized cost, a specific write down is charged to earnings for the credit loss and a specific charge is recognized in accumulated other comprehensive income for the non-credit loss component. If we intend to sell or believe we will be required to sell a fixed maturity security before its recovery, the full amount of the impairment write down to fair value is charged to earnings. For all equity securities, the full amount of an other-than-temporary impairment write down is recognized as a realized loss on investments in the consolidated statements of comprehensive income and the new cost basis for the security is equal to its fair value.

We monitor the financial condition and operations of the issuers of fixed maturities and equity securities that could potentially have a credit impairment that is other-than-temporary. In determining whether or not an unrealized loss is other-than-temporary, we review factors such as:

historical operating trends;
business prospects;
status of the industry in which the company operates;
analyst ratings on the issuer and sector;
quality of management;
size of unrealized loss;
level of current market interest rates compared to market interest rates when the security was purchased; and
length of time the security has been in an unrealized loss position.

In order to determine the credit and non-credit impairment loss for fixed maturities, every quarter we estimate the future cash flows we expect to receive over the remaining life of the instrument as well as review our plans to hold or sell the instrument. Significant assumptions regarding the present value of expected cash flows for each security are used when an other-than-temporary impairment occurs and there is a non-credit portion of the unrealized loss that won't be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities include collateral pledged, guarantees, vintage, anticipated principal and interest payments, prepayments, default levels, severity assumptions, delinquency rates and the level of nonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturities include anticipated principal and interest payments and an estimated recovery value, generally based on a percentage return of the current market value.

After an other-than-temporary write down of all equity securities and any fixed maturities with a credit-only impairment, the cost basis is generally not adjusted for subsequent recoveries in fair value. For fixed maturities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the remaining life of the security. Amortization in this instance is computed using the prospective method and the current estimate of the amount and timing of future cash flows.

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities

The following table sets forth the amount of credit loss impairments on fixed maturities we held as of the dates indicated for which a portion of the other-than-temporary impairment was recognized in other comprehensive income and corresponding changes in such amounts.


14

June 30, 2012

 
Six months ended June 30,
 
2012

2011
 
(Dollars in thousands)
Balance at beginning of period
$
(22,746
)
 
$
(29,603
)
Increases for which an impairment was not previously recognized
(847
)
 

Increases to previously impaired investments

 
(1,905
)
Reductions due to investments sold
85

 
59

Reductions due to intent to sell investments
40

 
273

Balance at end of period
$
(23,468
)
 
$
(31,176
)

Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Gross gains
$
4,227

 
$
2,235

 
$
4,648

 
$
4,485

Gross losses
(21
)
 
(164
)
 
(435
)
 
(164
)
Equity securities
205

 

 
310

 

Mortgage loans

 

 
767

 

Securities and indebtedness of related parties

 

 

 
10

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

 
(1,192
)
 
(847
)
 
(1,905
)
Other credit-related (2)
(3,679
)
 
(889
)
 
(4,354
)
 
(2,328
)
Realized gains (losses) on investments recorded in income
$
732

 
$
(10
)
 
$
89

 
$
98


(1)
Amount represents the credit-related losses recognized for fixed maturities which were not written down to fair value. As discussed above the non-credit portion of the losses have been recognized in other comprehensive income.
(2)
Amount represents credit-related losses for mortgage loans, real estate and fixed maturities written down to fair value.

Proceeds from sales of fixed maturities totaled $68.0 million at June 30, 2012 and $51.1 million at June 30, 2011.
  
Realized gains and losses on sales of investments are determined on the basis of specific identification.

Mortgage Loans

Our mortgage loan portfolio consists principally of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to-value ratio that provides sufficient excess collateral to absorb losses should we be required to foreclose and take possession of the collateral. In order to identify impairment losses timely, management maintains and reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and establish an allowance as needed for possible losses against our mortgage loan portfolio. An allowance is needed for loans in which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements or a modification which has been classified as a troubled debt restructuring.

Any loans delinquent on contractual payments are considered non-performing. Non-performing loans totaled $16.8 million at June 30, 2012 and $18.9 million at December 31, 2011. At June 30, 2012, there were two non-performing loans over 90 days past due on contractual payments with a carrying value of $16.8 million. At December 31, 2011, there were three non-performing loans over 90 days past due on contractual payments with a carrying value of $18.9 million. During the first quarter of 2012, we foreclosed on one non-performing loan with a book value of $2.1 million at December 31, 2011 and took possession of the real estate with an appraised value of $2.4 million . We discontinued the accrual of interest on the two loans totaling $16.8 million at June 30, 2012 and two loans totaling $4.0 million at December 31, 2011.

15

June 30, 2012


Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
December 31, 2011
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
226,283

 
41.4
%
 
$
234,853

 
42.5
%
Retail
 
190,668

 
34.9

 
178,954

 
32.4

Industrial
 
120,974

 
22.2

 
130,498

 
23.6

Other
 
8,026

 
1.5

 
8,054

 
1.5

Total
 
$
545,951

 
100.0
%
 
$
552,359

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
December 31, 2011
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
167,507

 
30.7
%
 
$
162,363

 
29.4
%
Pacific
 
96,913

 
17.8

 
99,486

 
18.0

East North Central
 
85,311

 
15.6

 
93,159

 
16.9

West North Central
 
71,213

 
13.0

 
70,277

 
12.7

West South Central
 
43,748

 
8.0

 
49,184

 
8.9

Mountain
 
28,987

 
5.3

 
28,099

 
5.1

Other
 
52,272

 
9.6

 
49,791

 
9.0

Total
 
$
545,951

 
100.0
%
 
$
552,359

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
December 31, 2011
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
(Dollars in thousands)
0% - 50%
$
179,411

 
32.9
%
 
$
144,915

 
26.2
%
51% - 60%
135,273

 
24.8

 
172,318

 
31.2

61% - 70%
175,700

 
32.2

 
171,146

 
31.0

71% - 80%
53,677

 
9.8

 
55,247

 
10.0

81% - 90%
1,890

 
0.3

 
8,733

 
1.6

Total
$
545,951

 
100.0
%
 
$
552,359

 
100.0
%

Loan-to-value ratio uses the most recent appraised value. Appraisals are updated when there is indication of a possible significant collateral decline or loan modification and refinance requests.



16

June 30, 2012

Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
December 31, 2011
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
(Dollars in thousands)
2012
$
23,860

 
4.4
%
 
$

 
%
2011
48,000

 
8.8

 
48,557

 
8.8

2010
28,009

 
5.1

 
28,578

 
5.2

2008
71,311

 
13.1