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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, 1999
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
FBL FINANCIAL GROUP, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Iowa 42-1411715
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 225-5400
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 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 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 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 of this Form 10-K. |_| Yes |X| No
Aggregate market value of Class A Common Stock held by non-affiliates of the
registrant (computed as of March 6, 2000): $184,145,172
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 29,956,817 shares of Class A
Common Stock and 1,192,990 shares of Class B Common Stock as of March 6, 2000.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement for the annual meeting of shareholders to be held May 16, 2000
are incorporated by reference into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
FBL Financial Group, Inc. (we or the Company) sells variable universal life,
traditional life, universal life and disability income insurance and variable
and traditional annuity products. We principally market these products through
our core distribution force consisting of approximately 1,620 exclusive Farm
Bureau agents in 14 midwestern and western states. We also market variable
universal life and variable annuity products in other states through alliances
with non-affiliated Farm Bureau insurance companies, other non-Farm Bureau life
insurance companies and a regional broker-dealer.
Our life insurance operations are complemented by non-insurance services we
provide to third parties and affiliates. These include investment advisory,
leasing, marketing and distribution services. In addition, we provide management
and administrative services to four Farm Bureau affiliated property-casualty
companies.
FBL Financial Group, Inc. was incorporated in Iowa in October 1993 and our
principal insurance subsidiaries include Farm Bureau Life Insurance Company
(Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust). During
1999, we merged Western Farm Bureau Life Insurance Company (Western Life), a
former wholly-owned subsidiary, into Farm Bureau Life.
BUSINESS STRATEGY
We have a three-pronged growth strategy that consists of (1) internal growth
within our traditional Farm Bureau distribution network in 14 midwestern and
western states, (2) alliances and consolidations with other Farm Bureau
companies and (3) alternative distribution - opportunities beyond the boundaries
of the Farm Bureau network. Our growth strategies are detailed below:
GROWTH STRATEGY #1 - INTERNAL GROWTH WITHIN OUR TRADITIONAL FARM BUREAU
DISTRIBUTION NETWORK. Our main focus is to grow our core business, which comes
through our Farm Bureau distribution network in 14 states, through cross-selling
opportunities, new products and competitive product features. We have
significant opportunities to increase our sales through cross selling life
insurance products to Farm Bureau members who already own a property-casualty
policy offered by Farm Bureau affiliated property-casualty companies. For
example, in the six-state region consisting of Iowa, Minnesota, South Dakota,
Utah, Arizona and New Mexico approximately 25% of the Farm Bureau members own at
least one of our life products, 61% own at least one Farm Bureau
property-casualty product and approximately 20% own both, providing significant
opportunity for cross selling. Cross selling and other opportunities have been
enhanced in recent years through the introduction of new products including
single premium deferred annuity, single premium immediate annuity and last
survivor whole life policies. Also, during 1999, we introduced several new
variable product features including new outside investment options from
Fidelity(R)* and T. Rowe Price, dollar cost averaging, systematic withdrawals,
automatic re-balancing and several other items for the benefit of the
policyholder. During 2000, we plan to introduce supplementary contracts with
variable settlement options and a last survivor variable universal life product.
GROWTH STRATEGY #2 - ALLIANCES AND CONSOLIDATIONS WITH OTHERS IN THE FARM BUREAU
ORGANIZATION. As the only Farm Bureau organization with variable product
expertise, variable product alliances within the Farm Bureau network give us
additional growth and economies of scale while sharing our expertise and
expanding relationships within the Farm Bureau network. Since December 1998, we
have launched variable product alliances with Country Life Insurance Company of
Illinois, Southern Farm Bureau Life Insurance Company of Mississippi and United
Farm Family Life Insurance Company of Indiana. In January of 2000, we signed a
letter of intent for a variable annuity alliance with Farm Bureau Life Insurance
Company of Missouri. These organizations join Kansas Farm Bureau Life Insurance
Company as alliance partners within the Farm Bureau network. Our variable
products are now available through six of the nine Farm Bureau affiliated life
insurance groups. We believe that additional opportunities exist in the
cultivation of new business alliances within the national Farm Bureau
organization. These
* Fidelity(R) is a registered trademark of FMR Corp.
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alliances can range from marketing agreements to sell our variable products to
the consolidation of resources through acquisition. We also believe that our
position as a publicly traded Farm Bureau affiliated company increases our
attractiveness as a merger partner.
GROWTH STRATEGY #3 - ALTERNATIVE DISTRIBUTION - ALLIANCES AND CONSOLIDATIONS
OUTSIDE THE FARM BUREAU NETWORK. We are also focusing on creating alliances with
entities outside the Farm Bureau organization to complement our solid foundation
of serving Farm Bureau members. We seek to leverage our expertise in designing,
registering and marketing variable products through unaffiliated companies that
do not have the expertise or systems to underwrite variable products. Alliances
with these types of entities are an efficient means to leverage our insurance
product expertise and expand our distribution channels. We currently have
variable product alliances with two life insurance companies and a regional
broker-dealer. We will continue to seek alliances of this nature to broaden our
distribution system and target the needs of new market segments.
Our subsidiary, EquiTrust, a life insurance company currently licensed in 42
states, underwrites life insurance and annuity products sold by our alliance
partners. Variable sales by our alliance partners are generally underwritten by
EquiTrust, but may be underwritten by our alliance partner. With respect to our
alliances with insurance companies, the risks, costs and profits of the business
are shared, generally on an equal basis, through reinsurance arrangements. For
all of our alliance partners, we perform various administrative processing and
other services with respect to the variable business written.
SEGMENT INFORMATION
In general, we are organized by the types of products and services we offer for
sale. Our principal and only reportable operating segment is our life insurance
segment. Life operations have been aggregated into the same segment due to the
similarity of the products, including the underlying economic characteristics,
the method of distribution and the regulatory environment. We also have several
other operating segments that do not meet the quantitative threshold for
separate segment reporting. A summary of these segments, along with the related
source of revenues, is as follows:
SEGMENT SOURCE OF REVENUES
Investment advisory.............. Fee income from the management of investments
Marketing and distribution....... Commissions and distribution fee income
from the sale of mutual funds and
insurance products not issued by us
Leasing.......................... Income from operating leases
Corporate........................ Fees from management and administrative
services
See Note 15 of Notes to Consolidated Financial Statements for additional
information regarding the financial results by operating segment.
MARKETING
MARKET AREA
Our sales are principally conducted in the following 14 state core marketing
region: multi-line (we own the life company and manage the property-casualty
company) states - Arizona, Iowa, Minnesota, New Mexico, South Dakota and Utah;
and life only (we own the life company only) states - Colorado, Idaho, Montana,
Nebraska, North Dakota, Oklahoma, Wisconsin and Wyoming. Additionally, our Farm
Bureau variable alliance partners market to Farm Bureau members in an additional
19 states and our alternative distribution alliance partners market to non-Farm
Bureau members throughout the United States.
Our core target market consists primarily of farmers, ranchers, rural and
suburban residents and related individuals and businesses. We believe that this
target market represents a relatively financially conservative and stable
customer base, which is generally familiar with Farm Bureau and the benefits of
Farm Bureau membership. Many of our customers are self-employed individuals who
are responsible for providing for their own insurance needs. Their financial
planning needs tend to focus on security, primary insurance needs and retirement
savings.
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AFFILIATION WITH FARM BUREAU
Many of our customers are members of Farm Bureau organizations affiliated with
the American Farm Bureau Federation, the nation's largest grass roots farm and
ranch organization with over 4.9 million member families. In order to market
insurance products in a given state using the "Farm Bureau" and "FB"
designations and related trademarks and service marks, a company must have
permission from the state's Farm Bureau federation. Historically, these
marketing rights have only been granted to companies owned by or closely
affiliated with Farm Bureau federations. For each of the 14 states in our core
market territory, we have the exclusive right to use the "Farm Bureau" name and
"FB" logo for marketing products in those states.
The American Farm Bureau Federation has the right to terminate our right to use
the "Farm Bureau" and "FB" designations in all of 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
Iowa Farm Bureau's membership in the American Farm Bureau or (iii) in the event
of a material breach of the Iowa Farm Bureau Federation's membership agreement
with the American Farm Bureau Federation, including by reason of the failure of
the Iowa Farm Bureau Federation to cause us to adhere to the American Farm
Bureau Federation's policies. Each state Farm Bureau federation in our trade
territory could terminate our right to use the Farm Bureau designations in that
particular state without cause on 60 days' notice. We believe that the
occurrence of any such termination is highly unlikely.
We believe our relationship with Farm Bureau provides a number of advantages.
Farm Bureau organizations in our current territory tend to be well known and
long established, have active memberships and provide a number of 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. Additionally, Farm Bureau members provide a financially
conservative and stable target market which has resulted in persistency for our
products that exceeds industry averages.
Our life insurance products are currently available for sale to both members and
non-members. Property-casualty products sold by the property-casualty insurance
companies affiliated with Farm Bureau are generally only available for sale to
Farm Bureau members. Annual Farm Bureau memberships generally cost $15 to $130
and are available to individuals and families who are farmers and ranchers, and
to the general public as well.
To facilitate our working relationship with state Farm Bureau organizations, the
Presidents of the 14 state Farm Bureau federations in our core market territory
serve on our Board of Directors. The President of the Kansas Farm Bureau
federation also serves on our Board of Directors. Each state Farm Bureau
federation, or its assignee, benefits from its relationship with us through
receipt of royalties. The royalties paid to a particular federation are based on
the sale of our products in the respective state. For 1999, total royalties paid
to Farm Bureau organizations were approximately $1.9 million.
We have marketing agreements with all of the Farm Bureau property-casualty
companies in our core marketing area, pursuant to which the property-casualty
companies develop and manage an agency force that sells both property-casualty
products for that company and life products for us. We pay them a fee for this
service in the nature of an overwrite commission based on first year life
insurance premiums and annuity deposits. The overwrite commissions are generally
equal to one-third of the first year commissions paid to the agent. We paid
overwrite commissions totaling $5.0 million in 1999.
Our Advisory Committee, which consists of certain executives of Farm Bureau
property-casualty insurance companies in our market territory, assists us in our
relationships with the property-casualty organizations. The Advisory Committee
meets on a regular basis to coordinate efforts and issues relating to the agency
force and other related matters. We view the Advisory Committee as an important
contributor to our success in marketing products through the Farm Bureau system.
All of the state Farm Bureau federations in our current marketing area are
associated with the American Farm Bureau Federation. The primary goal of the
American Farm Bureau Federation is to improve net farm income and the quality of
life of farmers, ranchers and other rural residents through education and
representation with respect to public policy issues. There are currently Farm
Bureau federations in all 50 states and Puerto Rico. Within each state, Farm
Bureau is generally organized at the county level. Farm Bureau programs
generally include policy
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development, state and national lobbying activities, leadership development,
speaker corps, media relations, crime prevention, marketing clubs, women's
activities, young farmers activities, promotion and education and commodity
promotion activities. Member services provided by Farm Bureau vary by state but
generally include newspapers and magazines, theft and arson rewards, eye care
programs, vehicle purchase and leasing programs, accidental death insurance,
credit card programs, computerized farm accounting services, electronic
information networks, feeder cattle procurement services, health care insurance
and financial planning services.
EXCLUSIVE AGENCY FORCE - CORE MARKET TERRITORY
Our life insurance, annuities, disability income insurance and sponsored mutual
funds are currently marketed throughout our core market territory by an
exclusive Farm Bureau force of approximately 1,620 agents and agency managers.
We have a written contract with each member of our agency force. The contracts
do the following:
* Specify and limit the authority of the agents to solicit insurance
applications on our behalf.
* Describe the nature of the independent contractor relationship between us
and the agent.
* Define the agent as an exclusive agent limited to selling insurance of the
types sold on our behalf, only for us and Farm Bureau affiliated insurance
companies.
* Allow either party to immediately terminate the contract.
* Specify the compensation payable to the agents.
* Reserve our ownership of customer lists.
* Set forth all other terms and conditions of the relationship.
Sales activities of our agents focus on personal contact and on cross selling
the multiple lines of products available through Farm Bureau affiliated
companies. Agents' offices are generally located in or serve as the Farm Bureau
office for their community. We believe that Farm Bureau name recognition and
access to Farm Bureau membership leads to additional customers and cross selling
of additional insurance products.
Our agents are independent contractors and exclusive agents. In the multi-line
states where we manage the Farm Bureau affiliated property-casualty company, our
agents are supervised by agency managers and assistant managers employed by the
property-casualty companies which are under our direction. There are
approximately 750 agents and managers in our multi-line states, all of whom
market a full range of our life insurance products and most of whom market our
mutual funds. These agents and agency managers also market property-casualty
products for the property-casualty companies that we manage.
In our life only states, our life insurance products and sponsored mutual funds
are marketed through agents managed by the property-casualty company affiliated
with the Farm Bureau federation of that state. These agents, of which there are
approximately 870, market our life and mutual fund products on an exclusive
basis and market the property-casualty products of that state's affiliated
property-casualty companies. Agents as well as agency managers in our life only
states are our independent contractors.
Several initiatives during 1999 supported our effort to increase production
through our core distribution channel. In addition to adding enhancements to our
products, we now promote the use of administrative and production assistants.
These are individuals hired by an agent to help him or her with administrative
and service responsibilities, as well as the acquisition of new business. We
also just started a program of paying commissions up front in connection with
new sales. This assists our new agents as they develop their book of business.
Many of our agents have significantly expanded their productivity in all product
lines as a result of these initiatives.
During the first quarter of 2000, we launched a Life Specialist program with the
goal of increasing sales within our core distribution channel. The Life
Specialist is hired by a multi-line manager to work as a resource within the
agency for life sales, including advanced markets. Providing we achieve the
expected results, we will expand this program into other agencies in late 2000.
Approximately 97% of the agents in our multi-line states are licensed with the
National Association of Securities Dealers (NASD) to sell our variable life and
annuity products and sponsored mutual funds. We continue to emphasize the
training of agents for NASD licensing in our life only territories, where
approximately 75% of the agents are NASD licensed.
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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 only 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 volume of new life business written in
the prior 12 months and on premium payments in the first three years after new
business is written. Production bonuses allow agents to increase their
compensation significantly. Persistency is a common measure of the quality of
life business and is included in calculating the bonus to either increase or
decrease (or even eliminate) the production bonuses earned, because we are
willing to pay added incentives for higher volumes of business only as long as
the business is profitable. In 1999, approximately 43% of agent compensation in
our multi-line states was derived from the sale of life and annuity products.
The focus of agency managers is to recruit and train agents to achieve high
production levels of profitable business. Agency managers receive overwrite
commissions on each agent's life insurance commissions which vary according to
that agent's productivity level and persistency of business. During the first
three years of an agent's relationship with us, the agent's manager receives
additional overwrite commissions to encourage early agent development. Early
agent development is also encouraged through financing arrangements and, at the
option of the agent, the annualization of commissions paid when a life policy is
sold.
We have a variety of incentives and recognitions to focus agents on production
of quality life insurance business. Some recognitions are jointly conducted with
the property-casualty companies. We believe that these programs provide
significant incentives for the most productive agents. Approximately 12% of the
agents qualify for our annual incentive trip.
Agents recruiting, training and financing programs are designed to develop a
productive agent for the long term. The one-year agency force retention rate for
1999 in our multi-line states was approximately 90%. We believe retention of
agents is enhanced because of their ability to sell both life and
property-casualty insurance products, as well as mutual funds.
AGENCY FORCE - ALLIANCE PARTNERS
Our Farm Bureau alliance partners have approximately 6,200 exclusive agents that
are dedicated to selling Farm Bureau products. At the time of this writing,
approximately 16% of these agents are registered representatives and our
partners are working with their other agents to license them to sell variable
products. Our Farm Bureau alliance partners have incentive programs, like ours,
to promote the sale of life insurance and annuity products. The agents earn
credit for these incentives by selling our variable products.
The alliance partners outside the Farm Bureau network have over 21,800
independent agents that have access to outside variable products and are not
limited solely to our variable products. While many of the alliance partners'
agents are not currently licensed for the sale of variable life insurance and
variable annuity products, the alliance partners are promoting the licensing of
existing agents and the recruitment of agents that are licensed.
Our variable product alliance partners are responsible for managing and training
their own agency force. We provide each partner with assistance on how to train
their agents in the sale of variable products.
PRODUCTS CURRENTLY UNDERWRITTEN
We are currently engaged in selling a varied portfolio of insurance products
including variable, interest sensitive and traditional permanent life insurance,
term life, variable and traditional annuities and disability income insurance
primarily to individuals in the rural and suburban areas of our market
territory. As discussed in more detail under the section entitled "Disability
Income Insurance" following, we intend to discontinue the sale of disability
income insurance during 2000.
VARIABLE UNIVERSAL LIFE INSURANCE. Variable universal life insurance is our lead
life insurance product. The variable universal life policy provides permanent
life insurance protection with a flexible premium structure which allows the
customer to pre-fund future insurance costs and accumulate savings on a
tax-deferred basis. Premiums received,
5
less policy assessments for administration expenses and mortality costs, are
credited to the policyholder's account balance. The policyholder has the ability
to direct cash value of the policy to an assortment of variable sub-accounts
and, in turn, assumes the investment risk passed through by those funds.
Variable universal life policyholders can also elect a declared interest option
under which the cash values are credited with interest as declared.
Policyholders can select from variable sub-accounts managed by us as well as
sub-accounts that are managed by outside investment advisors. See "Variable
Sub-Accounts and Mutual Funds."
UNIVERSAL LIFE INSURANCE. We offer a universal life policy which is similar in
design to the variable universal life policy, but without the additional
investment options for the cash value. Interest is credited to the cash value at
rates that we periodically set. Agents need not be registered with the NASD to
offer this product. We also market a last survivor universal life policy
designed especially for the estate planning market.
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 charges 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 participating
policy dividends. For 1999, participating life policies represented 12% of first
year life insurance collected premiums. We have a substantial book of in-force
participating policies with persistency which has historically exceeded industry
averages.
We currently market non-participating term insurance policies that provide life
insurance protection for a specified period. Term insurance is mortality based
and generally has no accumulation values. We may change the premium scales at
any time but may not increase rates above guaranteed levels. In the past, we
sold participating term insurance, but this product has been discontinued.
ANNUITIES. We offer annuities which are generally marketed to individuals in
anticipation of retirement. We offer variable and traditional annuities
principally in the form of flexible premium deferred annuities which 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. For variable annuities, policyholders have the right to
direct the cash value of the policy into an assortment of sub-accounts, thereby
assuming the investment risk passed through by those sub-accounts. Approximately
59% of our existing individual annuity business based on account balances is
held in qualified retirement plans. To further encourage persistency, a
surrender charge against the policyholders' account balance is imposed for early
termination of the annuity contract within a specified period after its
effective date.
The sub-account options for variable annuity contracts are the same as those
available for variable universal life policies. See "Variable Sub-Accounts and
Mutual Funds."
In addition to flexible premium deferred annuities, we also market single
premium immediate annuity (SPIA) and single premium deferred annuity (SPDA)
products. These products feature a single premium paid when the contract is
issued and interest crediting similar to other traditional annuities. Benefit
payments on SPIA contracts begin immediately after the issuance of the contract
and, for SPDA, are similar to our other traditional annuity products.
DISABILITY INCOME INSURANCE. We write a number of individual disability
policies. This type of policy provides for payment of benefits in the event of a
disabling accident or illness. Disability benefits reimburse the policyholder
for a specified dollar amount payable over a specific time period or for the
duration of the disability. Disability is defined as the inability to pursue the
policyholder's own occupation for the first two years after disability, and the
inability to pursue any occupation thereafter. The risks insured are similar to
those insured in a medical expense policy but the claim costs are much more
predictable. Since the policies are guaranteed renewable rather than
noncancellable, we may change the premium scale at any time based on claim costs
incurred, subject to regulatory approval. Some disability income products offer
flexibility in coverage amounts as financial needs change.
During 2000, it is anticipated that we will discontinue underwriting long-term
disability income insurance and begin to offer, to our agents, a long-term
disability income product underwritten by Country Life Insurance Company. We
will not share in the risks, costs or profits of the new product, but will earn
a commission on new sales. It is
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anticipated that this change, over time, will result in a decrease in accident
and health premiums and benefits as our existing block of business matures.
The following table sets forth the first year and renewal premiums collected for
our life, annuity and accident and health products for the years indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
Direct life premiums collected:
Universal life
First year .............................. $ 2,747 $ 2,857 $ 3,522 $ 4,398 $ 2,452
Renewal ................................. 40,978 42,263 44,969 46,493 47,901
----------- ----------- ----------- ----------- ---------
Total ................................ 43,725 45,120 48,491 50,891 50,353
Variable universal life
First year - core distribution .......... 13,385 15,272 12,427 9,244 7,689
First year - alliance partners .......... 1,468 98 -- -- --
Renewal ................................. 27,399 22,423 19,156 16,715 13,625
Internal rollover ....................... 10,052 18,032 7,824 2,726 1,328
----------- ----------- ----------- ----------- ---------
Total ................................ 52,304 55,825 39,407 28,685 22,642
Participating whole life
First year .............................. 3,003 3,226 3,646 6,105 7,390
Renewal ................................. 61,881 61,867 61,660 58,818 54,743
----------- ----------- ----------- ----------- ---------
Total ................................ 64,884 65,093 65,306 64,923 62,133
Other
First year .............................. 4,282 4,151 3,802 3,409 3,242
Renewal ................................. 18,122 16,676 15,513 14,646 13,891
----------- ----------- ----------- ----------- ---------
Total ................................ 22,404 20,827 19,315 18,055 17,133
----------- ----------- ----------- ----------- ---------
Total direct life ............... 183,317 186,865 172,519 162,554 152,261
Reinsurance ceded ............................... (4,841) (4,632) (4,681) (4,521) (4,190)
----------- ----------- ----------- ----------- ---------
Total life, net of reinsurance .................. 178,476 182,233 167,838 158,033 148,071
Direct annuity premiums collected:
Traditional annuities:
Individual .............................. 50,911 51,775 54,002 59,111 64,557
Group ................................... 1,227 1,022 7,241 16,502 6,253
Reinsurance assumed ..................... 190 22,034 -- -- --
----------- ----------- ----------- ----------- ---------
Total traditional annuities ..... 52,328 74,831 61,243 75,613 70,810
Variable annuities:
First year - core distribution .......... 26,034 24,891 23,773 14,638 5,426
First year - alliance partners .......... 8,888 490 -- -- --
Renewal ................................. 5,135 4,616 3,641 1,424 393
Internal rollover ....................... 7,097 11,469 6,240 855 143
----------- ----------- ----------- ----------- ---------
Total variable annuities ........ 47,154 41,466 33,654 16,917 5,962
----------- ----------- ----------- ----------- ---------
Total annuities ................................. 99,482 116,297 94,897 92,530 76,772
Accident and health premiums collected,
net of reinsurance .......................... 13,323 11,717 11,370 10,558 10,023
----------- ----------- ----------- ----------- ---------
Total collected premiums, net of
reinsurance ................................. $ 291,281 $ 310,247 $ 274,105 $ 261,121 $ 234,866
=========== =========== =========== =========== =========
Alliance partner amounts are net of ceded and assumed premiums collected.
During the five years in the period ended December 31, 1999, we have emphasized
the marketing of our variable products. This marketing emphasis, coupled with
the popularity of variable products and a program to encourage the rollover of
universal life policies to variable universal life policies, has resulted in a
shift in premiums during the period from traditional and interest sensitive
products to variable products.
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During 1999, we cancelled certain ceded reinsurance contracts on our accident
and health business. As a result of these cancellations, accident and health
premiums ceded decreased $0.9 million in 1999 compared to 1998. During 1998, we
assumed a block of individual deferred annuity policies through a 100%
coinsurance agreement. Premiums related to this block of business totaled $22.0
million in 1998.
LIFE INSURANCE AND ANNUITIES IN FORCE
The following table sets forth information regarding life insurance and
annuities in force at the end of each year presented:
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FACE AMOUNTS IN MILLIONS)
Life insurance
Universal and variable universal
Number of direct policies ............. 119,211 114,317 109,558 107,817 105,256
Policyholder account balances ......... $ 601,757 $ 576,392 $ 565,291 $ 540,116 $ 503,877
Direct face amounts ................... 10,267 9,549 8,830 8,476 8,096
Traditional
Number of direct policies ............. 262,363 265,407 267,476 266,599 267,452
Future policy benefits ................ $ 710,801 $ 691,047 $ 672,885 $ 645,684 $ 617,376
Direct face amounts ................... 10,758 10,117 9,551 8,719 8,113
Total life
Number of direct policies ............. 381,574 379,724 377,034 374,416 372,708
Direct face amounts ................... $ 21,025 $ 19,666 $ 18,381 $ 17,195 $ 16,209
Deposit administration funds -
Policyholder account balances ............. $ 135,453 $ 127,128 $ 77,254 $ 54,028 $ 48,109
Annuities and variable annuities:
Number of direct policies ................. 49,212 48,785 49,912 50,255 49,575
Policyholder account balances ............. $ 742,374 $ 770,081 $ 808,740 $ 808,221 $ 779,827
Future policy benefits .................... 146,458 122,870 127,509 123,646 110,412
Liabilities related to separate accounts ..... 256,028 190,111 138,409 79,043 44,789
Substantially all of the deposit funds relate to the funding of the Farm Bureau
retirement plans. In 1998, the funding vehicle for a portion ($48.0 million) of
the Farm Bureau retirement plans was changed from group annuities to deposit
administration funds.
We have experienced low lapse rates compared to the life insurance industry, as
indicated in the following table:
LAPSE RATES FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Our life insurance lapse rates.................. 7.6 % 7.2 % 7.0 % 7.5 % 7.9 %
Industry life insurance lapse rates............. (A) 8.3 8.5 8.5 8.8
- ------------
(A) The industry lapse rate for 1999 is not available as of the filing date of
this Form 10-K.
8
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 a professional underwriting staff of
nine underwriters who have an average of 19 years of experience in the insurance
industry. Our underwriters review each applicant's written application, which is
prepared under the supervision of our agents, and any required medical records.
We employ blood and urine testing (including HIV antibody testing) to provide
additional information on applications of over $100,000 face amount. Based on
the results of these tests, we may adjust the mortality charge or decline
coverage completely. Any tobacco use by a life insurance applicant within the
preceding one year 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.
REINSURANCE
We reinsure a portion of our life insurance exposure with unaffiliated insurance
companies under traditional indemnity reinsurance agreements. New insurance
sales are reinsured above prescribed limits and do not require the reinsurer's
prior approval within certain guidelines. These treaties are automatically
renewed and nonterminable for the first 10 years with regard to cessions already
made and are terminable after 90 days with regard to future cessions. After 10
years, we have the right to terminate and can generally discontinue the
reinsurance on a block of business. This is normally done to increase our
retention on older business to the same level as current cessions.
Generally, 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 retention limit on life policies issued after June
30, 1999 is $1,100,000. For policies issued prior to July 1, 1999, the maximum
retention is generally limited to $600,000. 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 such 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 monitor the financial strength of
our reinsurers. If for any reason such reinsurance coverages would need to be
replaced, we believe that replacement coverages from financially responsible
reinsurers would be available. A summary of our primary reinsurers as of
December 31, 1999 is as follows:
A.M. BEST AMOUNT OF IN
REINSURER RATING FORCE CEDED
------------- -------------
(DOLLARS IN
MILLIONS)
Lincoln National Life Insurance Company............ A $ 823.8
Business Men's Assurance Company................... A 428.6
The Cologne Life Reinsurance Company............... A+ 282.4
All other.......................................... 291.5
--------------
Total......................................... $ 1,826.3
==============
POLICY RESERVES
The policy liabilities reflected in the consolidated financial statements are
calculated in accordance with accounting principles generally accepted in the
United States. Liabilities for universal life and annuity policies consist of
the premiums and considerations received plus accumulated credited interest,
less accumulated policyholder assessments and benefits. For traditional
policies, liabilities for future policy benefits have been provided based on the
net level premium method, including assumptions as to interest, mortality and
other assumptions underlying the guaranteed policy cash values. See Note 1 of
Notes to Consolidated Financial Statements for additional information regarding
policy liability assumptions.
9
INTEREST CREDITING AND PARTICIPATING DIVIDEND POLICY
We have an asset/liability management 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 universal life insurance and annuity products after any initial
guaranteed period. We examine earnings on assets by portfolio. We then establish
rates based on each product's required interest spread and competitive market
conditions at the time.
We pay dividends, credit interest and determine other nonguaranteed elements on
their 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.
Policyholder dividends are currently being paid and will continue to be paid as
declared on traditional participating whole life business, some term business,
and the participating annuity 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.
Average contractual credited rates on our universal life contracts were 6.01% in
1999, 6.12% in 1998 and 6.32% in 1997 and average credited rates on our annuity
contracts were 5.69% in 1999, 6.05% in 1998 and 6.23% in 1997.
RATINGS
Ratings are an important factor in establishing the competitive position of
insurance companies. Farm Bureau Life is rated "A+(Superior)" by A.M. Best, A.M.
Best's second highest rating of 13 ratings assigned to solvent insurance
companies, which currently range from "A++(Superior)" to "D(Poor)." Farm Bureau
Life has maintained its existing "A+(Superior)" rating since A.M. Best first
began using this rating methodology. EquiTrust is rated "A- (Excellent)" by A.M.
Best. A.M. Best ratings consider claim paying ability and are not a rating of
investment worthiness.
VARIABLE SUB-ACCOUNTS AND MUTUAL FUNDS
We sponsor the EquiTrust Series Fund, Inc. (the Series Fund) and EquiTrust
Variable Insurance Series Fund (the Insurance Series Fund) (collectively, the
EquiTrust Funds) which are open-end, diversified series management investment
companies. The Series Fund is available to the general public. The Variable
Insurance Series Fund offers its shares, without a sales charge, only to our
separate accounts and our alliance partners as the investment medium for
variable annuity contracts or variable life insurance policies. These Funds each
currently issue shares in six investment series (a Portfolio or collectively the
Portfolios) with distinct investment objectives: (1) long-term capital
appreciation by investing in equity securities which have a potential to earn a
high return on capital or are undervalued by the market place; (2) as high a
level of current income as is consistent with investment in a portfolio of debt
securities deemed to be of high grade; (3) as high a level of current income as
is consistent with investment in a portfolio of fixed-income securities rated in
the lower categories of established rating services; (4) high total investment
return of income and capital appreciation by investing in growth common stocks,
high grade debt securities and preferred stocks and high quality short-term
money market instruments; (5) high current income consistent with liquidity and
stability of principal, and (6) an unmanaged index fund, which seeks growth of
capital and income by investing primarily in common stocks of designated
well-capitalized, established companies. The net assets of the equity EquiTrust
Funds at December 31, 1999 aggregated $425.9 million.
Our variable products also include sub-accounts that invest in mutual funds
managed by outside investment advisors in addition to our proprietary funds. We
receive an administrative service fee from the outside investment advisors
ranging from 5 basis points to 25 basis points (annualized) of the sub-account
values, generally once the sub-accounts meet a predetermined asset threshold.
EquiTrust Investment Management Services, Inc. (the Advisor), a subsidiary,
receives an annual fee based on the average daily net assets of each EquiTrust
Portfolio that ranges from 0.25% to 0.60% for the Series Fund and from 0.20% to
0.45% for the Variable Insurance Series Fund. The Advisor also serves as
distributor and principal underwriter for the EquiTrust Funds. The Advisor
receives from the Series Fund a 0.50% annual distribution
10
services fee, a 0.25% annual administration services fee and a 0.05% accounting
fee, and receives directly any contingent deferred sales charge paid on the
early redemption of shares. EquiTrust Marketing Services, LLC, another
subsidiary, serves as the principal dealer for the Series Fund and receives
commissions and service fees.
We also sponsor a money market fund, EquiTrust Money Market Fund, Inc. (Money
Market Fund), which is a no-load open-end diversified management investment
company with an investment objective of maximum current income consistent with
liquidity and stability of principal. The Advisor acts as the investment
advisor, manager and principal underwriter of the Money Market Fund and receives
an annual management fee, accrued daily and payable monthly, on a graduated
basis commencing at 0.25%, and certain other fees. The net assets of the Money
Market Fund were $30.1 million at December 31, 1999.
EquiTrust Series Fund, Inc. and EquiTrust Money Market Fund, Inc. are offered
through registered representatives of EquiTrust Marketing Services, LLC. For
more complete information including fees, charges and other expenses, obtain a
prospectus from EquiTrust Marketing Services, LLC, 5400 University Avenue, West
Des Moines, Iowa 50266. Read the prospectus before you invest or pay money.
COMPETITION
We operate in a highly competitive industry. The operating results of companies
in the insurance industry have been historically subject to significant
fluctuations due to competition, economic conditions, interest rates, investment
performance, maintenance of insurance ratings from rating agencies such as A.M.
Best 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 high ratings
from A.M. Best. 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 whom have
financial resources substantially greater than ours.
REGULATION
Our insurance subsidiaries are subject to government regulation in each of the
states in which they conduct business. Such regulatory authority is vested in
state agencies having broad administrative power dealing with all aspects of the
insurance business, including rates, policy forms and capital adequacy, and is
concerned primarily with the protection of policyholders rather than
stockholders. Our variable insurance products, mutual funds, investment advisor
and certain licensed broker-dealers and agents are also subject to regulation by
the Securities and Exchange Commission, the NASD, and state agencies.
Increased scrutiny has been placed upon the insurance regulatory framework, and
certain state legislatures have considered or enacted laws that alter, and in
many cases increase, state authority to regulate insurance companies and
insurance holding company systems. In light of recent legislative developments,
the National Association of Insurance Commissioners (NAIC) and state insurance
regulators continue to reexamine existing laws and regulations, specifically
focusing on insurance company investments and solvency issues, risk-adjusted
capital guidelines, interpretations of existing laws, the development of new
laws, the implementation of nonstatutory guidelines and the circumstances under
which dividends may be paid. We do not believe the adoption in any of our
operating states 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.
IMPACT OF YEAR 2000
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (page 20), for disclosures regarding the impact of the
Year 2000 on our operations.
11
EMPLOYEES
At February 1, 2000, we had approximately 1,200 employees. Many employees and
the executive officers also provide services to Farm Bureau Mutual Insurance
Company and other affiliates pursuant to management agreements. None of our
employees are members of a collective bargaining unit. We believe that we have
good employee relations.
ITEM 2. PROPERTIES
Our principal operations are conducted from property leased from a subsidiary of
the Iowa Farm Bureau Federation under a 15 year operating lease which expires in
2013. The property leased currently consists of approximately 181,000 square
feet of a 400,000 square foot office building located at 5400 University Avenue,
West Des Moines, Iowa 50266. We consider the current facilities to be adequate
for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are a party to lawsuits arising in the normal course of business. We believe
the resolution of these lawsuits will not have a material adverse effect on our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 for each quarter of 1999 and 1998. All per share amounts
reflect a two-for-one common stock split which occurred on April 17, 1998.
COMMON STOCK DATA (PER SHARE) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
--------- --------- --------- ---------
1999
High........................... $ 24 1/2 $ 22 1/2 $ 21 3/8 $ 20 3/4
Low............................ 17 3/8 17 1/8 18 5/8 12 3/8
Dividends declared and paid.... $ 0.0825 $ 0.0825 $ 0.0825 $ 0.0825
1998
High........................... $ 26 5/16 $ 30 11/16 $ 28 5/8 $ 26 3/8
Low............................ 17 5/8 24 3/4 19 11/16 18 1/16
Dividends declared and paid.... $ 0.075 $ 0.075 $ 0.075 $ 0.075
There is no established public trading market for the Company's Class B common
stock. As of March 1, 2000, there were approximately 2,800 holders of Class A
common stock, including participants holding securities under the name of a
broker (i.e., in "street name"), and 27 holders of Class B common stock.
The Company intends 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 the quarterly dividend rate during
2000 will be $0.09 per common share.
For restrictions on dividends, see "Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity" (page 26) and Note 10
to the consolidated financial statements (page 56).
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Interest sensitive product charges ............... $ 55,363 $ 52,157 $ 47,979 $ 43,654 $ 43,722
Traditional life insurance and accident and
health premiums ................................ 95,930 93,473 92,528 92,780 85,611
Net investment income ............................ 225,820 228,067 220,366 208,265 221,525
Realized gains (losses) on investments ........... (2,342) (4,878) 40,953 52,760 5,860
Total revenues ................................... 394,986 389,621 421,351 413,373 377,719
Income from continuing operations ................ 54,325 52,675 75,128 84,049 58,189
Income (loss) from discontinued operations ....... -- 287 699 (1,165) 1,439
Gain on sale of discontinued operations .......... 1,385 978 -- -- --
Net income ....................................... 55,710 53,940 75,827 82,844 59,628
Net income applicable to common stock ............ 55,560 53,790 73,656 80,634 59,628
Per common share:
Income from continuing operations .............. 1.68 1.56 2.01 1.90 1.23
Income from continuing operations -
assuming dilution ............................ 1.65 1.52 1.97 1.89 1.23
Earnings ....................................... 1.72 1.60 2.03 1.87 1.26
Earnings - assuming dilution ................... 1.69 1.56 1.99 1.86 1.26
Cash dividends ................................. 0.33 0.30 0.20 0.04 --
Weighted average common shares
outstanding - assuming dilution ................ 32,829,972 34,400,513 36,971,236 43,270,392 47,182,200
CONSOLIDATED BALANCE SHEET DATA:
Total investments ................................ $ 2,950,200 $ 3,031,436 $ 2,940,911 $ 2,829,517 $ 2,620,132
Assets held in separate accounts ................. 256,028 190,111 138,409 79,043 44,789
Total assets ..................................... 3,662,331 3,650,960 3,601,526 3,368,192 3,093,582
Long-term debt ................................... 40,000 71 24,577 24,581 12,604
Total liabilities ................................ 3,060,178 2,965,869 2,894,708 2,724,867 2,524,781
Company-obligated mandatorily redeemable
preferred stock of subsidiary trust ............ 97,000 97,000 97,000 -- --
Total stockholders' equity ....................... 505,008 583,588 605,315 638,522 564,298
Book value per common share ...................... 15.94 17.75 16.77 14.28 11.83
Book value per common share excluding
unrealized appreciation (depreciation) (1) ..... 17.46 16.14 15.36 13.75 11.12
OTHER DATA (UNAUDITED):
Adjusted operating income applicable to
common stock (2) ............................... $ 55,201 $ 55,998 $ 46,977 $ 42,495 $ 41,648
Adjusted operating income per common
share - assuming dilution (2) .................. 1.68 1.63 1.27 0.98 0.88
Statutory capital and surplus (3) ................ 301,542 376,929 360,782 344,965 288,302
Net statutory premiums collected (4) ............. 291,281 310,247 274,105 261,121 234,866
Life insurance in force .......................... 19,198,748 18,367,078 17,132,235 16,113,121 15,254,669
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Excludes the effect of reporting certain fixed maturity securities at fair
value.
(2) Adjusted operating income equals net income adjusted to eliminate certain
items which we believe are not indicative of operating trends because they
are unusual and/or nonrecurring in nature, including the impact of realized
gains (losses) on investments, gain on sale of discontinued operations and
net income (loss) from a venture capital investment company subsidiary. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Statutory data has been derived from the annual statements of our insurance
subsidiaries, as filed with insurance regulatory authorities and prepared
in accordance with statutory accounting practices.
(4) Net statutory premiums include premiums collected from annuities and
universal life-type products. For GAAP reporting, such premiums received
are not reported as revenues. Amounts include internal rollover premiums to
variable universal life or variable annuity contracts totaling $17.1
million in 1999, $29.5 million in 1998, $14.1 million in 1997, $3.6 million
in 1996 and $1.5 million in 1995.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING SECTIONS INCLUDE A SUMMARY OF FBL FINANCIAL GROUP, INC.'S
CONSOLIDATED RESULTS OF OPERATIONS, FINANCIAL CONDITION AND WHERE APPROPRIATE,
FACTORS THAT MANAGEMENT BELIEVES MAY AFFECT FUTURE PERFORMANCE. PLEASE READ THIS
DISCUSSION IN CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES. UNLESS NOTED OTHERWISE, ALL REFERENCES TO FBL
FINANCIAL GROUP, INC (WE OR THE COMPANY) INCLUDE ALL OF ITS DIRECT AND INDIRECT
SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE SUBSIDIARIES, FARM BUREAU
LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND EQUITRUST LIFE INSURANCE COMPANY
(EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES).
OVERVIEW
We sell universal life, variable universal life, traditional life and disability
income insurance and traditional and variable annuity products. These products
are principally marketed through a core distribution force consisting of
approximately 1,600 exclusive Farm Bureau agents in 14 midwestern and western
states. Variable universal life and variable annuity products are also marketed
in other states through alliances with unaffiliated Farm Bureau companies. We
also market variable products through alliances with two life insurance
companies and a regional broker-dealer not affiliated with Farm Bureau. Several
subsidiaries support various functional areas of the Life Companies and other
affiliates, by providing investment advisory, marketing and distribution, and
leasing services. In addition, we manage four Farm Bureau affiliated
property-casualty insurance companies.
In accordance with generally accepted accounting principles, premiums and
considerations received for interest sensitive products such as universal life
insurance and ordinary annuities are reflected as increases in liabilities for
policyholder account balances and not as revenues. Revenues reported for
interest sensitive products consist of policy charges for the cost of insurance,
administration charges, amortization of policy initiation fees and surrender
charges assessed against policyholder account balances. Surrender benefits paid
relating to these products are reflected as decreases in liabilities for
policyholder account balances and not as expenses. The Life Companies receive
investment income earned from the funds deposited into account balances, a
portion of which is passed through to the policyholders in the form of interest
credited. Amounts for interest credited to policyholder account balances and
benefit claims in excess of policyholder account balances are reported as
expenses in the consolidated financial statements.
Premium revenues reported for traditional life and disability income insurance
products are recognized as revenues when due. Future policy benefits are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits.
For variable universal life and variable annuities, premiums received are not
reported as revenues. Similar to universal life and ordinary annuities, revenues
reported consist of fee income and product charges collected from the
policyholders. Expenses related to these products include benefit claims
incurred in excess of policyholder account balances.
The costs related to acquiring new business, including certain costs of issuing
policies and other variable selling expenses (principally commissions), defined
as deferred policy acquisition costs, are capitalized and amortized into
expense. For nonparticipating traditional life and accident and health insurance
products, these costs are amortized over the premium paying period of the
related policies, in proportion to the ratio of annual premium revenues to total
anticipated premium revenues. Such anticipated premium revenues are estimated
using the same assumptions used for computing liabilities for future policy
benefits. For participating traditional life insurance and interest sensitive
products, these costs are amortized generally in proportion to expected gross
profits from surrender charges and investment, mortality, and expense margins.
This amortization is adjusted when the Life Companies revise their estimate of
current or future gross profits or margins. For example, deferred policy
acquisition costs are amortized earlier than originally estimated when policy
terminations are higher than originally estimated or when investments backing
the related policyholder liabilities are sold at a gain prior to their
anticipated maturity. Death and other policyholder benefits reflect exposure to
mortality risk and fluctuate from year to year based on the level of claims
incurred under insurance retention limits. The profitability of the Life
Companies is primarily affected by fluctuations in mortality, morbidity, other
policyholder benefits, expense levels, interest spreads (i.e., the difference
between interest earned on investments and interest credited to policyholders)
and persistency. We have the ability to mitigate adverse experience through
adjustments to credited interest rates, policyholder dividends or cost of
insurance charges.
15
Revenues and income from continuing operations are primarily derived from our
life insurance segment. Revenues and expenses of our other segments, which
consist of investment advisory, marketing and distribution, leasing and
management operations, are principally recorded in the other income and other
expense line items on the Consolidated Statements of Income. See Note 15 of the
Notes to Consolidated Financial Statements (page 59) for additional information
regarding segment information.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999
Net income applicable to common stock totaled $55.6 million in 1999, $53.8
million in 1998 and $73.7 million in 1997. The increase in net income in 1999 is
primarily the result of increased equity income and the impact of realized gains
and losses on investments. These items are offset by an increase in operating
expenses relating to the closing of an administrative service center and an
increase in the level of operations to support our expanding variable alliances.
In addition, net investment income decreased in 1999 due partially to a decrease
in fee income from mortgage loan prepayments and bond calls. The decrease in net
income in 1998 is attributable primarily to the impact of realized gains and
losses on investments. Adjusted operating income applicable to common stock,
which does not include the impact of realized gains and losses on investments
and other items that management believes are not indicative of operating trends,
totaled $55.2 million in 1999, $56.0 million in 1998 and $47.0 million in 1997.
The following is a reconciliation of net income to adjusted operating income.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income applicable to common stock ...................... $ 55,560 $ 53,790 $ 73,656
Adjustments:
Net realized losses (gains) on investments ............. 1,026 3,186 (25,956)
Gain on disposal of property-casualty operations ....... (1,385) (978) --
Net income from FBL Ventures ........................... -- -- (723)
------------ ------------ ------------
Adjusted operating income applicable to common stock ....... $ 55,201 $ 55,998 $ 46,977
============ ============ ============
Earnings per common share - assuming dilution .............. $ 1.69 $ 1.56 $ 1.99
============ ============ ============
Adjusted operating earnings per common share -
assuming dilution ........................................ $ 1.68 $ 1.63 $ 1.27
============ ============ ============
The adjustment for realized gains and losses on investments noted in the table
above is net of adjustments for that portion of amortization of deferred policy
acquisition costs, unearned revenue reserve, value of insurance in force
acquired and income taxes attributable to such gains and losses. FBL Ventures
was a wholly owned investment company subsidiary which invested in start-up and
mezzanine level venture capital investments in various sectors. FBL Ventures was
dissolved on June 30, 1997.
The change in earnings per common share from year to year is positively impacted
by a decrease in the weighted average common shares outstanding during the
three-year period ended December 31, 1999. Weighted average common shares
outstanding totaled 32.8 million in 1999, 34.4 million in 1998 and 37.0 million
in 1997. These decreases are the result of acquisitions of common stock by the
Company during 1999, 1998 and 1997.
16
A summary of our premiums and product charges is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ................................. $ 55,363 $ 52,157 $ 47,979
Traditional life insurance and accident and health premiums ........ 95,930 93,473 92,528
------------ ------------ ------------
Total .......................................................... $ 151,293 $ 145,630 $ 140,507
============ ============ ============
INTEREST SENSITIVE PRODUCT CHARGES increased 6.1% in 1999 to $55.4 million and
8.7% in 1998 to $52.2 million. These increases are due primarily to increased
cost of insurance charges resulting from an increase in the volume and age of
business in force. In addition, mortality and expense charges have increased as
a result of growth in variable product account balances. Surrender charge income
decreased 27.6% in 1999 to $2.1 million and increased 76.3% in 1998 to $2.9
million as a result of changes in the amount of interest sensitive product
surrenders.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH PREMIUMS increased 2.6% in
1999 to $95.9 million and 1.0% in 1998 to $93.5 million. During 1999,
traditional life premiums increased 1.0% to $82.6 million and accident and
health premiums increased 14.0% to $13.3 million. During 1998, traditional life
premiums increased 0.7% to $81.8 million and accident and health premiums
increased 3.4% to $11.7 million. Management believes the relatively flat sales
of traditional life insurance products are the result of a marketing emphasis
placed on the sale of variable universal life insurance contracts. Premiums
collected on variable universal life insurance products increased 11.8% to $42.3
million in 1999 and increased 19.7% to $37.8 million in 1998. The increase in
accident and health premiums is primarily the result of the recapture of certain
reinsurance ceded business, which is not expected to be a recurring item in
2000.
NET INVESTMENT INCOME, which excludes investment income on separate account
assets relating to variable products, decreased 1.0% in 1999 to $225.8 million
and increased 3.5% in 1998 to $228.1 million. The decrease in 1999 is
attributable to a decrease in the yield partially offset by an increase in
average invested assets. The increase in 1998 is attributable to increases in
yield and average invested assets. Average invested assets totaled $2,982.1
million in 1999, $2,895.5 million in 1998 and $2,855.7 million in 1997. The
annualized yield earned on average invested assets was 7.57% in 1999 compared to
7.88% in 1998 and 7.72% in 1997. The yield during the 1999 period declined due
principally to a reduction in the amount of prepayment and bond call fee income.
Despite a general decline in market interest rates during 1998 and 1997, yield
on invested assets during 1998 increased due principally to an increase in
prepayment and bond call fee income. Fee income from mortgage loan prepayments
and bond calls totaled $5.2 million in 1999, $9.8 million in 1998 and $3.1
million in 1997. In addition, we recorded $1.7 million in interest income during
1999 relating to settlement of a fixed maturity security that had been in
default. We had discontinued the accrual of interest on this security during
1996. The revenue from these sources is not expected to stay at these levels.
REALIZED GAINS (LOSSES) ON INVESTMENTS increased 52.0% in 1999 to a loss of $2.3
million and decreased 111.9% in 1998 to a loss of $4.9 million. Realized gains
(losses) include writedowns of investments that became other-than-temporarily
impaired totaling $7.2 million in 1999, $9.4 million in 1998 and $23.8 million
in 1997. These writedowns are the result of sustained operating losses,
unsuccessful efforts to raise capital and various other operational or economic
factors that became evident in the respective years. Net realized gains in 1997
resulted primarily from the sale of equity securities. The level of realized
gains (losses) is subject to fluctuation from year to year depending on the
prevailing interest rate and economic environment and the timing of the sale of
investments.
OTHER INCOME decreased 2.8 % in 1999 to $20.2 million and increased 6.5% in 1998
to $20.8 million. The decrease in 1999 is primarily due to a $0.9 million
decrease in rental income resulting from the exchange of the home office
properties for common stock on March 30, 1998. The increase in 1998 is
attributable to an increase in the level of leasing, investment advisory and
other financial services provided to affiliates and third parties, partially
offset by a $2.4 million decrease in rental income due to the exchange of home
office properties. See "Exchange of Home Office Properties."
17
A summary of our policy benefits is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive products benefits .................................. $ 123,231 $ 122,527 $ 122,729
Traditional life insurance and accident and health benefits ........... 57,941 55,880 56,369
Increase in traditional life and accident and health future policy
benefits .......................................................... 19,556 21,264 27,173
Distributions to participating policyholders .......................... 25,360 25,818 25,852
------------ ------------ ------------
Total ............................................................. $ 226,088 $ 225,489 $ 232,123
============ ============ ============
INTEREST SENSITIVE PRODUCT BENEFITS increased 0.6% in 1999 to $123.2 million and
decreased 0.2% in 1998 to $122.5 million. The components of interest sensitive
product benefits, along with selected average contractual interest crediting
rates, are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest credited to account balances ......................... $ 105,121 $ 105,604 $ 107,239
Death benefits in excess of related account balances .......... 18,110 16,923 15,490
Weighted average contractual crediting rates:
Universal life liabilities ............................... 6.01% 6.12% 6.32%
Annuity liabilities ...................................... 5.69 6.05 6.23
We decreased interest crediting rates on many of our products during 1999 and
1998 in response to the general decline in market interest rates during 1998.
The impact of the decreases in interest crediting rates was partially offset by
increases in the average account balances outstanding.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE
RELATED CHANGES IN RESERVES, increased 0.5% in 1999 to $77.5 million and
decreased 7.7% in 1998 to $77.1 million. Death and surrender benefits on
traditional products increased 2.1% in 1999 to $49.2 million and 3.6% in 1998 to
$48.2 million. Accident and health benefits increased 29.1% in 1999 to $5.5
million and decreased 33.0% in 1998 to $4.3 million. During 1999, these
increases were partially offset by a decrease in the change in reserves on life
and accident and health policies. A $5.9 million decrease in the change in
reserves in 1998 compared to 1997 is attributable primarily to a $4.0 million
decrease in the change in accident and health reserves resulting from fewer
disability income claims. Traditional life insurance and accident and health
benefits tend to fluctuate from year to year as a result of changes in mortality
and morbidity experience.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 1.8% in 1999 to $25.4
million and 0.1% in 1998 to $25.8 million. These decreases are primarily
attributable to decreases in the average interest rate used in the dividend
formula for these policies to 5.72% at December 31, 1999, from 5.84% at December
31, 1998 and 5.89% at December 31, 1997.
A summary of our underwriting, acquisition and insurance expenses is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ......................... $ 9,740 $ 9,125 $ 9,037
Amortization of deferred policy acquisition costs ............ 12,434 10,171 8,474
Other underwriting, acquisition and insurance expenses, net of
deferrals ................................................ 48,002 44,687 44,072
------------ ------------ ------------
Total .................................................... $ 70,176 $ 63,983 $ 61,583
============ ============ ============
18
COMMISSION EXPENSE increased 6.7% in 1999 to $9.7 million and 1.0% in 1998 to
$9.1 million. Commission expense increased during the periods due primarily to
an increase in direct life insurance premiums collected.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased 22.2% in 1999 to
$12.4 million and 20.0% in 1998 to $10.2 million. The increases are partially
attributable to increases in the unamortized acquisition cost asset due to
growth in the volume of business in force. During 1999, there was also a shift
in product profitability to blocks of business that have a larger acquisition
cost remaining to be amortized or that have higher amortization factors. During
1998, amortization also increased due to an increase in the profitability of the
underlying business.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 7.4% in 1999 to
$48.0 million and 1.4% in 1998 to $44.7 million. The increases are generally
attributable to an increase in the level of operations to support the promotion
and administration of variable products sold by our variable alliance partners.
In addition, included in insurance expenses for 1999 are restructuring charges
totaling $1.2 million relating to the closing of an administrative service
center. See "Restructuring." Expenses totaling $0.8 million in 1999, $2.2
million in 1998 and $0.7 million in 1997 were incurred to modify our computer
systems to prepare for the Year 2000 date conversion. See "Impact of Year 2000."
The increases were partially offset by a $0.9 million decrease in 1999 and $2.6
million decrease in 1998 in home office real estate expense due to the exchange
of home office properties on March 30, 1998. See "Exchange of Home Office
Properties." Changes in the amounts and timing of estimated guaranty fund
assessments resulted in a related credit of $1.2 million in 1998, while the
adoption of a new accounting pronouncement in 1997 resulted in an increase in
guaranty fund expense of $1.6 million in 1997.
INTEREST EXPENSE increased 51.1% in 1999 to $2.6 million and 13.2% in 1998 to
$1.7 million due to an increase in average debt outstanding.
OTHER EXPENSES decreased 2.8% in 1999 to $15.0 million and increased 33.6% in
1998 to $15.5 million. Other expenses were relatively consistent during 1999 as
the level of financial services provided to affiliates and third parties were
comparable. The increase in 1998 is due principally to an increase in the level
of leasing, management and financial services provided to affiliates and third
parties during 1998 compared to 1997.
INCOME TAXES decreased 1.9% in 1999 to $25.9 million and 31.2% in 1998 to $26.4
million. The effective tax rate was 31.9% for 1999, 31.8% for 1998 and 33.5% for
1997. The effective tax rates were lower than the federal statutory rate of 35%
due primarily to tax-exempt interest and dividend income and a tax benefit in
1999, 1998 and a portion of 1997 associated with the payment of dividends on
mandatorily redeemable preferred stock of subsidiary trust.
DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED STOCK OF
SUBSIDIARY TRUST were $4.9 million in 1999 and 1998 and $2.8 million in 1997.
The underlying securities were issued on May 30, 1997. The increase in 1998 is
offset by a corresponding decrease in dividends on serial preferred stock.
EQUITY INCOME, NET OF RELATED INCOME TAXES, increased 215.7% in 1999 to $4.0
million and decreased 39.8% in 1998 to $1.3 million. Equity income includes our
proportionate share of gains and losses on investments owned by the underlying
partnerships and joint ventures. The level of these gains and losses is subject
to fluctuation from year to year depending on the prevailing economic
environment and the timing of the sale of investments held by the partnerships
and joint ventures.
RESTRUCTURING
We closed an administrative service center during July 1999 and merged two life
insurance subsidiaries effective July 1, 1999. As a result of the closing of the
service center, a leased property was vacated, 22 job positions were eliminated
and moving costs were incurred. During 1999, we charged to expense costs
totaling $1.2 million, $0.4 million of which remains accrued at December 31,
1999, for related severance benefits, lease costs and other costs primarily
associated with closing the service center.
We expect to have pre-tax savings from these two transactions of approximately
$1.4 million annually beginning in 2000. Approximately $0.5 million in pre-tax
cost savings were earned during 1999 as a result of the restructuring.
19
DISCONTINUED OPERATIONS AND PRODUCT LINE
We recorded a gain of $1.4 million in 1999 and $1.0 million in 1998, net of
related income taxes, on the sale of Utah Farm Bureau Insurance Company (Utah
Insurance), a former wholly-owned property-casualty insurance company, to Farm
Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. In addition,
during 1998 the increase in net unrealized appreciation on securities classified
as available for sale was reduced $1.4 million, net of related income taxes, as
a result of the sale. The gain on the sale may be increased in future years in
accordance with an earn-out provision included in the related sales agreement.
See "Liquidity - FBL Financial Group, Inc."
Income (loss) from discontinued operations totaled $0.3 million for 1998 and
$0.7 million for 1997. Revenues from discontinued operations totaled $12.9
million through the date of sale in 1998 and $53.2 million in 1997.
During 2000, it is anticipated that we will discontinue underwriting long-term
disability income insurance and begin to offer, to our agents, a long-term
disability income product underwritten by one of our variable alliance partners.
We will not share in the risks, costs or profits of the new product, but will
earn a commission on new sales. It is anticipated that this change, over time,
will result in a decrease in accident and health premiums and benefits as our
existing block of business matures.
EXCHANGE OF HOME OFFICE PROPERTIES
On March 30, 1998, we exchanged a subsidiary owning our home office properties
for 2,536,112 unregistered shares of Class A common stock owned by the Iowa Farm
Bureau Federation. We are leasing a portion of the properties back from a
wholly-owned subsidiary of the Iowa Farm Bureau Federation under a 15-year
operating lease. The value of the transaction, which was structured as a
tax-free exchange of a real estate subsidiary, was $45.7 million, or $18.00 per
common share. The book value of the properties was $24.7 million on the date of
the exchange. A gain on the transaction of approximately $21.0 million was
deferred and is being amortized over the term of the operating lease. The
exchange did not have a significant impact on income from continuing operations
in 1999 or 1998, nor is it expected to have a significant impact in the future.
The impact is not significant because the increase in net expense associated
with leasing the properties versus owning them directly is substantially offset
by the amortization of the deferred gain on the transaction.
IMPACT OF YEAR 2000
Many of our computer programs were originally written using two digits rather
than four to define a particular year. As a result, these computer programs had
time-sensitive software that could have recognized a date using "00" as the year
1900 rather than the year 2000. This could have caused a system failure or
miscalculations causing disruptions to operations, including, but not limited
to, a temporary inability to process transactions, send premium notices and
calculate policy reserves and accruals. The Year 2000 could have also caused
other non-information technology systems, such as telephone switches, to fail or
malfunction.
As of March 10, 2000, we have not encountered any significant Year 2000
date-related problems that adversely impact our operations. The fact that we
have not encountered any significant problems is attributable to a three-year
date conversion project, which began in 1997. The plan consisted of the
following phases:
* Identification of all information technology and non-information technology
systems that have time-sensitive software.
* Modification or replacement of the software/systems.
* Testing the modified or new software/systems.
* Development of a contingency plan to address any critical system that may
malfunction.
In addition, we had ongoing formal communications with all of our significant
vendors to keep abreast of the extent to which our interface systems were
vulnerable to those third parties' failure to remediate their own Year 2000
issues.
The total incremental cost of the Year 2000 project (those costs which would not
have been incurred had the Year 2000 issue not existed) attributable to
continuing operations was $3.7 million and was funded through operating cash
flows. Year 2000 modification costs incurred and charged to expense totaled $0.8
million in 1999, $2.2 million in 1998 and $0.7 million in 1997. We also incurred
internal costs associated with the Year 2000 project. These
20
costs, which are principally payroll-related expenses for information systems
personnel, have not been separately accounted for and, therefore, are not
available. We expect costs incurred during 2000 related to the Year 2000 project
to be negligible.
Despite our success to date, we could still experience a disruption to our
operations as a result of the Year 2000. However, we believe the likelihood of
experiencing Year 2000 problems is remote, as our critical systems and programs
have been used in our daily operations since December 31, 1999 and, as stated
previously, no related problems have been encountered.
FINANCIAL CONDITION
INVESTMENTS
Our total investment portfolio decreased 2.7% to $2,950.2 million at December
31, 1999 compared to $3,031.4 million at December 31, 1998. This decrease is
primarily the result of a $162.5 million decrease in unrealized appreciation on
fixed maturity securities classified as available for sale, partially offset by
positive cash flows from operations. The decrease in unrealized appreciation on
fixed maturity securities is the result of an increase in market interest rates
at December 31, 1999 compared to December 31, 1998.
Over the last several years, the mix of the our life insurance business has been
shifting from traditional and interest sensitive products to variable products.
In addition, in an attempt to enhance our persistency rate, we have promoted an
exchange program for the rollover of universal life policies to variable
universal life policies. We expect the shift to variable products to continue
due to this program and the continued popularity of variable products. A
majority of premiums received on variable products are typically invested in our
separate accounts as opposed to the general account investments. This trend is
expected to impact the future growth rate of our investment portfolio and
separate account assets.
Internal investment professionals manage our investment portfolio. The
investment strategy is designed to achieve superior risk-adjusted returns
consistent with the investment philosophy of maintaining a largely investment
grade portfolio and providing adequate liquidity for obligations to
policyholders and other requirements. We continually review the returns on
invested assets and change the mix of invested assets as deemed prudent under
the current market environment to help maximize current income.
Our investment portfolio is summarized in the table below:
DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
CARRYING CARRYING CARRYING
VALUE PERCENT VALUE PERCENT VALUE PERCENT
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public .......................... $1,733,678 58.8% $1,852,291 61.1% $1,807,240 61.4%
144A private placement .......... 429,269 14.6 347,499 11.5 276,578 9.4
Private placement ............... 178,445 6.0 242,542 8.0 267,358 9.1
---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturities .......... 2,341,392 79.4 2,442,332 80.6 2,351,176 79.9
Equity securities ................... 35,345 1.2 35,287 1.2 57,736 2.0
Mortgage loans on real estate ....... 314,523 10.7 299,372 9.9 323,605 11.0
Investment real estate:
Acquired for debt ............... 783 -- 867 -- 1,168 --
Investment ...................... 19,336 0.6 39,812 1.3 38,774 1.3
Policy loans ........................ 123,717 4.2 123,328 4.1 121,941 4.2
Other long-term investments ......... 8,575 0.3 10,210 0.3 14,438 0.5
Short-term investments .............. 106,529 3.6 80,228 2.6 32,073 1.1
---------- ---------- ---------- ---------- ---------- ----------
Total investments ........... $2,950,200 100.0% $3,031,436 100.0% $2,940,911 100.0%
========== ========== ========== ========== ========== ==========
As of December 31, 1999, 93.8% (based on carrying value) of the fixed maturity
securities were investment grade debt securities, defined as being in the
highest two National Association of Insurance Commissioners (NAIC) designations.
Non-investment grade debt securities generally provide higher yields and involve
greater risks than investment grade debt securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities is usually more limited than for investment grade debt
securities. We regularly review the percentage of our portfolio that is invested
in non-investment grade debt securities (NAIC designations 3 through 6). As of
December 31, 1999,
21
the investment in non-investment grade debt was 6.2% of fixed maturity
securities. At that time no single non-investment grade holding exceeded 0.3% of
total investments.
The following table sets forth the credit quality, by NAIC designation and
Standard & Poors (S & P) rating equivalents, of fixed maturity securities.
DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
NAIC CARRYING CARRYING CARRYING
DESIGNATION EQUIVALENT S&P RATINGS (1) VALUE PERCENT VALUE PERCENT VALUE PERCENT
- ----------- ---------------------------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A)................ $1,414,868 60.4% $1,570,264 64.3% $1,548,628 65.9%
2 (BBB)....................... 781,342 33.4 738,468 30.2 689,414 29.3
---------- ---------- ---------- ---------- ---------- ----------
Total investment grade...... 2,196,210 93.8 2,308,732 94.5 2,238,042 95.2
3 (BB)........................ 107,249 4.6 105,138 4.3 62,214 2.7
4 (B)......................... 30,490 1.3 18,005 0.7 47,225 2.0
5 (CCC, CC, C)................ 7,293 0.3 7,060 0.3 525 --
6 In or near default.......... 150 -- 3,397 0.2 3,170 0.1
---------- ---------- ---------- ---------- ---------- ----------
Total below investment
grade..................... 145,182 6.2 133,600 5.5 113,134 4.8
---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturities...... $2,341,392 100.0% $2,442,332 100.0% $2,351,176 100.0%
========== ========== ========== ========== ========== ==========
(1) Private placement securities are generally rated by the Securities
Valuation Office of the NAIC. Comparisons between NAIC designations
and S & P ratings are published by the NAIC. S & P has not rated some
of the fixed maturity securities in our portfolio.
Mortgage and other asset-backed securities constitute a significant portion of
our portfolio of securities. These securities were purchased at a time when we
believed these types of investments provided superior risk-adjusted returns
compared to returns of more conventional investments such as corporate bonds and
mortgage loans. These securities are diversified as to collateral types, cash
flow characteristics and maturity.
The return of principal on mortgage and other asset-backed securities occurs
more frequently and is more variable than that of more traditional fixed
maturity securities. The principal prepayment speeds (e.g., the rate of
individuals refinancing their home mortgages) can vary based on a number of
economic factors that can not be predicted with certainty. These factors include
the prevailing interest rate environment and general status of the economy.
Deviations in actual prepayment speeds from that originally expected can cause a
change in the yield earned on mortgage and asset-backed securities purchased at
a premium or discount. Increases in prepayment speeds, which typically occur in
a decreasing interest rate environment, generally increases the rate at which
discount is accrued and premium is amortized into income. Decreases in
prepayment speeds, which typically occur in an increasing interest rate
environment, generally slows down the rate these amounts are recorded into
income.
The mortgage-backed portfolio includes pass-through and collateralized mortgage
obligation (CMO) securities. With a pass-through security, we receive a pro rata
share of principal payments as payments are made on the underlying mortgage
loans. CMOs consist of pools of mortgages divided into sections or "tranches"
which provide sequential retirement of the bonds. We invest in sequential
tranches, which provide cash flow stability in that principal payments do not
occur until the previous tranches are paid off. In addition, to provide call
protection and more stable average lives, we invest in CMOs such as planned
amortization class (PAC) and targeted amortization class (TAC) securities. CMOs
of these types provide more predictable cash flows within a range of prepayment
speeds by shifting the prepayment risks to support tranches. We do not purchase
certain types of collateralized mortgage obligations that we believe would
subject the investment portfolio to greater than average risk. These include,
but are not limited to, interest only, principal only, floater, inverse floater,
PAC II, Z and support tranches.
22
The following table sets forth the par value, amortized cost and carrying value
of our mortgage and asset-backed securities at December 31, 1999, summarized by
type of security.
PERCENT OF
AMORTIZED CARRYING FIXED
COST PAR VALUE VALUE MATURITIES
------------ ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential ...................................... $ 398,001 $ 402,276 $ 395,605 16.9%
Pass through .................................... 75,242 74,738 71,541 3.1
Planned and targeted amortization class ......... 41,042 41,144 40,953 1.7
Other ........................................... 11,396 11,663 11,389 0.5
------------ ------------ ------------ ----------
Total residential mortgage-backed securities ........ 525,681 529,821 519,488 22.2
Commercial mortgage-backed securities ............... 210,905 209,746 205,780 8.8
Other asset-backed securities ....................... 325,555 326,899 317,498 13.5
------------ ------------ ------------ ----------
Total mortgage and asset-backed securities .......... $ 1,062,141 $ 1,066,466 $ 1,042,766 44.5%
============ ============ ============ ==========
The commercial and other asset-backed securities are primarily sequential
securities. Commercial mortgage-backed securities typically have cash flows that
are less sensitive to interest rate changes than residential securities of
similar types due principally to prepayment restrictions on many of the
underlying commercial mortgage loans. Other asset-backed securities are
principally mortgage related (manufactured housing and home equity loans) which
historically have also demonstrated relatively less cash flow volatility than
residential securities of similar types.
At December 31, 1999, we held $314.5 million or 10.7% of invested assets in
mortgage loans. These mortgage loans are diversified as to property type,
location and loan size, and are collateralized by the related properties. At
December 31, 1999, mortgages more than 60 days delinquent accounted for less
than 0.1% of the carrying value of the mortgage portfolio. Our mortgage lending
policies establish limits on the amount that can be loaned to one borrower and
require diversification by geographic location and collateral type. Regions with
the largest concentration of our mortgage loan portfolio at December 31, 1999
include: Pacific (27.2%), which includes California; and West South Central
(25.7%), which includes Oklahoma and Texas. Mortgage loans on real estate are
also diversified by collateral type with office buildings (44.6%) and retail
facilities (34.6%) representing the largest holdings at December 31, 1999.
OTHER ASSETS
Deferred policy acquisition costs increased 16.1% to $236.3 million at December
31, 1999 due principally to the capitalization of costs incurred with new sales.
In addition, deferred policy acquisition costs increased $10.8 million during
1999 due to the impact of the decrease in unrealized appreciation on fixed
maturity securities classified as available for sale. Assets held in separate
accounts increased 34.7% to $256.0 million at December 31, 1999 due primarily to
net transfers to the separate accounts resulting from sales of our variable
products. Total assets increased 0.3% to $3,662.3 million at December 31, 1999.
During 1999, the impact of net income on assets was offset by the decrease in
unrealized appreciation on fixed maturity securities classified as available for
sale and a $25.7 million repurchase of our Class A common stock.
LIABILITIES
Policy liabilities and accruals increased 2.2% to $2,416.4 million at December
31, 1999. The relatively modest increase in policy liabilities is partially
attributable to our marketing emphasis on the sale of variable products. As
noted under the "Investments" section above, the shift in sales to variable
products will have an impact on the future growth rate of our policy liabilities
and accruals as well as the separate account liabilities. During 1999, we issued
$40.0 million in long-term debt and used the proceeds to fund the maturity of
our $24.5 million short-term note payable. Deferred income taxes decreased
109.9% from a liability of $46.5 million at December 31, 1998 to an asset of
$4.6 million at December 31, 1999, due principally to the decrease in unrealized
appreciation on fixed maturity securities classified as available for sale. At
December 31, 1999, we had total liabilities of $3,060.2 million, a 3.2% increase
from total liabilities at December 31, 1998.
23
STOCKHOLDERS' EQUITY
Stockholders' equity decreased 13.5%, to $505.0 million at December 31, 1999
compared to $583.6 million at December 31, 1998. This decrease is principally
attributable to the decrease in unrealized appreciation on securities classified
as available for sale and stock repurchases, partially offset by net income
during 1999.
At December 31, 1999, common stockholders' equity was $502.0 million, or $15.94
per share, compared to $580.6 million, or $17.75 per share at December 31, 1998.
Included in stockholders' equity per common share is ($1.52) at December 31,
1999 and $1.61 at December 31, 1998 attributable to unrealized investment gains
(losses) resulting from marking our fixed maturity securities classified as
available for sale to market value. The change in unrealized appreciation of
fixed maturity and equity securities classified as available for sale decreased
stockholders' equity $100.0 million during 1999, after related adjustments to
deferred policy acquisition costs, value of insurance in force acquired,
unearned revenue reserve and deferred income taxes.
MARKET RISKS OF FINANCIAL INSTRUMENTS
Interest rate risk is our primary market risk exposure. Substantial and
sustained increases and decreases in market interest rates can affect the
profitability of insurance products and market value of investments. The yield
realized on new investments generally increases or decreases in direct
relationship with interest rate changes. The market value of our fixed maturity
and mortgage loan portfolios generally increases when interest rates decrease,
and decreases when interest rates increase.
A majority of our insurance liabilities are backed by fixed maturity securities
and mortgage loans. The fixed maturity securities have laddered maturities and a
weighted average life of 8.6 years at December 31, 1999 and 7.0 years at
December 31, 1998. Accordingly, the earned rate on the portfolio lags behind
changes in market yields. The extent that the portfolio yield lags behind
changes in market yields generally depends upon the following factors:
* The average life of the portfolio.
* The amount and speed at which market interest rates rise or fall.
* The amount by which bond calls, mortgage loan prepayments and paydowns on
mortgage and asset-backed securities accelerate during periods of declining
interest rates.
* The amount by which bond calls, mortgage loan prepayments and paydowns on
mortgage and asset-backed securities decelerate during periods of
increasing interest rates.
For a majority of our traditional insurance products, profitability is
significantly affected by the spreads between interest yields on investments and
rates credited on insurance liabilities. For variable products, profitability on
the portion of the policyholder's account balance invested in our general
account, if any, is also affected by the spreads earned. The variable
policyholder assumes essentially all the investment earnings risk for the
portion of the account balance invested in the separate accounts.
For a substantial portion of our business in force, we have the ability to
adjust interest or dividend crediting rates in reaction to changes in portfolio
yield. We had the ability to adjust rates on 93% of our liabilities at December
31, 1999 and 1998. However, the ability to adjust these rates is limited by
competitive factors. Surrender rates could increase and new sales could be
negatively impacted if the crediting rates are not competitive with the rates on
similar products offered by other insurance companies and financial service
institutions. In addition, if market rates were to decrease substantially and
stay at a low level for an extended period of time, our spread could be lowered
due to interest rate guarantees on many of our interest sensitive products. At
December 31, 1999 and 1998, interest rate guarantees on interest sensitive
products ranged from 3.0% to 5.5%. The weighted average guarantee was 3.7% at
December 31, 1999 and 1998.
24
We design our products and manage our investment portfolio in a manner to
encourage persistency and to help ensure targeted spreads are earned. In
addition to the ability to change interest crediting rates on our products,
certain interest sensitive contracts have surrender and withdrawal penalty
provisions. The following is a summary of the surrender and discretionary
withdrawal characteristics of our interest sensitive products and supplementary
contracts without life contingencies:
RESERVE BALANCE AT
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Surrender charge rate:
Greater than or equal to 5% ................................. $ 288,695 $ 359,319
Less than 5%, but still subject to surrender charge ......... 266,317 240,345
Not subject to surrender charge ............................. 1,096,276 1,019,908
Not subject to surrender or discretionary withdrawal .............. 135,602 124,654
------------ ------------
Total ............................................................. $ 1,786,890 $ 1,744,226
============ ============
A major component of our asset-liability management program is structuring the
investment portfolio with cash flow characteristics consistent with the cash
flow characteristics of our insurance liabilities. We use computer models to
perform simulations of the cash flows generated from existing insurance policies
under various interest rate scenarios. Information from these models is used in
the determination of interest crediting rates and investment strategies.
Effective duration is a common measure for price sensitivity to changes in
interest rates. It measures the approximate percentage change in the market
value of a portfolio when interest rates change by 100 basis points. This
measure includes the impact of estimated changes in portfolio cash flows from
features such as bond calls and prepayments. When the estimated durations of
assets and liabilities are similar, exposure to interest rate risk is reduced
because a change in the value of assets should be largely offset by a change in
the value of liabilities. The effective duration of our fixed maturity portfolio
was approximately 4.7 at December 31, 1999 and 4.4 at December 31, 1998. The
effective duration of the interest sensitive products was approximately 4.5 at
December 31, 1999 and 3.5 at December 31, 1998.
If interest rates were to increase 10% from levels at December 31, 1999 and
1998, our fixed maturity securities and short-term investments, net of
corresponding changes in the values of deferred policy acquisition costs, value
of insurance in force acquired and unearned revenue reserves, would decrease
approximately $75.1 million at December 31, 1999 and $49.3 million at December
31, 1998. This hypothetical change in value does not take into account any
offsetting change in the value of insurance liabilities for investment contracts
since we estimate such value to be the cash surrender value of the underlying
contracts. If interest rates were to decrease 10% from levels at December 31,
1999 and 1998, the fair value of our debt and mandatorily redeemable preferred
stock of subsidiary trust would increase $2.9 million at December 31, 1999 and
$3.1 million at December 31,1998.
The computer models used to estimate the impact of a 10% change in market
interest rates use many assumptions and estimates that materially impact the
fair value calculations. Key assumptions used by the models include an immediate
and parallel shift in the yield curve and an acceleration of bond calls and
principal prepayments on mortgage and other asset-backed securities. Due to the
subjectivity of these assumptions, the actual impact of a 10% change in rates on
the fair market values would likely be different from that estimated.
Equity price risk is not material to us due to the relatively small equity
portfolio held at December 31, 1999. However, we do earn investment management
fees (on those investments managed by us) and mortality and expense fee income
based on the value of our separate accounts. On an annualized basis, the
investment management fee rates range from 0.20% to 0.45% for 1999 and 1998. The
mortality and expense fee rates range from 0.90% to 1.40% for 1999 and 1998. As
a result, revenues from these sources do fluctuate with changes in the market
value of the equity, fixed maturity and other securities held by the separate
accounts.
25
LIQUIDITY
FBL FINANCIAL GROUP, INC.
Our parent company cash inflows from operations consists primarily of dividends
from subsidiaries, if declared and paid, fees which it charges the various
subsidiaries and affiliates for management of their operations and tax
settlements between our parent company and its subsidiaries. Cash outflows are
principally for salaries and other expenses related to providing these
management services, dividends on outstanding stock and interest on our holding
company debt issued to a subsidiary. In addition, our parent company will on
occasion enter into capital transactions such as the acquisition of our common
stock.
We received $25.0 million in cash on March 31, 1998 in connection with the sale
of Utah Insurance. We received $3.2 million (before applicable taxes) subsequent
to the sale in accordance with an earn-out provision included in the underlying
sales agreement. We may receive additional consideration during each of the
three years in the period ending December 31, 2003, in accordance with the
earn-out provision. Under the earn-out arrangement, we and Farm Bureau Mutual
share equally in the dollar amount by which the incurred losses on Utah
Insurance's direct business, net of reinsurance ceded, is less than the incurred
losses assumed in the valuation model used to derive the initial $25.0 million
acquisition price. The earn-out calculation is performed and settlements
(subject to a maximum of $2.0 million per year) are made on a calendar year
basis.
On May 30, 1997, FBL Financial Group Capital Trust (the Trust), a consolidated
wholly-owned subsidiary, issued $97.0 million of 5% Preferred Securities to the
Iowa Farm Bureau Federation. In connection with the Trust's issuance of the 5%
Preferred Securities and the related purchase of all of the Trust's common
securities, the parent company issued to the Trust $100.0 million principal
amount of its 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the
Notes). Concurrent with the issuance of the Notes, we purchased from the Iowa
Farm Bureau Federation 5,000,000 shares of our Series A preferred stock at its
liquidation value of $100.0 million. In addition, we issued 5,000,000 shares of
Series B preferred stock to the Iowa Farm Bureau Federation for $3.0 million.
The purchase of Series A preferred stock and simultaneous issuance of Series B
preferred stock and 5% Preferred Securities were noncash transactions. Except
for the maturity of the Notes on June 1, 2047, the parent company's future cash
flow requirements were not changed significantly by the aforementioned
transactions.
We acquired Class A common shares totaling 1,322,920 in 1999, 3,497,648 in 1998
and 1,930,740 in 1997 as a result of three stock repurchases and the exchange of
a subsidiary owning our home office properties. These transactions reduced
stockholders' equity $25.7 million in 1999, $70.7 million in 1998 and $24.8
million in 1997.
We paid common and preferred stock dividends totaling $10.8 million in 1999,
$10.2 million in 1998 and $9.4 million in 1997. It is anticipated that dividend
requirements for 2000 will be $0.09 per quarter per common share and $0.0075 per
quarter per preferred share, or approximately $11.3 million. In addition,
interest payments on the Notes are estimated to be $5.0 million for 2000.
FBL Financial Group, Inc. expects to rely on available cash resources and on
dividends from Farm Bureau Life to make any dividend payments to its
stockholders and interest payments on its Notes. The ability of Farm Bureau Life
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. In addition, under the Iowa
Insurance Holding Company Act, Farm Bureau Life may not pay an "extraordinary"
dividend without prior notice to and approval by the Iowa insurance
commissioner. An "extraordinary" dividend is defined under the Iowa Insurance
Holding Company Act as any dividend or distribution of cash or other property
whose fair market value, together with that of other dividends or distributions
made within the preceding 12 months, exceeds the greater of (i) 10% of
policyholders' surplus (total statutory capital stock and statutory surplus) as
of December 31 of the preceding year, or (ii) the statutory net gain from
operations of the insurer for the 12-month period ending December 31 of the
preceding year. During 2000, the maximum amount legally available for
distribution to FBL Financial Group, Inc. without further regulatory approval is
$40.6 million.
26
On September 22, 1999, Farm Bureau Life paid an extraordinary dividend totaling
$75.0 million, consisting of cash and fixed maturity securities, to FBL
Financial Group, Inc. Because of this dividend, we expect that further
regulatory approval will be required for any dividends prior to the expiration
of the aforementioned 12-month measurement period ending September 22, 2000.
However, management believes that, due to the financial strength of Farm Bureau
Life, such regulatory approval would be granted to fund FBL Financial Group's
regular quarterly interest and dividend (subject to Board approval)
requirements, if needed.
Primarily as a result of the $75.0 million dividend, FBL Financial Group, Inc.
has cash and investments totaling $72.7 million at December 31, 1999. Except for
the potential acquisition of approximately $24.4 million worth of our common
stock to complete a stock repurchase plan and payment of expected recurring
dividends, management does not have any immediate plans to deploy this capital
and is currently evaluating capital management and investment options. We may
from time to time review potential acquisition opportunities. It is anticipated
that funding for any such acquisition would be provided from available cash
resources, debt or equity financing. As of December 31, 1999, we had no material
commitments for capital expenditures.
INSURANCE OPERATIONS
The Life Companies' cash inflows consist primarily of premium income, deposits
to policyholder account balances, product charges on variable products, income
from investments, sales, maturities and calls of investments and repayments of
investment principal. The Life Companies' cash outflows are primarily related to
withdrawals of policyholder account balances, investment purchases, payment of
policy acquisition costs, policyholder benefits, income taxes, dividends and
current operating expenses. Life insurance companies generally produce a
positive cash flow which may be measured by the degree to which cash inflows are
adequate to meet benefit obligations to policyholders and normal operating
expenses as they are incurred. The remaining cash flow is generally used to
increase the asset base to provide funds to meet the need for future policy
benefit payments and for writing new business. The Life Companies' liquidity
positions continued to be favorable in 1999, with cash inflows at levels
sufficient to provide the funds necessary to meet their obligations.
For the life insurance operations, cash outflow requirements for operations are
typically met from the year's normal premium and deposit cash inflows. This has
been the case for all reported years as the Life Companies' continuing
operations and financing activities relating to interest sensitive products
provided funds amounting to $104.1 million in 1999, $121.5 million in 1998 and
$99.3 million in 1997. These funds were primarily used to increase the insurance
companies' short-term and fixed maturity investment portfolios. In developing
their investment strategy, the Life Companies establish a level of cash and
securities which, when combined with expected net cash inflows from operations,
maturities of fixed maturity investments and principal payments on mortgage and
asset-backed securities and mortgage loans, are believed adequate to meet
anticipated short-term and long-term benefit and expense payment obligations.
Through its membership in the Federal Home Loan Bank of Des Moines (FHLB), Farm
Bureau Life is eligible to establish and borrow on a line of credit to provide
it additional liquidity. The line of credit available is based on the amount of
capital stock of the FHLB owned by Farm Bureau Life, which supported a borrowing
capacity of $55.8 million as of December 31, 1999. During 1999, Farm Bureau Life
established a line of credit and borrowed $40.0 million under this arrangement,
leaving a borrowing capacity of $15.8 million at December 31, 1999. The
outstanding debt is due September 17, 2003, and interest on the debt is charged
at a variable rate equal to the London Interbank Offered Rate less 0.0475%
(5.77% at December 31, 1999). Fixed maturity securities with a carrying value of
$41.7 million are on deposit with the FHLB as collateral for the note. Interest
is payable at the current market rate on the date of issuance. Proceeds from the
note were used to fund the maturity of our $24.5 million short-term debt.
We have a $12.0 million line of credit with Farm Bureau Mutual in the form of a
revolving demand note. Borrowings on the note, which totaled $11.7 million at
December 31, 1999 and $8.6 million at December 31, 1998, are being used to
acquire assets that will be leased to certain affiliates, including Farm Bureau
Mutual. Interest is payable at a rate equal to the prime rate of a national bank
(8.50% at December 31, 1999).
We anticipate that funds to meet our short-term and long-term capital
expenditures, cash dividends to stockholders and operating cash needs will come
from existing capital and internally generated funds. We believe that the
current level of cash and available-for-sale and short-term securities, combined
with expected net cash inflows from operations, maturities of fixed maturity
investments, principal payments on mortgage and asset-backed securities,
27
mortgage loans and our insurance products, are adequate to meet our anticipated
cash obligations for the foreseeable future. Our investment portfolio at
December 31, 1999, included $106.5 million of short-term investments and $271.7
million in carrying value of U.S. Government and U.S. Government agency backed
securities that could be readily converted to cash at or near carrying value.
PENDING ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (Statement) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Accounting for gains or losses resulting from changes in the values
of those derivatives is dependent on the use of the derivative and whether it
qualifies for hedge accounting. Statement No. 133 allows companies to transfer
securities classified as held for investment to either the available-for-sale or
trading categories in connection with the adoption of the new standard. The
Statement's effective date for the Company has been extended to the fiscal year
beginning January 1, 2001, with earlier adoption encouraged. Because of our
minimal use of derivatives, we do not anticipate that the adoption of the new
Statement will have a significant effect on earnings or our financial position.
EFFECTS OF INFLATION
We do not believe that inflation has had a material effect on our consolidated
results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
From time to time, we may publish statements relating to anticipated financial
performance, business prospects, new products, and similar matters. These
statements and others that 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. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
these types of statements. In order to comply with the terms of the safe harbor,
please note that 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:
* Changes to interest rate levels and stock market performance may impact our
lapse rates, market value of our investment portfolio and our ability to
sell life insurance products, notwithstanding product features to mitigate
the financial impact of such changes.
* The degree to which our products are accepted by customers and agents
(including the agents of our alliance partners) will impact our future
growth rate.
* Extraordinary acts of nature or man may result in higher than expected
claim activity.
* Changes in federal and state income tax laws and regulations may affect the
relative tax advantage of our products.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risks of Financial Instruments" (page 24), for
our qualitative and quantitative disclosures about market risk.
28
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FBL FINANCIAL GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Report of Management....................................................... 30
Report of Independent Auditors............................................. 31
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................ 32
Consolidated Statements of Income.......................................... 34
Consolidated Statements of Changes in Stockholders' Equity................. 35
Consolidated Statements of Cash Flows...................................... 36
Notes to Consolidated Financial Statements................................. 38
29
REPORT OF MANAGEMENT
To Our Stockholders
The management of FBL Financial Group, Inc. is responsible for the integrity of
the financial information contained in this annual report. The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. Certain financial
information presented depends on management's estimates and judgments regarding
the ultimate outcome of transactions which are not yet complete. Management
believes these estimates and judgements are fair and reasonable based upon
available information.
Management maintains a system of internal control designed to meet its
responsibilities for preparing reliable financial statements. The system is
designed to provide reasonable assurance that assets are safeguarded and
transactions are properly authorized and reported. Reasonable assurance is based
upon the premise that the cost of controls should not exceed the benefits
derived from them. An internal audit department is maintained to continually
monitor and challenge the adequacy of internal control. It is management's
opinion that its system of internal control during the periods covered by this
annual report was effective in providing reasonable assurance that the financial
statements are fairly stated in all material respects.
The Company engages Ernst & Young LLP as independent auditors to audit its
financial statements and express their opinion thereon. Their audits include
reviews and tests of the Company's internal controls to the extent they believe
necessary to determine and conduct the audit procedures that support their
opinion. A copy of Ernst & Young LLP's audit opinion follows this letter.
The Audit Committee of the Board of Directors, composed solely of nonmanagement
directors, meets periodically with management, internal auditors and Ernst &
Young LLP to review internal accounting control, audit activities, auditor
independence and financial reporting matters. The internal auditors and Ernst &
Young LLP have free access to the Audit Committee, with and without the presence
of management, to discuss the adequacy of internal controls and to review the
quality of financial reporting. The Audit Committee is also responsible for
making recommendations to the Board of Directors concerning the selection of
independent auditors.
William J. Oddy
CHIEF EXECUTIVE OFFICER AND DIRECTOR
James W. Noyce
CHIEF FINANCIAL OFFICER
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of FBL Financial
Group, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FBL
Financial Group, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 14, 2000
31
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 1999 - $337,794; 1998 -
$516,729) ................................................................ $ 339,362 $ 492,288
Available for sale, at market (amortized cost: 1999 - $2,077,341; 1998 -
$1,862,861) .............................................................. 2,002,030 1,950,044
Equity securities, at market (cost: 1999 - $38,147; 1998 - $39,589) ............ 35,345 35,287
Mortgage loans on real estate .................................................. 314,523 299,372
Investment real estate, less allowances for depreciation of $2,300 in 1999
and $4,223 in 1998 .......................................................... 20,119 40,679
Policy loans ................................................................... 123,717 123,328
Other long-term investments .................................................... 8,575 10,210
Short-term investments ......................................................... 106,529 80,228
------------ ------------
Total investments ................................................................. 2,950,200 3,031,436
Cash and cash equivalents ......................................................... 6,482 4,516
Securities and indebtedness of related parties .................................... 61,309 65,291
Accrued investment income ......................................................... 35,707 34,318
Accounts and notes receivable ..................................................... 1,733 833
Amounts receivable from affiliates ................................................ 4,484 4,020
Reinsurance recoverable ........................................................... 4,812 4,711
Deferred policy acquisition costs ................................................. 236,263 203,581
Value of insurance in force acquired .............................................. 15,894 14,533
Property and equipment, less allowances for depreciation of $40,115 in 1999
and $37,100 in 1998 ............................................................ 60,506 55,250
Current income taxes recoverable .................................................. -- 13,185
Deferred income taxes ............................................................. 4,616 --
Goodwill, less accumulated amortization of $4,181 in 1999 and $3,484 in
1998 ........................................................................... 9,251 9,948
Other assets ...................................................................... 15,046 19,227
Assets held in separate accounts .................................................. 256,028 190,111
------------ ------------
Total assets ............................................................. $ 3,662,331 $ 3,650,960
============ ============
32
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products ............................................. $ 1,626,042 $ 1,596,471
Traditional life insurance and accident and health products ............. 752,733 731,873
Unearned revenue reserve ................................................ 27,650 25,373
Other policy claims and benefits ............................................. 10,019 10,625
------------ ------------
2,416,444 2,364,342
Other policyholders' funds:
Supplementary contracts without life contingencies ........................... 160,848 147,755
Advance premiums and other deposits .......................................... 83,258 84,206
Accrued dividends ............................................................ 13,554 13,797
------------ ------------
257,660 245,758
Short-term debt ................................................................. -- 24,500
Short-term debt payable to affiliate ............................................ 11,694 8,626
Amounts payable to affiliates ................................................... 166 511
Long-term debt .................................................................. 40,000 71
Current income taxes payable .................................................... 1,002 --
Deferred income taxes ........................................................... -- 46,497
Other liabilities ............................................................... 77,184 85,453
Liabilities related to separate accounts ........................................ 256,028 190,111
------------ ------------
Total liabilities ....................................................... 3,060,178 2,965,869
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust .......................................................... 97,000 97,000
Other .......................................................................... 145 4,503
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 30,307,232 shares in 1999 and 31,512,113 shares
in 1998 ...................................................................... 42,308 42,034
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares ...................................... 7,558 7,558
Accumulated other comprehensive income (loss) ................................... (49,917) 50,050
Retained earnings ............................................................... 502,059 480,946
------------ ------------
Total stockholders' equity ................................................... 505,008 583,588
------------ ------------
Total liabilities and stockholders' equity .............................. $ 3,662,331 $ 3,650,960
============ ============
See accompanying notes.
33
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Interest sensitive product charges ................................ $ 55,363 $ 52,157 $ 47,979
Traditional life insurance and accident and health premiums ....... 95,930 93,473 92,528
Net investment income ............................................. 225,820 228,067 220,366
Realized gains (losses) on investments ............................ (2,342) (4,878) 40,953
Other income ...................................................... 20,215 20,802 19,525
------------ ------------ ------------
Total revenues ................................................. 394,986 389,621 421,351
Benefits and expenses:
Interest sensitive product benefits ............................... 123,231 122,527 122,729
Traditional life insurance and accident and health benefits ....... 57,941 55,880 56,369
Increase in traditional life and accident and health future
policy benefits ................................................ 19,556 21,264 27,173
Distributions to participating policyholders ...................... 25,360 25,818 25,852
Underwriting, acquisition and insurance expenses .................. 70,176 63,983 61,583
Interest expense .................................................. 2,553 1,690 1,493
Other expenses .................................................... 15,020 15,453 11,565
------------ ------------ ------------
Total benefits and expenses .................................... 313,837 306,615 306,764
------------ ------------ ------------
81,149 83,006 114,587
Income taxes .......................................................... (25,911) (26,404) (38,367)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily redeemable
preferred stock of subsidiary trust ............................ (4,850) (4,850) (2,829)
Other ............................................................. (35) (335) (351)
Equity income, net of related income taxes ............................ 3,972 1,258 2,088
------------ ------------ ------------
Income from continuing operations ..................................... 54,325 52,675 75,128
Discontinued operations:
Income from property-casualty operations, net of related
income taxes ................................................... -- 287 699
Gain on disposal of property-casualty operations, net of
related income taxes ........................................... 1,385 978 --
------------ ------------ ------------
Net income ............................................................ 55,710 53,940 75,827
Dividends on Series A and B preferred stock ........................... (150) (150) (2,171)
------------ ------------ ------------
Net income applicable to common stock ................................. $ 55,560 $ 53,790 $ 73,656
============ ============ ============
Earnings per common share:
Income from continuing operations ................................. $ 1.68 $ 1.56 $ 2.01
Income from discontinued operations ............................... 0.04 0.04 0.02
------------ ------------ ------------
Earnings per common share ......................................... $ 1.72 $ 1.60 $ 2.03
============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ................................. $ 1.65 $ 1.52 $ 1.97
Income from discontinued operations ............................... 0.04 0.04 0.02
------------ ------------ ------------
Earnings per common share - assuming dilution ..................... $ 1.69 $ 1.56 $ 1.99
============ ============ ============
Cash dividends per common share ....................................... $ 0.33 $ 0.30 $ 0.20
============ ============ ============
See accompanying notes.
34
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME (LOSS) EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 1997 .............. $ 100,000 $ 43,773 $ 7,567 $ 27,858 $ 459,324 $ 638,522
Comprehensive income:
Net income for 1997 .................. -- -- -- -- 75,827 75,827
Change in net unrealized investment
gains/losses ........................ -- -- -- 20,701 -- 20,701
------------
Total comprehensive income ............ 96,528
Purchase of Series A preferred stock .. (100,000) -- -- -- -- (100,000)
Issuance of Series B preferred stock .. 3,000 -- -- -- -- 3,000
Purchase of 1,930,740 shares of
common stock ......................... -- (2,402) -- -- (22,432) (24,834)
Issuance of 136,578 shares of
common stock under stock option
plan, including related income tax
benefit .............................. -- 1,536 -- -- -- 1,536
Dividends on preferred stock .......... -- -- -- -- (2,171) (2,171)
Dividends on common stock ............. -- -- -- -- (7,266) (7,266)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 ............ 3,000 42,907 7,567 48,559 503,282 605,315
Comprehensive income:
Net income for 1998 .................. -- -- -- -- 53,940 53,940
Change in net unrealized investment
gains/losses ........................ -- -- -- 1,491 -- 1,491
------------
Total comprehensive income ............ 55,431
Acquisition of 2,536,112 shares of
common stock in exchange for
properties ........................... -- (3,340) -- -- (42,310) (45,650)
Purchase of 961,536 shares of
common stock ......................... -- (1,224) -- -- (23,784) (25,008)
Issuance of 277,313 shares of
common stock under stock option
plan, including related income tax
benefit .............................. -- 3,742 -- -- -- 3,742
Adjustment resulting from capital
transactions of equity investee ...... -- (51) (9) -- -- (60)
Dividends on preferred stock .......... -- -- -- -- (150) (150)
Dividends on common stock ............. -- -- -- -- (10,032) (10,032)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 ............ 3,000 42,034 7,558 50,050 480,946 583,588
Comprehensive income (loss):
Net income for 1999 .................. -- -- -- -- 55,710 55,710
Change in net unrealized investment
gains/losses ........................ -- -- -- (99,967) -- (99,967)
------------
Total comprehensive loss .............. (44,257)
Purchase of 1,322,920 shares of
common stock ......................... -- (1,813) -- -- (23,839) (25,652)
Issuance of 118,039 shares of
common stock under employee
benefit and stock option plans,
including related income tax
benefit .............................. -- 2,087 -- -- -- 2,087
Dividends on preferred stock .......... -- -- -- -- (150) (150)
Dividends on common stock ............. -- -- -- -- (10,608) (10,608)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 ............ $ 3,000 $ 42,308 $ 7,558 $ (49,917) $ 502,059 $ 505,008
============ ============ ============ ============ ============ ============
See accompanying notes.
35
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES
Continuing operations:
Net income ............................................................ $ 54,325 $ 52,675 $ 75,128
Adjustments to reconcile net income to net cash provided by
continuing operations:
Adjustments related to interest sensitive products:
Interest credited to account balances ........................ 105,121 105,604 107,238
Charges for mortality and administration ..................... (54,229) (52,050) (48,468)
Deferral of unearned revenues ................................ 2,456 2,607 2,417
Amortization of unearned revenue reserve ..................... (1,318) (888) (775)
Provision for depreciation and amortization ...................... 16,202 10,629 17,276
Net losses (gains) related to investments held by broker-
dealer and investment company subsidiaries ................... 135 326 (1,130)
Realized losses (gains) on investments ........................... 2,342 4,878 (40,953)
Increase in traditional life and accident and health benefit
accruals ..................................................... 20,552 22,305 26,921
Policy acquisition costs deferred ................................ (34,275) (31,081) (30,111)
Amortization of deferred policy acquisition costs ................ 12,434 10,171 8,474
Provision for deferred income taxes .............................. 2,435 3,051 (8,552)
Other ............................................................ 4,278 19,830 (9,240)
------------ ------------ ------------
Net cash provided by continuing operations ................................. 130,458 148,057 98,225
Discontinued operations:
Net income ............................................................ 1,385 1,265 699
Adjustments to reconcile net income to net cash provided by
discontinued operations .......................................... (1,385) 1,207 7,144
------------ ------------ ------------
Net cash provided by discontinued operations ............................... -- 2,472 7,843
------------ ------------ ------------
Net cash provided by operating activities .................................. 130,458 150,529 106,068
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ................................ 154,700 151,298 49,961
Fixed maturities - available for sale ................................. 208,154 280,324 288,893
Equity securities ..................................................... 10,391 24,843 115,742
Mortgage loans on real estate ......................................... 53,922 75,887 48,059
Investment real estate ................................................ 20,080 1,349 1,191
Policy loans .......................................................... 28,401 28,423 27,513
Other long-term investments ........................................... 1,169 2,152 660
Short-term investments - net .......................................... -- -- 38,870
------------ ------------ ------------
476,817 564,276 570,889
36
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
INVESTING ACTIVITIES (CONTINUED)
Acquisition of investments:
Fixed maturities - available for sale ........................... $ (428,718) $ (513,992) $ (422,178)
Equity securities ............................................... (6,663) (5,644) (50,368)
Mortgage loans on real estate ................................... (69,606) (51,883) (78,703)
Investment real estate .......................................... (726) (3,096) (10,208)
Policy loans .................................................... (28,790) (29,810) (30,458)
Other long-term investments ..................................... (1,014) (1,726) (4,960)
Short-term investments - net .................................... (26,301) (48,155) --
------------ ------------ ------------
(561,818) (654,306) (596,875)
Proceeds from disposal, repayments of advances and other
distributions from equity investees ............................. 11,395 6,254 16,519
Investments in and advances to equity investees ...................... (6,654) (5,505) (41,018)
Net cash paid for acquisitions ....................................... -- -- (9,694)
Net proceeds from sale of discontinued operations .................... 1,229 24,844 --
Net purchases of property and equipment and other .................... (16,172) (26,680) (13,249)
Investing activities of discontinued operations ...................... -- (2,474) (8,356)
------------ ------------ ------------
Net cash used in investing activities ................................ (95,203) (93,591) (81,784)
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited
to policyholder account balances ................................ 255,931 260,949 258,919
Return of policyholder account balances on interest sensitive
and variable products ........................................... (264,159) (286,469) (247,823)
Proceeds from short-term debt with affiliate ......................... 3,068 8,626 --
Repayments of short-term debt ........................................ (24,500) -- --
Proceeds from long-term debt ......................................... 40,000 -- --
Repayments of long-term debt ......................................... (71) (6) (4)
Distributions on company-obligated mandatorily redeemable
preferred stock of subsidiary trust ............................. (4,850) (4,850) (2,829)
Other distributions to minority interests - net ...................... (4,588) (335) (663)
Purchase of common stock ............................................. (25,309) (25,008) (24,834)
Issuance of common stock ............................................. 1,947 2,456 1,201
Dividends paid ....................................................... (10,758) (10,182) (9,437)
------------ ------------ ------------
Net cash used in financing activities ................................ (33,289) (54,819) (25,470)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ..................... 1,966 2,119 (1,186)
Cash and cash equivalents at beginning of year ....................... 4,516 2,397 3,583
------------ ------------ ------------
Cash and cash equivalents at end of year ............................. $ 6,482 $ 4,516 $ 2,397
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ........................................................ $ 2,414 $ 1,676 $ 1,486
Income taxes .................................................... 11,781 23,683 56,592
See accompanying notes.
37
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
FBL Financial Group, Inc. (we or the Company) operates predominantly in the life
insurance industry through its principal subsidiaries, Farm Bureau Life
Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company
(EquiTrust) (collectively, the Life Companies). We currently market individual
life insurance policies and annuity contracts to Farm Bureau members and other
individuals and businesses in 14 midwestern and western states. Variable
universal life insurance and variable annuity contracts are also marketed in
these and other states through alliances with other insurance companies and a
regional broker/dealer. Several subsidiaries support various functional areas of
the Life Companies and other affiliates, by providing investment advisory,
marketing and distribution, and leasing services. In addition, we manage four
Farm Bureau affiliated property-casualty companies.
CONSOLIDATION
Our consolidated financial statements include the financial statements of FBL
Financial Group, Inc. and its direct and indirect subsidiaries. All significant
intercompany transactions have been eliminated.
INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
Fixed maturity securities, comprised of bonds and redeemable preferred stocks
that we have a positive intent and ability to hold to maturity, are designated
as "held for investment." Held for investment securities are reported at cost
adjusted for amortization of premiums and discounts. Changes in the market value
of these securities, except for declines that are other than temporary, are not
reflected in our financial statements. Fixed maturity securities which may be
sold are designated as "available for sale." Available for sale securities are
recorded at market value and unrealized gains and losses on these securities are
included directly in stockholders' equity as a component of accumulated other
comprehensive income or loss. The unrealized gains and losses included in
accumulated other comprehensive income or loss are reduced by a provision for
deferred income taxes and adjustments to deferred policy acquisition costs,
value of insurance in force acquired and unearned revenue reserve that would
have been required as a charge or credit to income had these amounts been
realized. Premiums and discounts are amortized/accrued using methods which
result in a constant yield over the securities' expected lives.
Amortization/accrual of premiums and discounts on mortgage and asset-backed
securities incorporates prepayment assumptions to estimate the securities'
expected lives.
Equity securities, comprised of common and non-redeemable preferred stocks, are
reported at market value. The change in unrealized appreciation and depreciation
of equity securities is included directly in stockholders' equity, net of any
related deferred income taxes, as a component of accumulated other comprehensive
income or loss.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate are reported at cost adjusted for amortization of
premiums and accrual of discounts. If we determine that the value of any
mortgage loan is impaired (i.e., when it is probable we will be unable to
collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the mortgage loan is reduced to its fair
value, which may be based upon the present value of expected future cash flows
from the loan (discounted at the loan's effective interest rate), or the fair
value of the underlying collateral. The carrying value of impaired loans is
reduced by the establishment of a valuation allowance, changes to which are
recognized as realized gains or losses on investments. Interest income on
impaired loans is recorded on a cash basis.
INVESTMENT REAL ESTATE
Investment real estate is reported at cost less allowances for depreciation.
Real estate acquired through foreclosure, which is included with investment real
estate in our consolidated balance sheets, is recorded at the lower of cost
(which includes the balance of the mortgage loan, any accrued interest and any
costs incurred to obtain title to the property) or fair value as determined at
or before the foreclosure date. The carrying value of these assets is subject to
regular review. If the fair value, less estimated sales costs, of real estate
owned decreases to an amount lower than its carrying value, a valuation
allowance is established for the difference. This valuation allowance can be
38
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reduced or eliminated should the fair value of the property increase. Changes in
this valuation allowance are recognized as realized gains or losses on
investments. No allowance was recorded at December 31, 1999 or December 31,
1998.
OTHER INVESTMENTS
Policy loans are reported at unpaid principal balance. Short-term investments
are reported at cost adjusted for amortization of premiums and accrual of
discounts.
Other long-term investments include certain nontraditional investments and
securities held by subsidiaries engaged in the broker-dealer or venture capital
investment company industries. Nontraditional investments include a debt-related
instrument and investment deposits which are reported at cost. In accordance
with accounting practices for the broker-dealer and investment company
industries, marketable securities held by subsidiaries in these industries are
valued at market value if readily marketable or at fair value, as determined by
the Board of Directors of the subsidiary holding the security, if not readily
marketable. The resulting difference between cost and market is included in the
statements of income as net investment income. Realized gains and losses are
also reported as a component of net investment income.
Securities and indebtedness of related parties include investments in
partnerships and corporations over which we may exercise significant influence.
Such investments are accounted for using the equity method. Changes in the value
of the Company's investment in equity investees attributable to capital
transactions of the investee, such as an additional offering of stock, are
recorded directly to stockholders' equity. Securities and indebtedness of
related parties also includes advances and loans to the partnerships and
corporations which are principally reported at cost.
REALIZED GAINS AND LOSSES ON INVESTMENTS
The carrying values of all our investments are reviewed on an ongoing basis for
credit deterioration, and if this review indicates a decline in market value
that is other than temporary, carrying value in the investment is reduced to its
estimated realizable value (the sum of the estimated nondiscounted cash flows
for securities or fair value for mortgage loans on real estate) and a specific
writedown is taken. Such reductions in carrying value are recognized as realized
losses on investments. Realized gains and losses on sales are determined on the
basis of specific identification of investments. If we expect that an issuer of
a security will modify its payment pattern from contractual terms but no
writedown is required, future investment income is recognized at the rate
implicit in the calculation of net realizable value under the expected payment
pattern.
MARKET VALUES
Market values of fixed maturity securities are reported based on quoted market
prices, where available. Market values of fixed maturity securities not actively
traded in a liquid market are estimated using a matrix calculation assuming a
spread (based on interest rates and a risk assessment of the bonds) over U. S.
Treasury bonds. Market values of redeemable preferred stocks and equity
securities are based on the latest quoted market prices, or for those not
readily marketable, generally at values which are representative of the market
values of comparable issues.
CASH AND CASH EQUIVALENTS
For purposes of our consolidated statements of cash flows, we consider all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions and other
expenses related to the production of new business, have been deferred. The
value of insurance in force acquired represents the cost assigned to insurance
contracts when an insurance company is acquired. The initial value is determined
by an actuarial study using expected future gross profits as a measurement of
the net present value of the insurance acquired. Interest accrues on the
unamortized balance at a weighted average rate of 5.72%.
39
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For participating traditional life insurance and interest sensitive products
(principally universal life insurance policies and annuity contracts), these
costs are being amortized generally in proportion to expected gross profits
(after dividends to policyholders, if applicable) from surrender charges and
investment, mortality, and expense margins. That amortization is adjusted
retrospectively when estimates of current or future gross profits/margins
(including the impact of investment gains and losses) to be realized from a
group of products are revised. For nonparticipating traditional life and
accident and health insurance products, these costs are amortized over the
premium paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumptions used for computing
liabilities for future policy benefits.
PROPERTY AND EQUIPMENT
Property and equipment, comprised primarily of furniture, equipment and
capitalized software costs, are reported at cost less allowances for
depreciation and amortization. Depreciation and amortization expense are
computed primarily using the straight-line method over the estimated useful
lives of the assets. Depreciation and amortization expense was $12.4 million in
1999, $11.4 million in 1998 and $11.0 million in 1997.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP, which was adopted prospectively as of January 1, 1999,
requires the capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Prior to the adoption of SOP
98-1, we capitalized external software development costs and charged internal
costs, primarily payroll and related items, to expense as they were incurred.
Pursuant to the SOP, these internal costs are now capitalized. The effect of
adopting the SOP was to increase net income for the year ended December 31, 1999
by $0.2 million.
GOODWILL
Goodwill represents the excess of the fair value of assets exchanged over the
net assets acquired. Goodwill is generally being amortized on a straight-line
basis over a period of 20 years. The carrying value of goodwill is regularly
reviewed for indicators of impairment in value, which in the view of management
are other than temporary. If facts and circumstances suggest that goodwill is
impaired, we assess the fair value of the underlying business and reduce
goodwill to an amount that results in the book value of the underlying business
approximating fair value. We have not recorded any such writedowns during 1999,
1998 or 1997.
FUTURE POLICY BENEFITS
The liability for future policy benefits for participating traditional life
insurance is based on net level premium reserves, including assumptions as to
interest, mortality, and other assumptions underlying the guaranteed policy cash
values. Reserve interest assumptions are level and range from 2.5% to 6.0%. The
average rate of assumed investment yields used in estimating gross margins was
7.83% in 1999, 8.03% in 1998 and 8.15% in 1997. Accrued dividends for
participating business are established for anticipated amounts earned to date
for the period through the policy's next anniversary and are provided for as a
separate liability. The declaration of future dividends for participating
business is at the discretion of the Board of Directors. Participating business
accounted for 40% of receipts from policyholders during the year ended December
31, 1999 and represented 17% of life insurance in force at December 31, 1999.
Participating business accounted for 41% of receipts from policyholders during
the year ended December 31, 1998 and represented 18% of life insurance in force
at December 31, 1998.
The liabilities for future policy benefits for accident and health insurance are
computed using a net level (or an equivalent) method, including assumptions as
to morbidity, mortality and interest and to include provisions for possible
unfavorable deviations. Policy benefit claims are charged to expense in the
period that the claims are incurred.
Future policy benefit reserves for interest sensitive products are computed
under a retrospective deposit method and represent policy account balances
before applicable surrender charges. Policy benefits and claims that are charged
to expense include benefit claims incurred in the period in excess of related
policy account balances.
40
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest crediting rates for interest sensitive products ranged from 4.00% to
6.25% in 1999, from 4.00% to 6.50% in 1998 and from 4.00% to 7.00% in 1997.
The unearned revenue reserve reflects the unamortized balance of the excess of
first year administration charges over renewal period administration charges
(policy initiation fees) on interest sensitive products. These excess charges
have been deferred and are being recognized in income over the period benefited
using the same assumptions and factors used to amortize deferred policy
acquisition costs.
GUARANTY FUND ASSESSMENTS
From time to time, assessments are levied on our insurance subsidiaries by
guaranty associations in most states in which the subsidiaries are licensed.
These assessments, which are accrued for, are to cover losses of policyholders
of insolvent or rehabilitated companies. In some states, these assessments can
be partially recovered through a reduction in future premium taxes.
We had undiscounted reserves of $1.3 million at December 31, 1999 and 1998 to
cover estimated future assessments on known insolvencies. We had assets totaling
$2.8 million at December 31, 1999 and $3.1 million at December 31, 1998
representing estimated premium tax offsets on paid and future assessments.
Expenses (credits) incurred for guaranty fund assessments, net of related
premium tax offsets, totaled ($0.1) million in 1999, ($1.2) million in 1998 and
$1.9 million (including $1.6 million related to the adoption of an accounting
standard requiring the accrual of assessments) in 1997. It is anticipated that
estimated future guaranty fund assessments on known insolvencies will be paid
during the two year period ended December 31, 2001 and substantially all the
related future premium tax offsets will be realized during the six year period
ended December 31, 2005. We believe the reserve for guaranty fund assessments is
sufficient to provide for future assessments based upon known insolvencies and
projected premium levels.
DEFERRED INCOME TAXES
Deferred income tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in our accompanying
consolidated balance sheets represent funds that are separately administered,
principally for the benefit of certain policyholders who bear the underlying
investment risk. The separate account assets and liabilities are carried at fair
value. Revenues and expenses related to the separate account assets and
liabilities, to the extent of benefits paid or provided to the separate account
policyholders, are excluded from the amounts reported in the accompanying
consolidated statements of income.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for interest sensitive and variable products consist of policy charges
for the cost of insurance, administration charges, amortization of policy
initiation fees and surrender charges assessed against policyholder account
balances. Expenses related to these products include interest credited to
policyholder account balances and benefit claims incurred in excess of
policyholder account balances.
Traditional life insurance premiums are recognized as revenues over the
premium-paying period. Future policy benefits and policy acquisition costs are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits and amortization of deferred policy acquisition costs.
All insurance-related revenues, benefits and expenses are reported net of
reinsurance ceded.
REINSURANCE
We use reinsurance to manage certain risks associated with our insurance
operations. These reinsurance arrangements provide for greater diversification
of business, allow management to control exposure to potential risks arising
from large losses and provide additional capacity for growth.
41
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our life insurance operations cede reinsurance to various reinsurers. The cost
of reinsurance is generally amortized over the contract periods of the
reinsurance agreements.
OTHER INCOME AND OTHER EXPENSES
Other income and other expenses include revenue and expenses generated by our
various non-insurance subsidiaries for investment advisory, marketing and
distribution, and leasing services. They also include revenues and expenses
generated by our parent company for management services. Certain of these
activities are performed on behalf of affiliates of the Company. In addition,
certain revenue generated by our insurance subsidiaries is classified as other
income. Revenues of the insurance subsidiaries included as other income
aggregated $0.6 million in 1999, $1.4 million in 1998 and $4.0 million in 1997.
Lease income from leases with affiliates totaled $7.9 million in 1999, $5.8
million in 1998 and $3.0 million in 1997. Investment advisory fee income from
affiliates totaled $1.5 million in 1999, $1.3 million in 1998 and $1.2 million
in 1997.
COMPREHENSIVE INCOME (LOSS)
Unrealized gains and losses on our available-for-sale securities are included in
other comprehensive income (loss) in stockholders' equity. Other comprehensive
income (loss) excludes net investment gains (losses) included in net income
which merely represent transfers from unrealized to realized gains and losses.
These amounts totaled ($0.1) million in 1999, ($0.9) million in 1998 and $26.5
million in 1997. These amounts, which have been measured through the date of
sale, are net of income taxes and adjustments to deferred policy acquisition
costs, value of insurance in force acquired and unearned revenue reserve
totaling $0.2 million in 1999, $0.5 million in 1998 and ($15.3) million in 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities. For example, significant
estimates and assumptions are utilized in the calculation of deferred policy
acquisition costs, policyholder liabilities and accruals and valuation
allowances on investments. It is reasonably possible that actual experience
could differ from the estimates and assumptions utilized which could have a
material impact on the consolidated financial statements.
PENDING ACCOUNTING CHANGE
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (Statement) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Accounting for gains or losses resulting from changes in the values
of those derivatives is dependent on the use of the derivative and whether it
qualifies for hedge accounting. Statement No. 133 also allows companies to
transfer securities classified as held for investment to either the
available-for-sale or trading categories in connection with the adoption of the
new standard. The Statement's effective date for the Company has been extended
to the fiscal year beginning January 1, 2001, with earlier adoption encouraged.
Because of our minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on our earnings
or financial position.
2. STOCKHOLDERS' EQUITY AND MINORITY INTEREST
On May 30, 1997, FBL Financial Group Capital Trust (the Trust), one of our
wholly-owned subsidiaries, issued $97.0 million of 5% Preferred Securities to
our majority stockholder, the Iowa Farm Bureau Federation. In connection with
the Trust's issuance of the 5% Preferred Securities and our related purchase of
all of the Trust's common securities, we issued to the Trust $100.0 million
principal amount of our 5% Subordinated Deferrable Interest Notes, due June 30,
2047 (the Notes). The sole assets of the Trust are and will be the Notes and any
interest accrued thereon. The interest payment dates on the Notes correspond to
the distribution dates on the 5% Preferred Securities. The 5% Preferred
Securities, which have a liquidation value of $1,000.00 per share plus accrued
and unpaid distributions, mature simultaneously with the Notes. As of December
31, 1999, 97,000 shares of 5% Preferred Securities were outstanding, all of
which we unconditionally guarantee.
42
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concurrent with the issuance of the 5% Preferred Securities, we purchased from
the Iowa Farm Bureau Federation our Series A preferred stock at its liquidation
value of $100.0 million. In addition, we issued 5,000,000 shares of Series B
preferred stock to the Iowa Farm Bureau Federation for $3.0 million. Each share
of Series B preferred stock has a liquidation preference of $0.60 and voting
rights identical to that of Class A common stock. The Series B preferred stock
pays cumulative annual cash dividends of $0.03 per share, payable quarterly, and
is redeemable by us, at our option, at $0.60 per share plus unpaid dividends if
the stock ceases to be beneficially owned by a Farm Bureau organization. The
purchase of Series A preferred stock and simultaneous issuance of Series B
preferred stock and 5% Preferred Securities were treated as noncash transactions
for purposes of the 1997 statement of cash flows.
On October 31, 1999, the Iowa Farm Federation exchanged the 5% Preferred
Securities issued by the Trust for $97.0 million face amount of 5% trust
preferred securities issued by an equity investee of the Company. In preparing
our consolidated financial statements, we do not eliminate our portion of the 5%
Preferred Securities owned by the equity investee since the terms of the
preferred securities issued by the equity investee are substantially similar to
the terms of the 5% Preferred Securities.
On March 30, 1998, we exchanged a subsidiary owning our home office properties
for 2,536,112 unregistered shares of Class A common stock owned by the Iowa Farm
Bureau Federation. The value of the transaction, which was structured as a
tax-free exchange of a real estate subsidiary, was $45.7 million, or $18.00 per
common share. The book value of the properties was $24.7 million on the date of
the exchange. We are leasing a portion of the properties back from a
wholly-owned subsidiary of the Iowa Farm Bureau Federation under a 15-year
operating lease. A gain on the transaction of approximately $21.0 million was
deferred and is being amortized over the term of the operating lease. The
transaction was accounted for as a noncash financing activity for purposes of
the 1998 statement of cash flows.
On March 17, 1998, our Board of Directors approved a two-for-one common stock
split payable in the form of a 100% stock dividend, to stockholders of record as
of April 6, 1998. The additional shares were distributed April 17, 1998. As
required by our Articles of Incorporation, holders of the Class B common stock
received Class A common shares in payment of the stock dividend. In addition,
the 5.0 million shares of Series B preferred stock have non-dilutive voting
rights. As a result, voting rights on these shares increased proportionately
while the number of shares outstanding did not change. All references to the
number of common shares and per share amounts in this report have been restated
to reflect the effect of the stock dividend.
We repurchased 1,322,920 shares in 1999, 961,536 shares in 1998 and 1,930,740
shares in 1997 of Class A common stock in accordance with repurchase plans
approved by our Board of Directors. The cost of the repurchases totaled $25.7
million in 1999, $25.0 million in 1998 and $24.8 million in 1997. Of the shares
repurchased in 1998 and 1997, 2,701,476 were unregistered shares owned by
various Farm Bureau entities. The purchase amounts were allocated partly to
Class A common stock based on the average common stock balance per share on the
acquisition dates with the remainder allocated to retained earnings.
Holders of the Class A common stock and Series B preferred stock, together as a
group, and Class B common stock vote as separate classes on all issues. Only
holders of the Class A common stock and Series B preferred stock vote for the
election of Class A Directors (three to five) and only holders of the Class B
common stock vote for the election of Class B Directors (ten to twenty). Voting
for the Directors is noncumulative. In addition, various ownership aspects of
the Company's Class B common stock are governed by a Class B Shareholder
Agreement which results in the Iowa Farm Bureau Federation, which owns 67.2% of
our voting stock as of December 31, 1999, maintaining control of the Company.
Holders of Class A common stock and Class B common stock are entitled to share
ratably on a share-for-share basis with respect to common stock dividends.
43
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT OPERATIONS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables contain amortized cost and market value information on
fixed maturities and equity securities:
HELD FOR INVESTMENT
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
DECEMBER 31, 1999 (DOLLARS IN THOUSANDS)
Fixed maturities - mortgage-backed
securities ............................. $ 339,362 $ 3,695 $ (5,263) $ 337,794
============== ============== ============== ==============
AVAILABLE FOR SALE
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
DECEMBER 31, 1999 (DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies .. $ 72,505 $ 90 $ (1,836) $ 70,759
State, municipal and other governments . 48,396 51 (2,415) 46,032
Public utilities ....................... 119,089 1,545 (3,832) 116,802
Corporate securities ................... 1,070,418 15,006 (60,877) 1,024,547
Mortgage and asset-backed securities ... 722,779 3,110 (22,485) 703,404
Redeemable preferred stocks ................. 44,154 365 (4,033) 40,486
-------------- -------------- -------------- --------------
Total fixed maturities ...................... $ 2,077,341 $ 20,167 $ (95,478) $ 2,002,030
============== ============== ============== ==============
Equity securities ........................... $ 38,147 $ 3,572 $ (6,374) $ 35,345
============== ============== ============== ==============
HELD FOR INVESTMENT
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
Bonds:
Corporate securities ................... $ 5,008 $ 542 $ (8) $ 5,542
Mortgage-backed securities ............. 487,280 24,690 (783) 511,187
-------------- -------------- -------------- --------------
Total fixed maturities ...................... $ 492,288 $ 25,232 $ (791) $ 516,729
============== ============== ============== ==============
AVAILABLE FOR SALE
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies .. $ 81,674 $ 5,375 $ (4) $ 87,045
State, municipal and other governments . 61,194 2,516 (101) 63,609
Public utilities ....................... 137,640 9,626 (536) 146,730
Corporate securities ................... 959,689 64,729 (16,985) 1,007,433
Mortgage and asset-backed securities ... 592,115 24,526 (1,129) 615,512
Redeemable preferred stocks ................. 30,549 741 (1,575) 29,715
-------------- -------------- -------------- --------------
Total fixed maturities ...................... $ 1,862,861 $ 107,513 $ (20,330) $ 1,950,044
============== ============== ============== ==============
Equity securities ........................... $ 39,589 $ 748 $ (5,050) $ 35,287
============== ============== ============== ==============
Short-term investments have been excluded from the above schedules as amortized
cost approximates market value for these securities.
44
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying value and estimated market value of our portfolio of fixed maturity
securities at December 31, 1999, by contractual maturity, are shown below.
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.
HELD FOR INVESTMENT AVAILABLE FOR SALE
-------------------------------- --------------------------------
ESTIMATED ESTIMATED
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Due in one year or less .................... $ -- $ -- $ 53,992 $ 54,078
Due after one year through five years ...... -- -- 222,187 217,611
Due after five years through ten years ..... -- -- 407,018 388,336
Due after ten years ........................ -- -- 627,211 598,115
-------------- -------------- -------------- --------------
-- -- 1,310,408 1,258,140
Mortgage and asset-backed securities ....... 339,362 337,794 722,779 703,404
Redeemable preferred stocks ................ -- -- 44,154 40,486
-------------- -------------- -------------- --------------
$ 339,362 $ 337,794 $ 2,077,341 $ 2,002,030
============== ============== ============== ==============
Net unrealized investment gains (losses) on equity securities and fixed maturity
securities classified as available for sale were comprised of the following:
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Unrealized appreciation (depreciation) on fixed maturity and equity
securities available for sale ................................................ $ (78,113) $ 82,881
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ............................................ 5,577 (5,264)
Value of insurance in force acquired ......................................... 1,040 (1,306)
Unearned revenue reserve ..................................................... (554) 585
Provision for deferred income taxes ............................................... 25,217 (26,914)
------------ ------------
(46,833) 49,982
Proportionate share of net unrealized investment gains (losses) of equity
investees .................................................................... (3,084) 68
------------ ------------
Net unrealized investment gains (losses) .......................................... $ (49,917) $ 50,050
============ ============
The change in net unrealized investment gains/losses are recorded net of
deferred income taxes and other adjustments for assumed changes in the
amortization pattern of deferred policy acquisition costs, value of insurance in
force acquired and unearned revenue reserve totaling $(64.2) million in 1999,
$1.2 million in 1998 and $16.6 million in 1997.
MORTGAGE LOANS ON REAL ESTATE
Our mortgage loan portfolio consists principally of commercial mortgage loans.
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 have provided an allowance for possible losses against our mortgage loan
portfolio. An analysis of this allowance, which consist of specific and general
reserves, is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Balance at beginning of year ...................................... $ 871 $ 812 $ 1,128
Realized losses .............................................. -- 59 --
Uncollectible amounts written off, net of recoveries ......... (65) -- (316)
------------ ------------ ------------
Balance at end of year ............................................ $ 806 $ 871 $ 812
============ ============ ============
45
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We did not have any impaired loans (those loans in which we do not believe we
will collect all amounts due according to the contractual terms of the
respective loan agreements) at December 31, 1999. We had impaired loans with a
carrying value of $1.0 million and a corresponding valuation allowance of $0.4
million at December 31, 1998.
NET INVESTMENT INCOME
Components of net investment income are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Held for investment ........................................ $ 32,431 $ 49,176 $ 53,332
Available for sale ......................................... 154,057 136,269 126,089
Equity securities .............................................. 2,145 2,116 1,283
Mortgage loans on real estate .................................. 23,989 25,895 26,160
Investment real estate ......................................... 5,098 5,822 4,902
Policy loans ................................................... 7,644 7,642 7,587
Other long-term investments .................................... 35 (42) 3,143
Short-term investments ......................................... 3,897 3,670 4,064
Other .......................................................... 6,700 8,200 4,522
------------ ------------ ------------
235,996 238,748 231,082
Less investment expenses ....................................... (10,176) (10,681) (10,716)
------------ ------------ ------------
Net investment income .......................................... $ 225,820 $ 228,067 $ 220,366
============ ============ ============
REALIZED AND UNREALIZED GAINS AND LOSSES
Realized gains (losses) and the change in unrealized appreciation/depreciation
on investments, excluding amounts attributed to investments held by subsidiaries
engaged in the broker-dealer and investment company industries, are summarized
below:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REALIZED
Fixed maturities - available for sale .......................... $ (2,529) $ 318 $ 4,300
Equity securities .............................................. 2,307 (1,712) 37,468
Mortgage loans on real estate .................................. -- (59) --
Investment real estate ......................................... (221) 381 (28)
Other long-term investments .................................... (1,345) -- (300)
Securities and indebtedness of related parties ................. (582) (331) (487)
Notes receivable and other ..................................... 28 (3,475) --
------------ ------------ ------------
Realized gains (losses) on investments ......................... $ (2,342) $ (4,878) $ 40,953
============ ============ ============
UNREALIZED
Fixed maturities:
Held for investment ........................................ $ (26,009) $ 724 $ 8,900
Available for sale ......................................... (162,494) 5,555 51,465
Equity securities .............................................. 1,500 (1,538) (14,957)
------------ ------------ ------------
Change in unrealized appreciation/depreciation of
investments ................................................ $ (187,003) $ 4,741 $ 45,408
============ ============ ============
46
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
An analysis of sales, maturities and principal repayments of our fixed
maturities portfolio is as follows:
GROSS REALIZED GROSS REALIZED
AMORTIZED COST GAINS LOSSES PROCEEDS
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999
Scheduled principal repayments and calls:
Available for sale .................... $ 133,087 $ -- $ -- $ 133,087
Held for investment ................... 154,700 -- -- 154,700
Sales - available for sale ............... 72,389 3,485 (807) 75,067
-------------- -------------- -------------- --------------
Total ................................. $ 360,176 $ 3,485 $ (807) $ 362,854
============== ============== ============== ==============
YEAR ENDED DECEMBER 31, 1998
Scheduled principal repayments and calls:
Available for sale .................... $ 191,636 $ 170 $ (291) $ 191,515
Held for investment ................... 151,298 -- -- 151,298
Sales - available for sale ............... 85,586 5,965 (2,742) 88,809
-------------- -------------- -------------- --------------
Total ................................. $ 428,520 $ 6,135 $ (3,033) $ 431,622
============== ============== ============== ==============
YEAR ENDED DECEMBER 31, 1997
Scheduled principal repayments and calls:
Available for sale .................... $ 175,996 $ 42 $ -- $ 176,038
Held for investment ................... 49,961 -- -- 49,961
Sales - available for sale ............... 108,597 6,457 (2,199) 112,855
-------------- -------------- -------------- --------------
Total ................................. $ 334,554 $ 6,499 $ (2,199) $ 338,854
============== ============== ============== ==============
Realized losses on fixed maturities totaling $5.2 million in 1999 and $2.8
million in 1998 were incurred as a result of writedowns for other than temporary
impairment of fixed maturity securities. No such writedowns were recorded during
1997.
Income taxes (credits) include a provision of ($0.8) million in 1999, ($1.7)
million in 1998 and $14.3 million in 1997 for the tax effect of realized gains.
OTHER
At December 31, 1999, affidavits of deposits covering investments with a
carrying value totaling $2,605.0 million were on deposit with state agencies to
meet regulatory requirements.
At December 31, 1999, the Company had committed to provide additional funding
for mortgage loans on real estate aggregating $15.8 million. These commitments
arose in the normal course of business at terms that are comparable to similar
investments.
The carrying value of investments which have been non-income producing for the
twelve months preceding December 31, 1999 include other long-term investments
totaling $5.1 million.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States Government) exceeded ten percent of stockholders'
equity at December 31, 1999.
47
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1997, we acquired a 35% interest in an unaffiliated life insurance
company, American Equity Investment Life Holding Company (American Equity), for
$25.0 million. The excess (approximately $5.9 million) of the carrying amount of
the investment, which is classified as securities and indebtedness of related
parties on the consolidated balance sheets, over the amount of underlying equity
in net assets on the acquisition date is attributable to goodwill. This goodwill
is being amortized over a 20 year period. The investment is being accounted for
using the equity method. American Equity underwrites and markets life insurance
and annuity products throughout the United States. In addition, during 1999 we
invested an additional $2.3 million in preferred stock issued by a subsidiary of
American Equity. Summarized financial information for American Equity is as
follows:
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Total investments ....................................... $ 1,477,590 $ 634,153 $ 212,285
Total assets ............................................ 1,689,868 683,012 229,418
Long-term debt .......................................... 20,600 10,000 10,000
Total liabilities ....................................... 1,534,842 616,881 174,992
Minority interest ....................................... 98,460 -- --
Total revenues .......................................... 82,875 37,954 15,455
Income (loss) from continuing operations ................ 3,221 244 (3,369)
Net income (loss) ....................................... 3,221 244 (3,369)
Percentage ownership .................................... 33.2% 34.1% 35.3%
Also in December 1997, we acquired all of the common stock of EquiTrust Life
Insurance Company for $9.7 million. EquiTrust Life Insurance Company is a life
insurance company licensed in 42 states. Goodwill totaling $1.5 million was
recorded in connection with the acquisition and is being amortized over 20
years.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated balance sheets, for which it is
practicable to estimate value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 also excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements and allows companies to forego the disclosures when
those estimates can only be made at excessive cost. Accordingly, the aggregate
fair value amounts presented herein are limited by each of these factors and do
not purport to represent our underlying value.
We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments.
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using a matrix calculation assuming a
spread (based on interest rates and a risk assessment of the bonds) over U. S.
Treasury bonds.
EQUITY SECURITIES: The fair values for equity securities are based on quoted
market prices, where available. For equity securities that are not actively
traded, estimated fair values are based on values of comparable issues.
MORTGAGE LOANS ON REAL ESTATE AND POLICY LOANS: Fair values are estimated by
discounting expected cash flows using interest rates currently being offered for
similar loans.
OTHER LONG-TERM INVESTMENTS: The fair values for nontraditional debt instruments
and investment deposits are estimated by discounting expected cash flows using
interest rates currently being offered for similar investments. The fair values
for investments held by broker-dealer subsidiaries are based on quoted market
prices, where available. For holdings that are not actively traded, fair values
are determined in good faith by the Board of Directors of the subsidiary holding
the security.
48
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate their fair values.
SECURITIES AND INDEBTEDNESS OF RELATED PARTIES: Fair values for loans and
advances are estimated by discounting expected cash flows using interest rates
currently being offered for similar investments. As allowed by Statement No.
107, fair values are not assigned to investments accounted for using the equity
method.
ASSETS AND LIABILITIES OF SEPARATE ACCOUNTS: Separate account assets and
liabilities are reported at estimated fair value in the Company's consolidated
balance sheets.
FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' FUNDS: Fair values of our
liabilities under contracts not involving significant mortality or morbidity
risks (principally deferred annuities, deposit administration funds and
supplementary contracts) are stated at cash surrender value, the cost we would
incur to extinguish the liability. We are not required to estimate the fair
value of our liabilities under other insurance contracts.
SHORT-TERM AND LONG-TERM DEBT: The fair values for long-term debt are estimated
using discounted cash flow analysis based on our current incremental borrowing
rate for similar types of borrowing arrangements. For short-term debt, the
carrying value approximates fair value.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED STOCK OF SUBSIDIARY TRUST:
Fair values are estimated by discounting expected cash flows using interest
rates currently being offered for similar securities.
OTHER PREFERRED STOCK: The carrying amount reported in the consolidated balance
sheets, which equals redemption value, approximates fair value.
The following sets forth a comparison of the fair values and carrying values of
our financial instruments subject to the provisions of Statement No. 107:
DECEMBER 31,
--------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Fixed maturities:
Held for investment ....................... $ 339,362 $ 337,794 $ 492,288 $ 516,729
Available for sale ........................ 2,002,030 2,002,030 1,950,044 1,950,044
Equity securities ............................. 35,345 35,345 35,287 35,287
Mortgage loans on real estate ................. 314,523 301,309 299,372 311,012
Policy loans .................................. 123,717 135,888 123,328 144,264
Other long-term investments ................... 8,575 8,864 10,210 10,610
Cash and short-term investments ............... 113,011 113,011 84,744 84,744
Securities and indebtedness of related
parties ................................... 4,179 4,278 4,812 5,288
Assets held in separate accounts .............. 256,028 256,028 190,111 190,111
LIABILITIES
Future policy benefits ........................ $ 1,024,285 $ 1,006,155 $ 1,020,080 $ 996,428
Other policyholders' funds .................... 243,076 243,076 230,945 230,945
Short-term debt ............................... -- -- 24,500 24,500
Short-term debt payable to affiliate .......... 11,694 11,694 8,626 8,626
Long-term debt ................................ 40,000 40,000 71 75
Liabilities related to separate accounts ...... 256,028 256,028 190,111 190,111
MINORITY INTEREST IN SUBSIDIARIES
Company-obligated mandatorily
redeemable preferred stock of
subsidiary trust .......................... $ 97,000 $ 44,477 $ 97,000 $ 53,024
Other preferred stock ......................... -- -- 4,503 4,503
49
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REINSURANCE AND POLICY PROVISIONS
In the normal course of business, we seek to limit our exposure to loss on any
single insured and to recover a portion of benefits paid by ceding reinsurance
to other insurance enterprises or reinsurers. Our reinsurance coverage for life
insurance varies according to the age and risk classification of the insured
with retention limits ranging up to $1.1 million of coverage per individual
life. We do not use financial or surplus relief reinsurance. Life insurance in
force ceded on a consolidated basis totaled $1,826.3 million (8.7% of total life
insurance in force) at December 31, 1999 and $1,298.7 million (6.6% of total
life insurance in force) at December 31, 1998.
Reinsurance contracts do not relieve the Company of its obligations to
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, our insurance subsidiaries would be
liable for these obligations, 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. No
allowance for uncollectible amounts has been established against our asset for
reinsurance recoverable since none of our receivables are deemed to be
uncollectible.
In addition to the cession of risks in excess of specific retention limits, we
also have reinsurance agreements with five variable alliance partners to cede a
specified percentage of risks associated with variable universal life and
variable annuity contracts. Under these agreements, we pay the alliance partners
their reinsurance percentage of charges and deductions collected on the
reinsured polices. The alliance partners in return pay us their reinsurance
percentage of benefits in excess of related account balances. In addition, the
alliance partners pay us an expense allowance for certain new business,
development and maintenance costs on the reinsured contracts.
In total, including amounts applicable to traditional products, insurance
premiums and product charges have been reduced by $5.3 million in 1999, $5.9
million in 1998 and $6.0 million in 1997 and insurance benefits have been
reduced by $2.4 million in 1999, $2.2 million in 1998 and $6.6 million in 1997
as a result of cession agreements.
Prior to 1998, the amount of reinsurance assumed was not significant. In
December 1998, we assumed a block of ordinary annuity policies with reserves
totaling $22.0 million. In addition, beginning in 1998, we began assuming
variable annuity business from American Equity through a modified coinsurance
arrangement. Product charges from this business were not significant during 1999
or 1998.
50
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unpaid claims on accident and health policies (entirely disability income
products) include amounts for losses and related adjustment expense and are
estimates of the ultimate net costs of all losses, reported and unreported.
These estimates are subject to the impact of future changes in claim severity,
frequency and other factors. The activity in the liability for unpaid claims and
related adjustment expense, net of reinsurance, is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Unpaid claims liability, net of related reinsurance, at
beginning of year ............................................. $ 20,706 $ 21,199 $ 14,801
Add:
Provision for claims occurring in the current year ............ 6,630 5,520 8,289
Increase (decrease) in estimated expense for claims
occurring in the prior years ............................. (1,417) (519) 3,038
------------ ------------ ------------
Incurred claim expense during the current year .................... 5,213 5,001 11,327
Deduct expense payments for claims occurring during:
Current year .................................................. 2,274 2,200 2,010
Prior years ................................................... 3,212 3,294 2,919
------------ ------------ ------------
5,486 5,494 4,929
------------ ------------ ------------
Unpaid claims liability, net of related reinsurance, at end of
year .......................................................... 20,433 20,706 21,199
Active life reserve ............................................... 19,705 17,632 16,924
------------ ------------ ------------
Net accident and health reserves .................................. 40,138 38,338 38,123
Reinsurance ceded ................................................. 853 612 2,940
------------ ------------ ------------
Gross accident and health reserves ................................ $ 40,991 $ 38,950 $ 41,063
============ ============ ============
We develop reserves for unpaid claims by using industry mortality and morbidity
data. One year development on prior year reserves represents our experience
being more or less favorable than that of the industry. Over time, we expect our
experience with respect to disability income business to be comparable to that
of the industry. A certain level of volatility in development is inherent in
these reserves since the underlying block of business is relatively small.
An analysis of the value of insurance in force acquired is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Excluding impact of net unrealized investment gains and
losses:
Balance at beginning of year .......................... $ 15,839 $ 17,105 $ 18,824
Accretion of interest during the year ................. 877 973 1,062
Amortization of asset ................................. (1,862) (2,239) (2,781)
------------ ------------ ------------
Balance prior to impact of net unrealized investment gains
and losses ............................................ 14,854 15,839 17,105
Impact of net unrealized investment gains and losses ...... 1,040 (1,306) (1,061)
------------ ------------ ------------
Balance at end of year .................................... $ 15,894 $ 14,533 $ 16,044
============ ============ ============
Net amortization of the value of insurance in force acquired, based on expected
future gross profits/margins, for the next five years and thereafter is expected
to be as follows: 2000 - $1.1 million; 2001 - $1.1 million; 2002 - $1.0 million;
2003 - $1.0 million; 2004 - $0.9 million; and thereafter, through 2023 - $9.8
million.
6. INCOME TAXES
We file a consolidated federal income tax return with Farm Bureau Life and FBL
Financial Services, Inc. and certain of their subsidiaries. The companies
included in the consolidated federal income tax return each report current
income tax expense as allocated under a consolidated tax allocation agreement.
Generally, this allocation
51
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
results in profitable companies recognizing a tax provision as if the individual
company filed a separate return and loss companies recognizing benefits to the
extent their losses contribute to reduce consolidated taxes.
Deferred income taxes have been established based upon the temporary differences
between the financial statement and income tax bases of assets and liabilities.
The reversal of the temporary differences will result in taxable or deductible
amounts in future years when the related asset or liability is recovered or
settled.
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Taxes provided in consolidated statements of income on:
Income from continuing operations before minority
interest in earnings of subsidiaries and equity income:
Current ................................................... $ 23,604 $ 23,432 $ 46,996
Deferred .................................................. 2,307 2,972 (8,629)
------------ ------------ ------------
25,911 26,404 38,367
Equity income:
Current ................................................... 2,010 575 1,048
Deferred .................................................. 128 79 78
------------ ------------ ------------
2,138 654 1,126
Taxes provided in consolidated statements of changes in
stockholders' equity:
Change in net unrealized investment gains/losses -
deferred .................................................. (53,750) 1,570 10,734
Adjustment resulting from capital transaction of equity
investee - deferred ....................................... -- (33) --
Adjustment resulting from the issuance of shares under
stock option plan - current ............................... (140) (1,286) (335)
------------ ------------ ------------
(53,890) 251 10,399
------------ ------------ ------------
$ (25,841) $ 27,309 $ 49,892
============ ============ ============
The effective tax rate on income from continuing operations before income taxes,
minority interest in earnings of subsidiaries and equity income is different
from the prevailing federal income tax rate as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Income from continuing operations before income taxes,
minority interest in earnings of subsidiaries and equity
income .......................................................... $ 81,149 $ 83,006 $ 114,587
============ ============ ============
Income tax at federal statutory rate (35%) .......................... $ 28,402 $ 29,052 $ 40,105
Tax effect (decrease) of:
Dividends on company-obligated mandatorily
redeemable preferred stock of subsidiary trust ............... (1,698) (1,698) (990)
Tax-exempt interest income ...................................... (226) (280) (336)
Tax-exempt dividend income ...................................... (598) (229) (1,186)
State income taxes .............................................. (193) (207) 240
Other items ..................................................... 224 (234) 534
------------ ------------ ------------
Income tax expense .................................................. $ 25,911 $ 26,404 $ 38,367
============ ============ ============
52
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effect of temporary differences giving rise to our deferred income tax
assets and liabilities is as follows:
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Deferred income tax liabilities:
Fixed maturity and equity securities .................... $ -- $ 34,214
Deferred policy acquisition costs ....................... 67,275 57,114
Value of insurance in force acquired .................... 5,563 5,087
Other ................................................... 15,077 16,747
------------ ------------
87,915 113,162
Deferred income tax assets:
Fixed maturity and equity securities .................... (22,799) --
Future policy benefits .................................. (44,136) (44,684)
Accrued dividends ....................................... (3,851) (4,045)
Accrued pension costs ................................... (9,848) (10,729)
Other ................................................... (11,897) (7,207)
------------ ------------
(92,531) (66,665)
------------ ------------
Deferred income tax liability (asset) ........................ $ (4,616) $ 46,497
============ ============
Prior to 1984, a portion of Farm Bureau Life's current income was not subject to
current income taxation, but was accumulated, for tax purposes, in a memorandum
account designated as "policyholders' surplus account." The aggregate
accumulation in this account at December 31, 1999 was $11.9 million. Should the
policyholders' surplus account exceed the limitation prescribed by federal
income tax law, or should distributions be made to the parent company in excess
of $519.7 million, such excess would be subject to federal income taxes at rates
then effective. Deferred income taxes of $4.2 million have not been provided on
amounts included in this memorandum account.
7. CREDIT ARRANGEMENTS
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0
million at December 31, 1999. Proceeds from the note, which was issued during
1999, were used to fund the maturity of our $24.5 million short-term debt. The
note is due September 17, 2003, and interest on the note is charged at a
variable rate equal to the London Interbank Offered Rate less 0.0475% (5.77% at
December 31, 1999). Fixed maturity securities with a carrying value of $41.7
million are on deposit with the FHLB as collateral for the note. As an investor
in the FHLB, the Company has the ability to borrow an additional $15.8 million
from the FHLB at December 31, 1999. No debt was outstanding under this credit
agreement as of December 31, 1998.
We have a $12.0 million line of credit with Farm Bureau Mutual Insurance Company
(Farm Bureau Mutual), an affiliate, in the form of a revolving demand note.
Borrowings on the note, which totaled $11.7 million at December 31, 1999 and
$8.6 million at December 31, 1998 are being used to acquire assets that are
leased to certain affiliates, including Farm Bureau Mutual. Interest is payable
at a rate equal to the prime rate of a national bank (8.50% at December 31, 1999
and 7.75% at December 31, 1998). Rental income from the related leases includes
a provision for interest on the carrying value of the assets.
8. RETIREMENT AND COMPENSATION PLANS
We participate with several affiliates in various defined benefit plans covering
substantially all of our employees. The benefits of these plans are based
primarily on years of service and employees' compensation. Net periodic pension
cost of the plans is allocated between participants generally on a basis of time
incurred by the respective employees for each employer. Such allocations are
reviewed annually. Pension expense aggregated $4.5 million in 1999, $5.7 million
in 1998 and $6.9 million in 1997.
We participate with several affiliates in a 401(k) defined contribution plan
which covers substantially all employees. Beginning in 1998, we contribute FBL
Financial Group, Inc. stock in the amount equal to 50 percent of an employee's
contributions up to four percent of the annual salary contributed by the
employees. Costs are allocated
53
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
among the affiliates on a basis of time incurred by the respective employees for
each employer. Related expense totaled $0.3 million for 1999 and 1998.
We have established deferred compensation plans for certain key current and
former employees and have certain other benefit plans which provide for
retirement and other benefits. These plans have been accrued or funded as deemed
appropriate by management.
Certain of the assets related to these plans are on deposit with the Company and
amounts relating to these plans are included in our financial statements. In
addition, certain amounts included in the policy liabilities for interest
sensitive products relate to deposit administration funds maintained by the
Company on behalf of affiliates offering substantially the same benefit programs
as the Company.
In addition to benefits offered under the aforementioned benefit plans, we and
several other affiliates sponsor a plan that provides group term life insurance
benefits to retired full-time employees who have worked ten years and attained
age 55 while in service. Postretirement benefit expense is allocated in a manner
consistent with pension expense discussed above. Postretirement benefit expense
aggregated $0.2 million in 1999, $0.1 million in 1998 and $0.3 million in 1997.
9. STOCK COMPENSATION
We have a Class A Common Stock Compensation Plan (the Plan) under which
incentive stock options, nonqualified stock options, bonus stock, restricted
stock and stock appreciation rights may be granted to directors, officers and
employees. Option shares granted to directors are fully vested upon grant and
have a contractual term that varies with the length of time the director remains
on the Board. Option shares granted to officers and employees have a contractual
term of 10 years and generally vest over a period up to five years, contingent
upon continued employment with the Company.
Information relating to stock options is as follows:
WEIGHTED-
AVERAGE EXERCISE TOTAL
NUMBER OF SHARES PRICE PER SHARE EXERCISE PRICE
---------------- ---------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Shares under option at January 1, 1997................. 1,642,464 $ 8.83 $ 14,511
Granted........................................... 137,684 13.04 1,795
Exercised......................................... 136,578 8.79 1,201
Forfeited......................................... 39,898 8.80 351
---------------- ------------
Shares under option at December 31, 1997............... 1,603,672 9.20 $ 14,754
Granted........................................... 105,143 19.56 2,057
Exercised......................................... 276,807 8.84 2,446
Forfeited......................................... 4,156 16.12 67
---------------- -------------
Shares under option at December 31, 1998............... 1,427,852 10.01 $ 14,298
Granted........................................... 24,433 22.06 539
Exercised......................................... 35,437 8.77 311
---------------- -------------
Shares under option at December 31, 1999............... 1,416,848 10.25 $ 14,526
================ =============
Exercisable options:
December 31, 1997................................. 514,330 $ 8.99 $ 4,626
December 31, 1998................................. 610,258 9.87 6,022
December 31, 1999................................. 840,163 9.92 8,334
54
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information regarding stock options outstanding at December 31, 1999 is as
follows:
CURRENTLY OUTSTANDING CURRENTLY EXERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE PRICE EXERCISE PRICE
NUMBER LIFE (IN YEARS) PER SHARE NUMBER PER SHARE
-------------- --------------- -------------- -------------- --------------
Range of exercise prices:
At $8.75........................ 1,114,629 6.55 $ 8.75 698,248 $ 8.75
$8.76 - $14.00.................. 155,763 7.01 12.06 80,730 12.02
$14.01 - $19.25................. 87,511 8.00 18.08 27,085 18.15
$19.26 - $24.25................. 58,945 8.56 22.29 34,100 22.32
-------------- --------------
$8.75 - $24.25.................. 1,416,848 6.77 10.25 840,163 9.92
============== ==============
At December 31, 1999, shares of Class A common stock available for grant as
additional awards under the Plan totaled 1,634,330.
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related Interpretations in accounting for our
stock options. No compensation expense is recognized under APB 25 because the
exercise price of our stock options equals the market price of the underlying
stock on the date of grant. Under the alternative accounting method provided by
Statement No. 123, compensation expense is recognized in an amount equal to the
estimated fair value of stock options on the date of grant. We have not adopted
the accounting provisions of Statement No. 123 because the valuation of
non-traded stock options is highly subjective and, in management's opinion, the
existing pricing models do not necessarily provide a reliable single measure of
the fair value of the Company's options.
Pro forma information regarding net income and earnings per common share is
required by Statement No. 123, and has been determined as if we had accounted
for the stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
Risk-free interest rate................................. 4.73 % 5.40 % 6.34 %
Dividend yield.......................................... 2.10 % 1.40 % 1.60 %
Volatility factor of the expected market price.......... 0.13 0.12 0.12
Weighted-average expected life.......................... 5.0 years 4.9 years 5.1 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Our
employee stock options have characteristics significantly different from those
of traded options and the subjective input assumptions can materially affect the
fair value estimate produced by the Black-Scholes option valuation model.
55
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro forma net
earnings and earnings per common share are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income - as reported ........................................ $ 55,710 $ 53,940 $ 75,827
Net income - pro forma .......................................... 55,028 53,273 75,240
Earnings per common share - as reported ......................... 1.72 1.60 2.03
Earnings per common share - pro forma ........................... 1.70 1.58 2.01
Earnings per common share - assuming dilution, as reported ...... 1.69 1.56 1.99
Earnings per common share - assuming dilution, pro forma ........ 1.68 1.55 1.98
Weighted-average fair value of options granted during the
year (per share) ............................................. 3.31 3.27 2.29
The pro forma impact is likely to increase in future years as additional options
are granted and amortized ratably over the vesting period.
10. STOCKHOLDERS' EQUITY OF SUBSIDIARIES
REDEEMABLE PREFERRED STOCK OF SUBSIDIARY
During 1999, Western Farm Bureau Life Insurance Company (Western Life), a former
wholly-owned subsidiary, merged into Farm Bureau Life. Concurrent with the
merger, Western Life redeemed 22,517 shares of its redeemable preferred stock
for $4.5 million. The redeemable preferred stock and related dividends were
reported as minority interest in subsidiaries in the consolidated financial
statements.
STATUTORY LIMITATIONS ON SUBSIDIARY DIVIDENDS
The ability of Farm Bureau Life to pay dividends to the parent company is
restricted because prior approval of the Iowa insurance commissioner is required
for payment of dividends to the stockholder which exceed an annual limitation.
During 2000, Farm Bureau Life could pay dividends to the parent company of
approximately $40.6 million without prior approval of insurance regulatory
authorities.
STATUTORY ACCOUNTING POLICIES
The financial statements of our insurance subsidiaries included herein differ
from related statutory-basis financial statements principally as follows: (a)
the bond portfolio is segregated into held-for-investment (carried at amortized
cost) and available-for-sale (carried at fair value) classifications rather than
generally being carried at amortized cost; (b) acquisition costs of acquiring
new business are deferred and amortized over the life of the policies rather
than charged to operations as incurred; (c) future policy benefit reserves for
participating traditional life insurance products are based on net level premium
methods and guaranteed cash value assumptions which may differ from statutory
reserves; (d) future policy benefit reserves on certain interest sensitive
products are based on full account values, rather than discounting methodologies
utilizing statutory interest rates; (e) deferred income taxes are provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (f) net realized gains or losses attributed to changes in the
level of market interest rates are recognized as gains or losses in the
statements of income when the sale is completed rather than deferred and
amortized over the remaining life of the fixed maturity security or mortgage
loan; (g) declines in the estimated realizable value of investments are charged
to the statements of income when such declines are judged to be other than
temporary rather than through the establishment of a formula-determined
statutory investment reserve (carried as a liability), changes in which are
charged directly to surplus; (h) agents' balances and certain other assets
designated as "non-admitted assets" for statutory purposes are reported as
assets rather than being charged to surplus; (i) revenues for interest sensitive
and variable products consist of policy charges for the cost of insurance,
policy administration charges, amortization of policy initiation fees and
surrender charges assessed rather than premiums received; (j) pension income or
expense is recognized in accordance with Statement No. 87, "Employers'
Accounting for Pensions" rather than in accordance with rules and regulations
permitted by the Employee Retirement Income Security Act of 1974; (k) the
financial statements of subsidiaries are consolidated with those of the
insurance subsidiary; and (l) assets and liabilities are
56
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
restated to fair values when a change in ownership occurs that is accounted for
as a purchase, with provisions for goodwill and other intangible assets, rather
than continuing to be presented at historical cost.
Net income of the life insurance subsidiaries, as determined in accordance with
statutory accounting practices, was $40.4 million in 1999, $52.5 million in 1998
and $85.3 million in 1997. Statutory net gain from operations for the life
insurance subsidiaries, which excludes realized gains and losses, totaled $41.2
million in 1999, $56.0 million in 1998 and $46.9 million in 1997. Statutory
capital and surplus, after appropriate elimination of intercompany accounts,
totaled $301.5 million at December 31, 1999 and $376.9 million at December 31,
1998.
11. MANAGEMENT AND OTHER AGREEMENTS
We share certain office facilities and services with the Iowa Farm Bureau
Federation and its affiliated companies. These expenses are allocated on the
basis of cost and time studies that are updated annually and consist primarily
of salaries and related expenses, travel, and other operating costs.
We have management agreements with Farm Bureau Mutual and other affiliates under
which we provide general business, administrative and management services. Fee
income for these services totaled $0.8 million in 1999, $0.5 million in 1998 and
$0.2 million in 1997. In addition, Farm Bureau Management Corporation, a
wholly-owned subsidiary of the Iowa Farm Bureau Federation, provides certain
management services to the Company under a separate arrangement. We incurred
related expenses totaling $0.5 million in 1999, $0.7 million in 1998 and $0.8
million in 1997.
We have marketing agreements with the Farm Bureau property-casualty companies
operating within our marketing territory, including Farm Bureau Mutual and other
affiliates. Under the marketing agreements, the property-casualty companies are
responsible for development and management of our agency force for a fee equal
to a percentage of commissions on first year life insurance premiums and annuity
deposits. We paid $5.0 million in 1999, $4.5 million in 1998 and $3.9 million in
1997 to the property-casualty companies under these arrangements.
We are licensed by the Iowa Farm Bureau Federation to use the "Farm Bureau" and
"FB" designations in Iowa. In connection with this license, royalties of $0.9
million in 1999, $0.7 million in 1998 and $0.5 million in 1997 were paid to the
Iowa Farm Bureau Federation. We have similar arrangements with Farm Bureau
organizations in other states in our market territory. Total royalties paid to
Farm Bureau organizations other than the Iowa Farm Bureau Federation were $1.0
million in 1999 and 1998, and $1.1 million in 1997.
Beginning in 1998, we established administrative services agreements with
American Equity under which we provide underwriting, claims processing,
accounting, compliance and other administrative services relating to certain
variable insurance products underwritten by them. Fee income from performing
these services totaled $0.3 million in 1999 and $0.2 million in 1998.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we may be involved in litigation where amounts
are alleged that are substantially in excess of contractual policy benefits or
certain other agreements. At December 31, 1999, management is not aware of any
claims for which a material loss is reasonably possible.
We lease our home office properties under a 15-year operating lease from a
wholly-owned subsidiary of the Iowa Farm Bureau Federation. Future remaining
minimum lease payments under this lease as of December 31, 1999 are as follows:
2000 - $2.1 million; 2001 - $2.1 million; 2002 - $2.1 million; 2003 - $2.3
million; 2004 - $2.4 million and thereafter, through 2013 - $21.2 million. Rent
expense for the lease totaled $2.3 million in 1999 and $1.3 million in 1998.
These amounts are net of $1.4 million in 1999 and $1.0 million in 1998 in
amortization of the deferred gain on the exchange of home office properties for
common stock (see Note 2).
In connection with an investment in a limited real estate partnership, we have
agreed to pay any cash flow deficiencies of a medium-sized shopping center owned
by the partnership through January 1, 2001. We recorded a reserve for expected
future cash flow deficiencies totaling $0.4 million at December 31, 1999 and
$0.3 million at December 31, 1998. At December 31, 1999, the limited partnership
had a $5.3 million mortgage loan, secured by the shopping center, with Farm
Bureau Mutual.
57
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income from continuing operations ........................ $ 54,325 $ 52,675 $ 75,128
Income from discontinued operations ...................... 1,385 1,265 699
------------ ------------ ------------
Net income ............................................... 55,710 53,940 75,827
Dividends on Series A and B preferred stock .............. (150) (150) (2,171)
------------ ------------ ------------
Numerator for earnings per common share-income
available to common stockholders ................ $ 55,560 $ 53,790 $ 73,656
============ ============ ============
Denominator:
Denominator for earnings per common share - weighted-
average shares ...................................... 32,213,154 33,568,852 36,332,858
Effect of dilutive securities - employee stock options ... 616,818 831,661 638,378
------------ ------------ ------------
Denominator for diluted earnings per common share
- adjusted weighted-average shares .............. 32,829,972 34,400,513 36,971,236
============ ============ ============
Earnings per common share:
Income from continuing operations ........................ $ 1.68 $ 1.56 $ 2.01
Income from discontinued operations ...................... 0.04 0.04 0.02
------------ ------------ ------------
Earnings per common share ................................ $ 1.72 $ 1.60 $ 2.03
============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ........................ $ 1.65 $ 1.52 $ 1.97
Income from discontinued operations ...................... 0.04 0.04 0.02
------------ ------------ ------------
Earnings per common share - assuming dilution ............ $ 1.69 $ 1.56 $ 1.99
============ ============ ============
14. DISCONTINUED OPERATIONS AND RESTRUCTURING
On March 31, 1998, we sold our wholly-owned subsidiary, Utah Farm Bureau
Insurance Company (Utah Insurance), to Farm Bureau Mutual. We recorded gains on
the sale totaling $1.4 million in 1999 and $1.0 million in 1998. The 1999 gain
and $0.8 million of the 1998 gain were earned in connection with an earn-out
provision included in the underlying sales agreement. The 1999 gain is net of
income taxes totaling $0.6 million. The 1998 gain is net of an income tax
benefit of $0.5 million resulting from the reversal of cumulative temporary
differences between the book and income tax bases of Utah Insurance's assets and
liabilities.
We may earn additional consideration during each of the three years in the
period ended December 31, 2002 in accordance with the earn-out provision. Under
the earn-out arrangement, the Company and Farm Bureau Mutual share equally in
the dollar amount by which the incurred losses on Utah Insurance's direct
business, net of reinsurance ceded, is less than the incurred losses assumed in
the valuation model used to derive the initial acquisition price. The earn-out
calculation is performed and any settlement (subject to a maximum of $2.0
million per year) is made on a calendar year basis. We have not accrued any
contingent consideration for the three year period ending December 31, 2002 as
such amounts, if any, cannot be reasonably estimated as of December 31, 1999.
Receipts as a result of the earn-out provision are recorded as an adjustment to
the gain on the disposal of the discontinued segment.
58
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income from discontinued operations was comprised of the following:
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
Revenues ............................................... $ 12,902 $ 53,199
Benefits and expenses .................................. 12,579 52,522
------------ ------------
Pre-tax income ......................................... 323 677
Income tax expense (credit) ............................ 36 (22)
------------ ------------
Income ................................................. $ 287 $ 699
============ ============
In addition to merging Western Life into Farm Bureau Life, we also closed an
administrative processing center during 1999. As a result of the closing of the
service center, a leased property was vacated, 22 positions were eliminated and
moving costs were incurred. During 1999, we charged to expense costs totaling
$1.2 million, $0.4 million of which remains accrued at December 31, 1999, for
related severance benefits, lease costs and other costs primarily associated
with the closing of the service center. The restructuring expenses are recorded
in the underwriting, acquisition and insurance expense line of the 1999
consolidated statement of income.
15. SEGMENT INFORMATION
In general, we are organized by the types of products and services we offer for
sale. Our principal and only reportable operating segment is our life insurance
segment. The life insurance segment includes activities related to the sale of
life insurance, annuities and accident and health insurance products. Operations
have been aggregated into the same segment due to the similarity of the
products, including the underlying economic characteristics, the method of
distribution and the regulatory environment. We also have several other
operating segments that do not meet the quantitative threshold for separate
segment reporting and, therefore, are aggregated herein. A summary of these
segments, along with the related source of revenues, is as follows:
SEGMENT SOURCE OF REVENUES
Investment advisory.............. Fee income from the management of investments
Marketing and distribution....... Commissions and distribution fee income from
the sale of mutual funds and insurance
products not issued by the Company
Leasing.......................... Income from operating leases
Corporate........................ Fees from management and administrative
services
As noted above, we also had a property-casualty insurance segment prior to March
31, 1998. Revenues from this segment were derived from the sale of
property-casualty insurance policies. See Note 14, "Discontinued Operations and
Restructuring", for additional information regarding this segment.
59
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial information concerning our operating segments is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Revenues from external customers:
Life insurance ................................... $ 374,980 $ 371,230 $ 406,712
All other ........................................ 41,619 36,939 32,903
------------- ------------- -------------
416,599 408,169 439,615
Eliminations ..................................... (21,613) (18,548) (18,264)
------------- ------------- -------------
Consolidated ..................................... $ 394,986 $ 389,621 $ 421,351
============= ============= =============
Intersegment revenues:
Life insurance ................................... $ 1,677 $ 934 $ 1,162
All other ........................................ 19,936 17,614 17,102
------------- ------------- -------------
21,613 18,548 18,264
Eliminations ..................................... (21,613) (18,548) (18,264)
------------- ------------- -------------
Consolidated ..................................... $ -- $ -- $ --
============= ============= =============
Net investment income:
Life insurance ................................... $ 225,040 $ 228,494 $ 220,328
All other ........................................ 2,091 216 326
------------- ------------- -------------
227,131 228,710 220,654
Eliminations ..................................... (1,311) (643) (288)
------------- ------------- -------------
Consolidated ..................................... $ 225,820 $ 228,067 $ 220,366
============= ============= =============
Depreciation and amortization:
Life insurance ................................... $ 5,688 $ 1,111 $ 8,714
All other ........................................ 10,514 9,518 8,562
------------- ------------- -------------
Consolidated ..................................... $ 16,202 $ 10,629 $ 17,276
============= ============= =============
Income tax expense (benefit):
Life insurance ................................... $ 25,686 $ 27,196 $ 38,007
All other ........................................ 225 (792) 360
------------- ------------- -------------
Consolidated ..................................... $ 25,911 $ 26,404 $ 38,367
============= ============= =============
Income (loss) from continuing operations:
Life insurance ................................... $ 53,926 $ 53,661 $ 74,907
All other ........................................ 399 (986) 221
------------- ------------- -------------
Consolidated ..................................... $ 54,325 $ 52,675 $ 75,128
============= ============= =============
Assets:
Life insurance ................................... $ 3,558,366 $ 3,602,015
All other ........................................ 249,677 175,996
------------- -------------
3,808,043 3,778,011
Eliminations ..................................... (145,712) (127,051)
------------- -------------
Consolidated ..................................... $ 3,662,331 $ 3,650,960
============= =============
Our investment in equity method investees and the related equity income are
attributable to the life insurance segment. The exchange of our home office
properties for Class A common stock described in Note 2 is attributable to the
life insurance segment.
Transactions between segments are recorded at negotiated rates generally
intended to be at levels commensurate with charges that would be assessed to
unaffiliated parties. Interest expense and expenditures for long-lived assets
were not significant during 1999, 1998 or 1997.
60
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly results of operations are as follows:
1999
---------------------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Premiums and product charges .................... $ 36,843 $ 41,497 $ 36,333 $ 36,620
Net investment income ........................... 55,987 58,843 54,870 56,120
Realized gains (losses) on investments .......... (2,240) 1,512 (68) (1,546)
Total revenues .................................. 95,519 106,762 96,207 96,498
Income from continuing operations ............... 11,625 16,928 12,609 13,163
Discontinued operations ......................... -- -- -- 1,385
Net income ...................................... 11,625 16,928 12,609 14,548
Net income applicable to common stock ........... 11,588 16,890 12,571 14,511
Earnings per common share:
Income from continuing operations ........... $ 0.35 $ 0.52 $ 0.39 $ 0.42
Income from discontinued operations ......... -- -- -- 0.04
------------ ------------ ------------ ------------
Earnings per common share ................... $ 0.35 $ 0.52 $ 0.39 $ 0.46
============ ============ ============ ============
Earnings per common share - assuming
dilution:
Income from continuing operations ........... $ 0.35 $ 0.51 $ 0.38 $ 0.41
Income from discontinued operations ......... -- -- -- 0.04
------------ ------------ ------------ ------------
Earnings per common share - assuming
dilution ................................. $ 0.35 $ 0.51 $ 0.38 $ 0.45
============ ============ ============ ============
1998
---------------------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Premiums and product charges .................... $ 35,496 $ 39,548 $ 35,119 $ 35,467
Net investment income ........................... 56,070 58,603 56,587 56,807
Realized gains (losses) on investments .......... 1,312 (4,169) 475 (2,496)
Total revenues .................................. 98,162 99,006 97,239 95,214
Income from continuing operations ............... 13,076 12,870 14,198 12,531
Discontinued operations ......................... 466 -- -- 799
Net income ...................................... 13,542 12,870 14,198 13,330
Net income applicable to common stock ........... 13,505 12,832 14,160 13,293
Earnings per common share:
Income from continuing operations ........... $ 0.36 $ 0.39 $ 0.43 $ 0.38
Income from discontinued operations ......... 0.02 -- -- 0.03
------------ ------------ ------------ ------------
Earnings per common share ................... $ 0.38 $ 0.39 $ 0.43 $ 0.41
============ ============ ============ ============
Earnings per common share - assuming
dilution:
Income from continuing operations ........... $ 0.35 $ 0.38 $ 0.42 $ 0.37
Income from discontinued operations ......... 0.02 -- -- 0.03
------------ ------------ ------------ ------------
Earnings per common share - assuming
dilution ................................. $ 0.37 $ 0.38 $ 0.42 $ 0.40
============ ============ ============ ============
Earnings per common share for each quarter is computed independently of earnings
per common share for the year. As a result, the sum of the quarterly earnings
per common share amounts may not equal the earnings per common share for the
year due primarily to transactions affecting the number of weighted average
common shares outstanding in each quarter.
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
The information required by Part III is hereby incorporated by reference from
the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See index to Financial Statements on page 29
for a list of financial statements included in this Report.
2. Financial Statement Schedules. The following financial statement
schedules are included as part of this Report immediately following
the signature page:
Schedule I -- Summary of Investments
Schedule II -- Condensed Financial Information of Registrant (Parent
Company)
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
All other schedules are omitted, either because they are not applicable, not
required, or because the information they contain is included elsewhere in the
consolidated financial statements or notes.
3. Exhibits.
10.19 Advance Agreement between Federal Home Loan Bank of Des
Moines and Farm Bureau Life Insurance Company dated August
17, 1999
21 Subsidiaries of FBL Financial Group, Inc.
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 14th day of March,
2000.
FBL Financial Group, Inc.
By: /s/ EDWARD M. WIEDERSTEIN
-------------------------
Edward M. Wiederstein
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated;
Signature Title Date
- ------------------------- ---------------------------------- --------------
/s/ WILLIAM J. ODDY Chief Executive Officer (Principal March 14, 2000
- ------------------- Executive Officer)
William J. Oddy
/s/ JAMES W. NOYCE Chief Financial Officer (Principal March 14, 2000
- ------------------ Financial and Accounting Officer)
James W. Noyce
/s/ EDWARD M. WIEDERSTEIN Chairman of the Board and Director March 14, 2000
- -------------------------
Edward M. Wiederstein
/s/ ROGER BILL MITCHELL First Vice Chair and Director March 14, 2000
- -----------------------
Roger Bill Mitchell
/s/ KAREN J. HENRY Second Vice Chair and Director March 14, 2000
- ------------------
Karen J. Henry
/s/ ERIC K. AASMUNDSTAD Director March 14, 2000
- -----------------------
Eric K. Aasmundstad
/s/ STANLEY R. AHLERICH Director March 14, 2000
- -----------------------
Stanley R. Ahlerich
/s/ KENNETH R. ASHBY Director March 14, 2000
- --------------------
Kenneth R. Ashby
/s/ JERRY L. CHICOINE Director March 14, 2000
- ---------------------
Jerry L. Chicoine
/s/ O. AL CHRISTOPHERSON Director March 14, 2000
- ------------------------
O. Al Christopherson
/s/ JOHN W. CREER Director March 14, 2000
- -----------------
John W. Creer
/s/ KENNY J. EVANS Director March 14, 2000
- ------------------
Kenny J. Evans
63
Signature Title Date
- ------------------------- ---------------------------------- --------------
/s/ RICHARD G. KJERSTAD Director March 14, 2000
- -----------------------
Richard G. Kjerstad
/s/ G. STEVEN KOUPLEN Director March 14, 2000
- ---------------------
G. Steven Kouplen
/s/ DAVID L. MCCLURE Director March 14, 2000
- --------------------
David L. McClure
/s/ BRYCE P. NEIDIG Director March 14, 2000
- -------------------
Bryce P. Neidig
/s/ HOWARD D. POULSON Director March 14, 2000
- ---------------------
Howard D. Poulson
/s/ FRANK S. PRIESTLEY Director March 14, 2000
- ----------------------
Frank S. Priestley
/s/ JOHN J. VAN SWEDEN Director March 14, 2000
- ----------------------
John J. Van Sweden
/s/ JOHN E. WALKER Director March 14, 2000
- ------------------
John E. Walker
/s/ JERRY C. DOWNIN Senior Vice President, Secretary, March 14, 2000
- ------------------- Treasurer and Director
Jerry C. Downin
/s/ STEPHEN M. MORAIN Senior Vice President, General March 14, 2000
- --------------------- Counsel and Director
Stephen M. Morain
64
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited the consolidated balance sheets of FBL Financial Group, Inc. as
of December 31, 1999 and 1998, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999, and have issued our report thereon
dated February 14, 2000 (included elsewhere in this Form 10-K). Our audits also
included the financial statement schedules listed in Item 14(a) of this Form
10-K. These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 14, 2000
65
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER
THAN INVESTMENTS IN RELATED PARTIES
FBL FINANCIAL GROUP, INC.
DECEMBER 31, 1999
COLUMN A COLUMN B COLUMN C COLUMN D
- -------------------------------------------------- -------------- -------------- ---------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
- -------------------------------------------------- -------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
Fixed maturity securities, held for investment-
mortgage-backed securities ..................... $ 339,362 $ 337,794 $ 339,362
==============
Fixed maturity securities, available for sale:
Bonds:
United States Government and agencies ........ 72,505 70,759 70,759
State, municipal and other governments ....... 48,396 46,032 46,032
Public utilities ............................. 119,089 116,802 116,802
Corporate securities ......................... 1,015,849 969,939 969,939
Mortgage and asset-backed securities ......... 722,779 703,404 703,404
Convertible bonds ............................ 54,569 54,608 54,608
Redeemable preferred stock ...................... 44,154 40,486 40,486
-------------- -------------- --------------
Total ................................... 2,077,341 $ 2,002,030 2,002,030
==============
Equity securities, available-for-sale:
Common stocks:
Public utilities ............................. 2,833 1,950 1,950
Banks, trusts, and insurance companies ....... 7,671 7,683 7,683
Industrial, miscellaneous, and all other ..... 19,953 18,622 18,622
Nonredeemable preferred stocks .................. 7,690 7,090 7,090
-------------- -------------- --------------
Total ................................... 38,147 $ 35,345 35,345
==============
Mortgage loans on real estate .................... 315,329 314,523(2)
Investment real estate:
Acquired for debt ............................ 783 783
Investment ................................... 19,336 19,336
Policy loans ..................................... 123,717 123,717
Other long-term investments ...................... 14,083 8,575(3)
Short-term investments ........................... 106,529 106,529
-------------- --------------
$ 3,034,627 $ 2,950,200
============== ==============
(1) On the basis of cost adjusted for repayments and amortization of premiums
and accrual of discounts for fixed maturities, other long-term investments
and short-term investments; original cost for equity securities; unpaid
principal balance for mortgage loans on real estate and policy loans, and
original cost less accumulated depreciation for investment real estate.
(2) Amount not equal to cost (Column B) because of allowance for possible
losses deducted from cost to determine reported amount.
(3) Amount not equal to cost (Column B) because other long-term investments
include securities held by broker-dealer subsidiaries that carry
securities at market value. Also, an allowance for possible losses is
deducted from cost to determine reported amount.
66
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
ASSETS
Investments:
Cash and cash equivalents ................................................ $ 247 $ 1,743
Amounts receivable from affiliates ....................................... 3,196 2,067
Amounts receivable from subsidiaries (eliminated in consolidation) ....... 816 3,521
Accrued investment income ................................................ 956 --
Current income taxes recoverable ......................................... 2,256 2,197
Deferred income taxes .................................................... 1,493 1,668
Other assets ............................................................. 3,746 3,121
Short-term investments ................................................... 46,588 --
Fixed maturities - available for sale, at market (amortized cost 1999 -
$25,962) ............................................................ 25,851 --
Investments in subsidiaries (eliminated in consolidation) ................ 527,434 675,161
------------ ------------
Total assets ........................................................ $ 612,583 $ 689,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities ................................... $ 4,235 $ 1,649
Amounts payable to affiliates ............................................ 159 437
Amounts payable to subsidiaries (eliminated in consolidation) ............ 3,181 3,804
Long-term debt (eliminated in consolidation) ............................. 100,000 100,000
------------ ------------
Total liabilities ................................................... 107,575 105,890
Stockholders' equity:
Preferred stock .......................................................... 3,000 3,000
Class A common stock ..................................................... 42,308 42,034
Class B common stock ..................................................... 7,558 7,558
Accumulated other comprehensive income (loss) ............................ (49,917) 50,050
Retained earnings ........................................................ 502,059 480,946
------------ ------------
Total stockholders' equity .......................................... 505,008 583,588
------------ ------------
Total liabilities and stockholders' equity ................... $ 612,583 $ 689,478
============ ============
See accompanying notes to condensed financial statements.
67
SCHEDULE II -CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Net investment income ..................................... $ 1,810 $ 242 $ 22
Dividends from subsidiaries (eliminated in consolidation) . 104,945 59,244 37,038
Management fee income from affiliates ..................... 780 538 247
Management fee income from subsidiaries (eliminated in
consolidation) ........................................ 619 392 290
------------ ------------ ------------
Total revenues ........................................ 108,154 60,416 37,597
Expenses:
Interest expense (eliminated in consolidation) ............ 5,000 5,000 2,917
General and administrative expenses ....................... 1,404 1,083 562
------------ ------------ ------------
Total expenses ........................................ 6,404 6,083 3,479
------------ ------------ ------------
101,750 54,333 34,118
Income taxes (credits) ......................................... (1,117) (1,795) (975)
------------ ------------ ------------
Income before equity in undistributed income (dividends in
excess of equity income) of subsidiaries and discontinued
operations ................................................ 102,867 56,128 35,093
Equity in undistributed income (dividends in excess of equity
income) of subsidiaries (eliminated in consolidation) ..... (48,542) (3,453) 40,035
------------ ------------ ------------
Income from continuing operations .............................. 54,325 52,675 75,128
Discontinued operations:
Equity income from property-casualty subsidiary, net of
related income taxes ................................. -- 287 699
Gain on disposal of property-casualty subsidiary, net of
related income taxes ................................. 1,385 978 --
------------ ------------ ------------
Net income ..................................................... 55,710 53,940 75,827
Dividends on Series A and B preferred stock .................... (150) (150) (2,171)
------------ ------------ ------------
Net income applicable to common stock .......................... $ 55,560 $ 53,790 $ 73,656
============ ============ ============
See accompanying notes to condensed financial statements.
68
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................... $ 1,036 $ (4,526) $ (4,048)
INVESTING ACTIVITIES
Short-term investments - net ...................................... 997 -- --
Investment in subsidiaries (eliminated in consolidation) .......... (583) -- --
Net proceeds from sale of subsidiary - discontinued operations .... 1,229 25,000 --
Dividends from subsidiaries (eliminated in consolidation) ......... 29,945 13,594 37,038
------------ ------------ ------------
Net cash provided by investing activities .............................. 31,588 38,594 37,038
FINANCING ACTIVITIES
Purchase of common stock .......................................... (25,309) (25,008) (24,834)
Issuance of common stock .......................................... 1,947 2,456 1,201
Dividends paid .................................................... (10,758) (10,182) (9,437)
------------ ------------ ------------
Net cash used in financing activities .................................. (34,120) (32,734) (33,070)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ....................... (1,496) 1,334 (80)
Cash and cash equivalents at beginning of year ......................... 1,743 409 489
------------ ------------ ------------
Cash and cash equivalents at end of year ............................... $ 247 $ 1,743 $ 409
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash received (paid) during the year for income taxes .................. $ (786) $ 1,853 $ (111)
Noncash investing and financing activities:
Dividend from subsidary ........................................... 75,000 45,650 --
Investment in subsidiaries ........................................ -- -- (3,000)
Issuance of long-term debt ........................................ -- -- 100,000
Purchase of Series A preferred stock .............................. -- -- (100,000)
Issuance of Series B preferred stock .............................. -- -- 3,000
------------ ------------ ------------
75,000 45,650 --
See accompanying notes to condensed financial statements.
69
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BASIS OF PRESENTATION
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of FBL Financial
Group, Inc.
In the parent company only financial statements, our investments in subsidiaries
are stated at cost plus equity in undistributed earnings of subsidiaries since
the date of acquisition and net unrealized gains/losses on the subsidiaries'
investments classified as "available-for-sale" in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
2. CASH DIVIDENDS FROM SUBSIDIARY
The parent company received cash dividends totaling $29.9 million in 1999, $13.6
million in 1998 and $37.0 million in 1997.
70
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------------- -------------- -------------- -------------- --------------
FUTURE POLICY
DEFERRED POLICY BENEFITS, LOSSES, OTHER
ACQUISITION CLAIMS AND LOSS UNEARNED POLICYHOLDER PREMIUM
COSTS EXPENSES REVENUES FUNDS REVENUE
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
December 31, 1999:
Life insurance .................... $ 236,263 $ 2,388,794 $ 27,650 $ 257,660 $ 151,293
============== ============== ============== ============== ==============
December 31, 1998:
Life insurance .................... $ 203,581 $ 2,338,969 $ 25,373 $ 245,758 $ 145,630
============== ============== ============== ============== ==============
December 31, 1997:
Life insurance .................... $ 181,916 $ 2,304,004 $ 23,530 $ 236,479 $ 140,507
============== ============== ============== ============== ==============
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J
-------- -------------- -------------- -------------- --------------
AMORTIZATION
BENEFITS, OF DEFERRED
CLAIMS, LOSSES POLICY OTHER
NET INVESTMENT AND SETTLEMENT ACQUISITION OPERATING
INCOME(1) EXPENSES COSTS EXPENSES
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
December 31, 1999:
Life insurance .................... $ 225,040 $ 200,728 $ 12,434 $ 57,742
Other, including eliminations ..... 780 -- -- --
-------------- -------------- -------------- --------------
Total ............................. $ 225,820 $ 200,728 $ 12,434 $ 57,742
============== ============== ============== ==============
December 31, 1998:
Life insurance .................... $ 228,494 $ 199,671 $ 10,171 $ 53,812
Other, including eliminations ..... (427) -- -- --
-------------- -------------- -------------- --------------
Total ............................. $ 228,067 $ 199,671 $ 10,171 $ 53,812
============== ============== ============== ==============
December 31, 1997:
Life insurance .................... $ 220,328 $ 206,271 $ 8,474 $ 53,109
Other, including eliminations ..... 38 -- -- --
-------------- -------------- -------------- --------------
Total ............................. $ 220,366 $ 206,271 $ 8,474 $ 53,109
============== ============== ============== ==============
(1) Net investment income is allocated to the segments based upon the
investments held by the respective segment.
71
SCHEDULE IV - REINSURANCE
FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------------- -------------- -------------- -------------- --------------
ASSUMED FROM PERCENT OF
CEDED TO OTHER OTHER AMOUNT
GROSS AMOUNT COMPANIES COMPANY NET AMOUNT ASSUMED TO NET
-------------- -------------- -------------- -------------- --------------
Year ended December 31, 1999:
Life insurance in force, at end of
year .............................. $ 21,024,991 $ 1,826,299 $ 56 $ 19,198,748 --
============== ============== ============== ============== ==============
Insurance premiums and other
considerations:
Interest sensitive product charges $ 57,206 $ 1,846 $ 3 $ 55,363 --
Traditional life insurance and
accident and health premiums ... 99,420 3,490 -- 95,930 --
-------------- -------------- -------------- -------------- --------------
$ 156,626 $ 5,336 $ 3 $ 151,293 --%
============== ============== ============== ============== ==============
Year ended December 31, 1998:
Life insurance in force, at end of
year .............................. $ 19,665,773 $ 1,298,695 $ -- $ 18,367,078 --
============== ============== ============== ============== ==============
Insurance premiums and other
considerations:
Interest sensitive product charges $ 53,976 $ 1,820 $ 1 $ 52,157 --
Traditional life insurance and
accident and health premiums ... 97,591 4,118 -- 93,473 --
-------------- -------------- -------------- -------------- --------------
$ 151,567 $ 5,938 $ 1 $ 145,630 --%
============== ============== ============== ============== ==============
Year ended December 31, 1997:
Life insurance in force, at end of
year .............................. $ 18,380,799 $ 1,248,564 $ -- $ 17,132,235 --
============== ============== ============== ============== ==============
Insurance premiums and other
considerations:
Interest sensitive product charges $ 49,793 $ 1,814 $ -- $ 47,979 --
Traditional life insurance and
accident and health premiums ... 96,708 4,180 -- 92,528 --
-------------- -------------- -------------- -------------- --------------
$ 146,501 $ 5,994 $ -- $ 140,507 --%
============== ============== ============== ============== ==============
72