Cautionary Statement Regarding Forward Looking Information

PART I

ITEM 1. BUSINESS

General

FBL Financial Group, Inc. Business and Distribution Channels

Business Strategy

We provide our agents with marketing and sales materials, training and a high level of field management and sales support. Additionally, the field sales support team includes Life Sales Advisors and Regional Financial Consultants who work as a resource to help agents with life and annuity sales.

Our sales model is designed so that our agents act likeare 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.

This business strategy and sales model results in deep customer engagement and long-term customer relationships. Our agents are often viewed as the go-to person for all the insurance needs of their customers. As a result, while we underwrite the majority of the life and annuity 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 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. Agents who

During 2018 and continuing in 2019, we are Investment Advisor Representatives (IARs) offer fee-based financial planning. In 2018 we plan to launchexecuting on a wealth management initiative that will allowstrategy which allows us to offer an open architecture mutual fund platform. With this initiative, in 2018platform and fee based financial planning. For several years, we plan to expandhave had a limited number of agents who are Investment Advisor Representatives (IARs) and offered fee-based financial planning. In 2019, we are expanding the advisory services offered by our IARs and createadding a new role known as the Farm Bureau Wealth Management Advisor. These advisors will serve as wealth management resources to other Farm Bureau Financial Services agents. Once implemented, we expect this initiativeThis wealth management strategy will allow our agents to add more value, enhance the customer experience and further strengthen the agent/customer relationship. We expect that this will also add a diversified earnings stream to FBL Financial Group given the fee-based nature of wealth management. This is a long term strategy that we expect to invest in and build outgrow over time.

Marketing and Distribution

Market Area

Affiliation with Farm Bureau Organizations

Agency Force

Business Segments

Annuity Segment

Fixed Rate Annuities

Withdrawal Rates

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'sproduct’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 2.12% at December 31, 2018 and 2.18% at December 31, 2017 and 2.24% at December 31, 2016.2017. The weighted average interest rate guarantees on annuity contracts issued during 20172018 was 1.00%.

Indexed Annuities

Life Insurance Segment

Traditional Life Insurance

Universal Life Insurance

Underwriting

Interest Crediting and Participating Dividend Policy

 

Corporate and Other Segment

We previously issued our own variable products, but in 2010 discontinued underwriting new sales. The existing in force business remains on our books and we continue to administer this business. Variable premiums collected from prior sales were $50.0 million in 2018, $53.6 million in 2017 and $58.3 million in 2016 and $63.8 million in 2015.2016. For a period between 2010 and 2017, we soldearned fees from the sale of variable products underwritten by another insurance company with variable product expertise. This was discontinued in 2017. We earned fees from the sale of these brokered products and we are not responsible for administering this business. A portion of these revenues was passed on to our agents as commissions for the underlying sales.

Reinsurance

Ratings and Competition

Regulation

All segments of our business are highly regulated. See "ItemItem 1A. Risk Factors."

Employees

ITEM 1A. RISK FACTORS

Risk Factors

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'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 contractual minimum crediting rate guarantees. 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.

Conversely, in periods of rapidly increasing interest rates, surrenders and withdrawals may increase as policyholders seek financial instruments with higher investment returns, commonly referred to as disintermediation. This may lead to net cash outflows and the resulting liquidity demands may require us to sell investments when the prices of those assets are adversely affected by the increase in interest rates, which may result in realized investment losses.

See "ItemItem 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risks of Financial Instruments"Instruments for further discussion of our interest rate risk exposure and information regarding our asset-liability management program.

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. The U.S. economy appeared to finish 2018 with moderately above-trend growth for the year, but the global economy has slowed noticeably from a year ago. In the financial markets, liquidity,U.S. Treasury yields declined at year-end, while corporate profitabilityspreads widened due to concerns over the potential impact of trade tensions and moderatethe global economic growth continue to supportslowdown on fundamental credit quality. However, strong demand for U.S. assets has constrained interest rates broadly, challenging growth inPortfolio investment income and resulting in declining portfolio investment yields will continue to decline across the life insurance and annuity industry.industry as long as market yields remain below portfolio yields.

Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economy characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business

base operates in the agricultural industry; accordingly, fluctuations in commodity prices, federal subsidies, the impact of tariffs and the value of farm land may impact our customers'customers’ demand for our insurance and investment products. We also may experience a higher incidence of claims, lapses or surrenders of policies following such fluctuations. We cannot predict with certainty 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.

Capital requirements depend on factors including the rate of sales growth of our products, aggregate reserve levels and the levels of risks in our insurance products and invested assets. In order to meet these capital requirements, we may need to increase or maintain Farm Bureau Life'sLife’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 additional financing, thereby ultimately impacting our profitability, liquidity and ability to support or grow our businesses. Without sufficient capital and liquidity, 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.

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 during and after periods of volatile and illiquid market conditions, increasing the difficulty in valuing certain instruments, as trading becomes less frequent and/or market data less observable. As a result, certain valuations may 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 whetherWhether 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'ssecurity’s fair value may ultimately prove to be incorrect.

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.

During a major downturn in the economy, 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, 2017,2018, we held $7.3$7.0 billion of fixed income securities, $0.3$0.2 billion of which represented below-investment grade holdings. We generally do not purchase below-investment grade securities. Typically, the below-investment grade holdings we own were acquired as investment grade holdings, but subsequently downgraded. An increase in defaults on our fixed maturity securities and commercial mortgage loans 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.

See "ItemItem 1. Business - Ratings and Competition"Competition for information regarding risks relating to competition.

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'sLife’s ability to pay dividends to FBL Financial Group, Inc. is limited by 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. At December 31, 2017,2018, Farm Bureau Life’s statutory unassigned surplus was $482.5$503.7 million. There are certain additional limits to the amount of dividends that may be paid within a year without approval of the Insurance Division, Department of Commerce of the State of Iowa (the Iowa Insurance Division) as discussed in Note 7 to our consolidated financial statements included in Item 8. During 2018,2019, the maximum amount available for distribution to FBL Financial Group, Inc. from Farm Bureau Life without regulatory approval is $106.1$100.8 million.

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'sagency’s opinions as to our financial strength, operating performance and ability to meet obligations to Farm Bureau Life'sLife’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'sagency’s judgment, circumstances so warrant. See "ItemItem 1. Business - Ratings and Competition"Competition for a summary of our current ratings.

Cyber attacks, system security risks, data protection breaches and other technology failures could adversely affect our business and results of operations.

A technology failure could occur and potentially disrupt our business, damage our reputation and adversely affect our profitability. Our information technology systems are subject to computer viruses or other malicious codes, unauthorized access and cyber attacks. The administrative and technical controls and other preventive actions we take to reduce the risk of cyber incidents and protect our information technology systems may be insufficient to prevent physical and electronic break-ins, cyber attacks or other security breaches to our computer systems. In addition, disruptions or breaches could occur as a result of

predict the method or outcome of every possible cyber incident. Unanticipated problems with our systems or recovery plans could have a material adverse impact on our ability to conduct business, our results of operations and our financial position.

Our business is dependent upon effective technology for interacting with employees, agents, policyholders, vendors, third parties and investors. It is crucial to our business to reach a large number of people and secure, store and provide sizable 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. A failure to provide customers with the information systems they need to conduct business with us could negatively impact relationships with our customers.

Our business is dependent, in part, upon third-party software and services for some of the above-listed technology needs. If one of our third-party vendors is unable to provide the service we require, there could be an adverse impact on our ability to meet our customer, agent, reporting, regulatory and other operational needs.

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. An inability to provide and maintain effective information technology systems could adversely impact our results of operations and financial condition.

We are subject to statutes and regulations in various states in which our life insurance 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.

Our variable insurance products, investment advisors,advisers, broker/dealer and certain licensed agents and employees who are also registered representatives and investment advisoradviser representatives are subject to regulation by the Securities and Exchange Commission (SEC), state securities regulators (in most states where they are authorized to do business) and the Financial Industry Regulatory Authority (FINRA).

As noted above, through adoption by law in states where we do business, our life insurance subsidiaries are subject to the NAIC'sNAIC’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 insurance subsidiaries also may be required under solvency or guaranteeguaranty laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses for insolvent insurance companies.

Although the federal government does not directly regulate the business of insurance, our company is subject to many of the same federal laws and regulations as other corporations, including, but not limited to pension regulation, employment laws, financial services regulation, securities regulation and federal taxation. Each of these laws and regulations 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. The Dodd-Frank Act of 2010 established the Federal Insurance Office (FIO) within the Department of Treasury to

On April 8, 2016, the U.S. Department of Labor (DOL) issuedRegulations imposing new suitability or fiduciary obligations on our agents and registered representatives could increase our operations, regulatory and litigation risks. Recent regulations (the Final Rule) addressing whenhave been enacted, then vacated, imposing new fiduciary obligations which would have impacted our companies and individuals providing investment advice with respect to certain employee benefit plansour distribution force. Since then, similar rules imposing a higher suitability or individual retirement accounts (IRAs) are considered a fiduciary understandard have been proposed by various state insurance regulators, the Employee Retirement Income Security Act (ERISA)SEC and the Internal Revenue Code. Under the Final Rule, the agents who sell fixed indexed annuities and the registered representatives who sell variable annuitiesNAIC. Until these new rules are finalized or investment products for useadopted by states in certain employee benefit plans or IRAs would be considered fiduciaries, and could subject themselves and one or more of our companies to additional disclosures, reporting, record keeping and other regulatory requirements. Amendments to the Final Rule went into effect on June 9, 2017, without some of the more onerous requirements of the Best Interest Contract Exemption (BICE). On November 29, 2017, a new rule became effective that delayed the effective date of implementation of the balance of the requirements of the Final Rule until July 1, 2019. Based on statements by the DOL, FINRA (Financial Industry Regulatory Authority) and the NAIC (National Association of Insurance Commissioners), there is speculation that the three groups will seek to adopt a new uniform best interest standard that would apply to sales of securities products and annuities, prior to the new July 1, 2019, effective date. Until more information is provided with respect to this new standard,operating territory, we are unable to assess the effect thisthey might have on our business. We do not anticipate making anyIf adopted, however, these new regulations could subject our companies and representatives to a higher standard of care and necessitate additional changes in the way we currently handle business during calendar year 2018. We continue to analyze the effect of the Final Rule (as adopted to date) on our business.compliance requirements such as disclosures, reporting and record keeping.

A significant change in accounting guidance could have a material effect on our financial condition or results of operations.

Actual experience that differs from our assumptions regarding future persistency, mortality, interest rates and benefit utilization 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 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) and benefit utilization (the amount and timing of withdrawal benefits). 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.

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 and any corresponding reinsurance offset. We are exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths. 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.

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'sreinsurer’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 current maximum retention limit on an insured life is $1.0 million.

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.

Farm Bureau Life'sLife’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“Item 1. Business - Marketing and Distribution - Affiliation with Farm Bureau Organizations"Organizations” for information regarding these relationships and circumstances under which our access to the Farm Bureau membership base and use of the "Farm Bureau"“Farm Bureau” and "FB"“FB” designations could be terminated. The loss of the right to use these designations in a key state or states could have a material adverse effect on operating results.

Our business and operations are interrelated to a degree with that of the American Farm Bureau Federation and its affiliates, and state Farm Bureau organizations and their affiliates. The Company and its wholly-owned subsidiary, Farm Bureau Life, share common directors with the American Farm Bureau Federation and certain state Farm Bureau organizations and their affiliates. Farm Bureau Life has written agreements with certain state Farm Bureau organizations, which cover the use of the Farm Bureau name and logo in their respective states. Farm Bureau Life also has written service agreements with affiliates of these state Farm Bureau organizations covering the management of our shared distribution in those states. Negotiation and approval of those agreements may give rise to conflicts of interest for those who serve on the boards of directors of both parties to such agreements. Conflicts could also arise with respect to other business dealings among the parties.

The Tax Cuts &and Jobs Act of 2017 (the Tax Act) was enacted on December 22, 2017. The Tax Act reduced the corporate tax rate from 35% to 21% and contained many base-broadening provisions specific to the life insurance industry. The reduction in the corporate tax rate will generally result in increased net income for the year of enactment and future years. However,in years subsequent to enactment. Some proposed guidance has been issued regarding several relevant issues, but additional guidance is still needed to fully evaluate the extent to which several of thecould result in base-broadening provisions might offsetoffsetting the benefit of the lower rate.

Additionally, the Tax Act reduced individual tax rates and doubled the estate tax exemptions. The Tax Act does not change the taxation of annuity and life products, and they maintain the policyholder tax advantages not present in other savings instruments, such as certificates of deposit and taxable bonds. Federal income tax law allows for the deferral of income tax on the earnings during the accumulation period of certain annuity and life insurance products, as opposed to the current taxation of other savings instruments. In addition, life insurance death benefits are generally exempt from income tax.

The long-term impact, if any, on the sales of our products from lower individual tax rates and a higher estate tax exemption is uncertain at this time.

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.

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.

The success of our business and the ability to reach our 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,ability. It can be particularly challenging with our headquarters being located in central Iowa, a hub of insurance company home offices, where we compete with other insurance and financial institutions.institution home offices.

Our employees are not subject to employment contracts. There can be no certainty regarding the length of time any of our named executive officers will remain with us. 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.

We are occasionally involved in litigation, both as a defendant and as a plaintiff. Some lawsuits naming us as defendants may be, or purport to be, class actions. In addition, state regulators such as the Iowa Insurance Division, and federal regulators such as the SEC, FINRA, DOL and the Internal Revenue Service, are entitled to 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(ERISA) and laws governing the activities of broker-dealers.broker-dealers and investment advisers. Moreover, we are subject to the risks of errors and misconduct by our exclusive agents and other representatives, such as fraud, non-compliance with policies and recommending transactions that are not suitable for particular customers. While we are currently 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 any litigation will not have such an effect, whether financially, through distraction of our management or otherwise.

ITEM 1B. UNRESOLVED STAFF COMMENTS

ITEM 2. PROPERTIES

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 SAFETY DISCLOSURES

PART II

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

Stock Market and Dividend Information

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 of January 26, 2018,17, 2019, there were approximately 5,1004,700 holders of Class A common stock and 21 holders of record of Class B common stock.

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

Issuer Purchases of Equity Securities

Activity in this table represents Class A common shares repurchased by the Company in connection with the repurchase program announced on March 3, 2016,1, 2018, which will expire on March 31, 2018. It is anticipated that a new $50.0 million program will be authorized upon expiration of the current program, remaining open through March 31, 2022. The program authorizes us to make 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.

 

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

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:

Overview and Profitability

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 use net income determined using U.S. Generally Accepted Accounting Principles (GAAP), in addition to non-GAAP operating income (a measure of earnings not recognized under GAAP), to measure our performance. Non-GAAP operating income is a common life insurance industry measure of performance. Non-GAAP operating income, for the periods presented, consists of net income adjusted to exclude the impact of realized gains and losses on investments and the change in net unrealized gains and losses onfair value of derivatives, which can fluctuate greatly from period to period. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income (loss). Specifically, call options relating to our indexed business are one-year assets while the embedded derivatives in the indexed contracts represent the rights of the contract holder to receive index credits over the entire period the indexed annuities are expected to be in force. During 2017, we revised our non-GAAP operating income definition to remove from net income the initial impact to deferred income taxes from a change in tax laws. Such changes can create an unusual one-time remeasurement of deferred taxes not reflective of normal operations. The revision did not impact 2016 or 2015 non-GAAP operating earnings but did affect 2017 and 2018, with the recent enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act). See Note 5 to our consolidated financial statements included in itemItem 8 for additional information regarding the Tax Act. A view of our operating performance without the impact of these items enhances the analysis of our results, although it should not be viewed as a substitute for net income as a measure of financial performance. See Note 13 to our consolidated financial statements included in Item 8 for further information regarding how we define our segments and non-GAAP operating income.

We also include within our analysis “premiums collected,” another measure that is not used in financial statements prepared in accordance with GAAP, but is a common life insurance industry measure of agent productivity. See Note 13 to our consolidated financial statements included in Item 8 for further information regarding this measure and its relationship to GAAP revenues.

Impact of Recent Business Environment

Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economy 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 during such times. 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.

Economic and other environmental factors that may impact our business include, but are not limited to, the following:

The low market interest rate environment continues to impact our investment yields as well as the interest we credit on our interest sensitive products. The benchmark 10-year U.S. Treasury yield fluctuatedrose 29 basis points during 2017,2018, reaching a high of 2.62%3.24% during the fourth quarter and ending the year at 2.69%. Corporate credit spreads also increased during the year, contributing to an overall increase in Marchmarket interest rates and ultimately ending 2017decreasing the fair value of our investment portfolio. While interest rates have risen they remain at 2.40%, five basis points lower than year-end 2016. Credit spreads continued to tighten during 2017. Low crediting rates pose challenges to maintaining attractivehistorically low levels, which along with a relatively flat yield curve impacts the attractiveness of our annuity and universal life products although ourcompared with other products such as certificates of deposit offered by banks. Our rates are comparable to other insurance companies however, allowing us to maintain our competitive position within the market. We experienced an increase in the fair value of our fixed maturity security portfolio during 2017 primarily due to a decrease in market yields. See the segment discussion and “Financial Condition” section that follows for additional information regarding the impact of low market interest rates on our business.

Results of Operations for the Three Years Ended December 31, 20172018

We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired, deferred sales inducements, unearned revenue reserve for participating life insurance and interest sensitive products, as well as certain reserves on 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

In 2018, we offered a voluntary early retirement program to certain employees. The impact of the program to the Annuity segment was a $1.9 million at December 31, 2015.increase in other underwriting expenses and a $0.6 million increase in investment expenses, which lowered net investment income.

The weighted average yield on cash and invested assets for individual annuities decreased in 20172018 and 2016,2017, compared to the prior periods, 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 and lower other investment-related income. See the "Financial Condition"“Financial Condition” section that follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our individual annuity products decreased due to crediting rate actions taken in 2018, 2017 2016 and 20152016 in response to the declining portfolio yield and a change in the underlying product mix.