Back to GetFilings.com
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, 2000
-----------------
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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266
- --------------------------------------------------------------------------------
(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, 2001): $157,168,836
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 26,142,682 shares of Class A
Common Stock and 1,192,990 shares of Class B Common Stock as of March 6, 2001.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement for the annual meeting of shareholders to be held May 15, 2001
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 universal life, variable
universal life and traditional life insurance and traditional and variable
annuity products. Through December 31, 2000, these products were principally
marketed through a core distribution force consisting of approximately 1,645
exclusive Farm Bureau agents in 14 midwestern and western states. On January 1,
2001, our agency force and geographic marketing territory expanded with the
acquisition of the assets and liabilities of Kansas Farm Bureau Life Insurance
Company (Kansas Farm Bureau Life), a single-state life insurance company selling
traditional life and annuity products in the state of Kansas. In addition to
traditional life and annuity products, since 1995, Kansas Farm Bureau Life also
sold variable life insurance and variable annuities through an alliance with us.
At December 31, 2000, Kansas Farm Bureau Life had 336 exclusive agents and held
the largest market share of combined life insurance and annuity business in the
state of Kansas.
Our variable universal life and variable annuity products are also marketed in
other states through alliances with other life insurance companies and a
regional broker-dealer. Several of our subsidiaries support various functional
areas of the Company and affiliates, by providing investment advisory, marketing
and distribution, and leasing services. In addition, we provide management and
administrative services to four Farm Bureau affiliated property-casualty
insurance 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). Farm Bureau
Life commenced operations in 1945 and EquiTrust commenced operations in 1998.
BUSINESS STRATEGY
We have a three-pronged growth strategy that consists of (1) internal growth
within our traditional Farm Bureau distribution network in 15 midwestern and
western states, (2) alliances with other companies and (3) consolidations. Our
growth strategies are detailed below:
GROWTH STRATEGY #1 - INTERNAL GROWTH WITHIN OUR TRADITIONAL FARM BUREAU
DISTRIBUTION NETWORK.
We are focused on growing our core business, which comes through our Farm Bureau
distribution network in 15 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
where we manage the affiliated property-casualty insurance company and related
field force (Iowa, Minnesota, South Dakota, Utah, Arizona and New Mexico),
approximately 25% of the Farm Bureau members own at least one of our life
products, 63% own at least one Farm Bureau property-casualty product and
approximately 20% own both. Cross selling and other opportunities have been
enhanced in recent years through the introduction of new products including last
survivor variable universal life insurance, simplified issue traditional life
insurance and variable settlement options.
Several programs introduced in 2000 are targeted at increasing life insurance
and annuity sales within our core distribution system. These programs include
life specialists, wholesalers and the BUILDING A PROFESSIONAL PRACTICE series.
The intent of these programs is to provide support to our multi-line agents as
they cross-sell to their customers and provide a model for growth in the way
they approach their business. Life specialists are hired by a multi-line manager
and work as a resource within the agency for life sales, including advanced
markets. The wholesalers are responsible for increasing variable product and
mutual fund sales within their own territory, and assist with agency training,
case analysis support, and may have direct client involvement on large cases.
The goal of our BUILDING A PROFESSIONAL PRACTICE series is to help agents
position themselves for a dramatic increase in productivity. This program
teaches agents to examine the way they have their business structured, how they
are spending their time, and encourages them to hire assistants so that they may
spend more time with direct client contact.
1
GROWTH STRATEGY #2 - ALLIANCES WITH OTHER COMPANIES.
Significant growth opportunities exist through forming alliances with other
companies for the sale of products developed and administered by us. To date, we
have leveraged our variable product expertise and used alliances for the
distribution of variable products. With this strategy, we obtain access to
additional distribution systems and our partners are provided with access to
variable products and share in the underwriting results without developing the
infrastructure and know-how to underwrite and administer the business. Since
December 1998, we have developed variable product alliances with the following
companies:
Related to Farm Bureau Not Farm Bureau related
---------------------- -----------------------
Country Life Insurance Company American Equity Investment Life Insurance Company
Southern Farm Bureau Life Insurance Company Berthel Fisher and Company
Farm Bureau Life Insurance Company of Missouri Modern Woodmen of America*
United Farm Family Life Insurance Company National Travelers Life Insurance Company
* Scheduled to begin production in early 2002.
Growth can be achieved through increasing sales with these existing partners and
developing new alliance partners. Sales from existing partners are increasing
with additional product offerings, an increase in the number of the partners'
registered representatives and a higher average production per registered
representative, as they become more familiar with our variable products. In
addition, during 2000 we developed the capability of selling traditional
products through EquiTrust and have the ability to expand our alliance strategy
in this area as well.
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.
GROWTH STRATEGY #3 - CONSOLIDATIONS.
At the beginning of 2001, we finalized our acquisition of the assets and
liabilities of Kansas Farm Bureau Life and we see additional growth
opportunities through the consolidation with other companies. Consolidations
expand our distribution systems, generate top-line revenue growth and provide us
with a larger base over which to spread our fixed operating costs. These items,
in turn, put us in a better position to offer competitive products and to invest
in the infrastructure necessary to stay competitive in the maturing life
insurance industry.
We have a successful history of being a consolidator among Farm Bureau
affiliated insurance companies. In addition to taking over the management of
four property-casualty companies since 1984, we acquired Utah Farm Bureau Life
Insurance Company in 1984, Rural Security Life Insurance Company in 1993,
Western Farm Bureau Life Insurance Company in 1994 and Kansas Farm Bureau Life
Insurance Company in 2001. Currently there are seven Farm Bureau affiliated life
insurance groups. We expect there to be further consolidation within the Farm
Bureau network and we believe, as a publicly held company, we are well
positioned to be the consolidator of choice among these companies.
We are not able to dictate the pace at which the further consolidation, if any,
of the Farm Bureau life insurance companies will happen. Accordingly, we are
seeking smaller insurance companies that will not be able to compete as the
marketplace continues to demand increased technological and customer service
capabilities. We are profiling possible acquisition candidates that we think
would be a compatible fit for us. As we seek to grow our operations via
consolidation, we will only look at consolidation opportunities that grow our
earnings.
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:
2
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 14 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 15 state core marketing
region: multi-line states (we own the Farm Bureau affiliated life company and
manage the Farm Bureau affiliated property-casualty company) - Arizona, Iowa,
Minnesota, New Mexico, South Dakota and Utah; and life only states (we own the
Farm Bureau affiliated life company only) - Colorado, Idaho, Kansas, Montana,
Nebraska, North Dakota, Oklahoma, Wisconsin and Wyoming. Additionally, our
variable alliance partners market 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.
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 5.0 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. Generally, these marketing
rights have only been granted to companies owned by or closely affiliated with
Farm Bureau federations. For each of the 15 states in our core marketing
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 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 in our core marketing
territory generally cost $24 to $112 and are available to individuals and
families who are farmers and ranchers, and to the general public as well.
3
To facilitate our working relationship with state Farm Bureau organizations, the
Presidents of the 15 state Farm Bureau federations in our core marketing
territory serve 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 2000, 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 $6.0 million in 2000.
Our Advisory Committee, which consists of certain executives of Farm Bureau
property-casualty insurance companies in our marketing 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 the financial well-being 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 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 often include newspapers and magazines, theft and arson
rewards, eye care 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 MARKETING TERRITORY
Our life insurance, annuities and sponsored mutual funds are currently marketed
throughout our core marketing territory by an exclusive Farm Bureau force of
approximately 1,980 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, or for certain products, on the behalf of other
insurance companies approved by us.
* 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 often 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
4
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 1,230, 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 independent contractors.
Approximately 96% 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 71% of the agents are NASD licensed.
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 2000, approximately 42% 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 15% of our
agents qualify for our annual incentive trip.
Agent recruiting, training and financing programs are designed to develop a
productive agent for the long term. The one-year agency force retention rate for
2000 in our multi-line states was approximately 91%. 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 6,100 exclusive agents that
are dedicated to selling insurance products using the Farm Bureau brand. The
number of Farm Bureau alliance partner agents licensed to sell variable products
has grown steadily from 3% at December 31, 1998 to approximately 27% at February
28, 2001. Our partners continue working with their other agents to license them
to become registered representatives. 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.
Our alliance partners outside the Farm Bureau network have over 27,600 agents,
most of which are independent agents that have access to outside variable
products and are not limited solely to our variable products. While many of our
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.
5
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, traditional permanent, and term life
insurance, and variable and traditional annuities primarily to individuals in
the rural and suburban areas of our marketing territory.
VARIABLE UNIVERSAL LIFE INSURANCE. 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, 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 last survivor universal life and last survivor variable universal
life policies 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 dividends. For
2000, participating life policies represented 10% of first year life insurance
collected premiums. We have a substantial book of in-force participating
policies with persistency that 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 that allow
policyholders to make contributions over a number of periods. For traditional
annuity products, policyholder account balances are credited interest at rates
that we determine. 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
58% 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.
6
ACCIDENT AND HEALTH INSURANCE. During 2000, we discontinued underwriting
individual long-term disability income insurance and began to offer a long-term
disability income product underwritten by Country Life Insurance Company. We do
not share in the risks, costs or profits of the new product, but will earn a
commission on new sales. The existing block of individual disability income
business was reinsured to another insurance company through a 100% coinsurance
agreement.
KANSAS PRODUCT PORTFOLIO. The agents in Kansas currently sell the portfolio of
products previously offered by Kansas Farm Bureau Life Insurance Company. The
products are very similar to the universal life insurance, traditional life
insurance and annuity products described above. In addition, the Kansas agents
market individual disability income and hospital income insurance. The
individual disability income 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. Hospital income policies
generally provide for payment of benefits when an insured is admitted to a
hospital for a specified period of time.
Beginning in 2001, the product portfolio currently available to the Kansas
agents will be integrated with the products available to the agents in the
balance of our core marketing territory. During this integration process, which
we expect to complete during 2002, we will select the most desirable products
and plans and create a new uniform portfolio for all of our agents.
7
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,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Direct life premiums collected:
Universal life
First year ........................... $ 2,010 $ 2,747 $ 2,857 $ 3,522 $ 4,398
Renewal .............................. 39,374 40,978 42,263 44,969 46,493
---------- ---------- ---------- ---------- ----------
Total .............................. 41,384 43,725 45,120 48,491 50,891
Variable universal life
First year - core distribution ....... 14,594 13,385 15,272 12,427 9,244
First year - alliance partners (1) .. 1,462 1,468 98 -- --
Renewal (1) .......................... 32,293 27,399 22,423 19,156 16,715
Internal rollover .................... 10,024 10,052 18,032 7,824 2,726
---------- ---------- ---------- ---------- ----------
Total .............................. 58,373 52,304 55,825 39,407 28,685
Participating whole life
First year ........................... 2,616 3,003 3,226 3,646 6,105
Renewal .............................. 61,083 61,881 61,867 61,660 58,818
---------- ---------- ---------- ---------- ----------
Total .............................. 63,699 64,884 65,093 65,306 64,923
Other
First year ........................... 4,930 4,282 4,151 3,802 3,409
Renewal .............................. 19,394 18,122 16,676 15,513 14,646
---------- ---------- ---------- ---------- ----------
Total .............................. 24,324 22,404 20,827 19,315 18,055
---------- ---------- ---------- ---------- ----------
Total direct life .............. 187,780 183,317 186,865 172,519 162,554
Reinsurance ceded .......................... (4,274) (4,841) (4,632) (4,681) (4,521)
---------- ---------- ---------- ---------- ----------
Total life, net of reinsurance ............. 183,506 178,476 182,233 167,838 158,033
Direct annuity premiums collected:
Traditional annuities:
Individual ........................... 42,225 50,911 51,775 54,002 59,111
Group ................................ 2,730 1,227 1,022 7,241 16,502
Reinsurance assumed .................. 136 190 22,034 -- --
---------- ---------- ---------- ---------- ----------
Total traditional annuities .... 45,091 52,328 74,831 61,243 75,613
Variable annuities:
First year - core distribution ....... 30,916 26,034 24,891 23,773 14,638
First year - alliance partners (1) .. 21,710 8,888 490 -- --
Renewal (1) .......................... 7,081 5,135 4,616 3,641 1,424
Internal rollover .................... 14,989 7,097 11,469 6,240 855
---------- ---------- ---------- ---------- ----------
Total variable annuities ....... 74,696 47,154 41,466 33,654 16,917
---------- ---------- ---------- ---------- ----------
Total annuities ............................ 119,787 99,482 116,297 94,897 92,530
Accident and health premiums collected,
net of reinsurance ...................... 9,561 13,323 11,717 11,370 10,558
---------- ---------- ---------- ---------- ----------
Total collected premiums, net of
reinsurance ............................. $ 312,854 $ 291,281 $ 310,247 $ 274,105 $ 261,121
========== ========== ========== ========== ==========
(1) Amounts are net of portion ceded to or assumed from alliance partners.
During the five years in the period ended December 31, 2000, we have emphasized
the marketing of our variable products. This marketing emphasis, coupled with
the popularity of variable products and a program for 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.
The amount of premiums collected in 2001 will be impacted by the acquisition of
Kansas Farm Bureau Life. During 2000, premiums collected by Kansas Farm Bureau
Life, net of reinsurance, totaled $25.5 million for life insurance, $44.4
million for annuities and $3.9 million for accident and health.
8
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,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FACE AMOUNTS IN MILLIONS)
Life insurance
Universal and variable universal
Number of direct policies ............. 123,661 119,211 114,317 109,558 107,817
Policyholder account balances ......... $ 614,507 $ 601,757 $ 576,392 $ 565,291 $ 540,116
Direct face amounts ................... 10,952 10,267 9,549 8,830 8,476
Traditional
Number of direct policies ............. 258,789 262,363 265,407 267,476 266,599
Future policy benefits ................ $ 726,516 $ 710,801 $ 691,047 $ 672,885 $ 645,684
Direct face amounts ................... 11,649 10,758 10,117 9,551 8,719
Total life
Number of direct policies ............. 382,450 381,574 379,724 377,034 374,416
Direct face amounts ................... $ 22,601 $ 21,025 $ 19,666 $ 18,381 $ 17,195
Deposit administration funds -
policyholder account balances ............ $ 147,143 $ 135,453 $ 127,128 $ 77,254 $ 54,028
Annuities and variable annuities:
Number of direct policies ................ 48,416 49,212 48,785 49,912 50,255
Policyholder account balances ............ $ 681,822 $ 742,374 $ 770,081 $ 808,740 $ 808,221
Future policy benefits ................... 155,486 146,458 122,870 127,509 123,646
Liabilities related to separate accounts ... 327,407 256,028 190,111 138,409 79,043
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.
Going forward, the amount of life insurance and annuities in force will be
impacted by our acquisition of Kansas Farm Bureau Life. At December 31, 2000,
Kansas Farm Bureau Life had 65,317 life insurance policies with $3.4 billion of
direct insurance in force. Also at December 31, 2000, Kansas Farm Bureau Life
had 12,254 direct annuity policies and $390.8 million in reserves on interest
sensitive product benefits.
A summary of our individual life insurance lapse rates, compared to industry
averages, is outlined in the following table:
LAPSE RATES FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Our life insurance lapse rates......... 7.9% 8.1% 7.2% 7.0% 7.5%
Industry life insurance lapse rates.... (A) 8.2 8.3 8.5 8.5
(A) The industry lapse rate for 2000 is not available as of the filing date of
this Form 10-K.
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 14
underwriters who have an average of 16 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 testing (including HIV antibody testing) to provide additional
information whenever the applicant is over 40 and the face amount is over
$100,000. Additionally, urine testing is done whenever the applicant is over 60.
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.
9
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 maximum 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 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 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, 2000 is as follows:
A.M. BEST AMOUNT OF IN
REINSURER RATING FORCE CEDED
----------- --------------
(DOLLARS IN
MILLIONS)
Lincoln National Life Insurance Company............ A $ 730.3
Business Men's Assurance Company................... A 545.0
Swiss Re Life & Health America Inc ................ A++ 251.3
The Cologne Life Reinsurance Company............... A+ 243.2
All other.......................................... 289.2
--------------
Total.......................................... $ 2,059.0
==============
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.
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
the individual insurance policies depending on the type of product. Some
elements, such as dividends, are generally declared for a year at a time.
Interest rates and other nonguaranteed elements are determined based on
experience as it emerges and with regard to competitive factors.
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
10
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 5.99% in
2000, 6.01% in 1999 and 6.12% in 1998 and average credited rates on our annuity
contracts were 5.75% in 2000, 5.69% in 1999 and 6.05% in 1998.
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 claims 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 the following 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 marketplace; (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, 2000 aggregated $411.3 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 0.05% to 0.25% (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 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 at 0.25%, and
certain other fees. The net assets of the Money Market Fund were $28.9 million
at December 31, 2000.
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.
11
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 which 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. This 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 ongoing legislative developments,
the National Association of Insurance Commissioners (NAIC) and state insurance
regulators continue to reexamine existing laws and regulations, accounting
policies and procedures, 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.
EMPLOYEES
At February 1, 2001, we had approximately 1,260 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 183,000 square
feet of a 400,000 square foot office building in West Des Moines, Iowa. We also
lease 22,000 square feet of an office building in Manhattan, Kansas under a 5
year operating lease which expires in 2006. 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 2000 and 1999.
COMMON STOCK DATA (PER SHARE) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
---------- ---------- ---------- ----------
2000
High .................................. $ 19.750 $ 16.875 $ 17.000 $ 17.875
Low ................................... 12.375 12.625 12.125 12.500
Dividends declared and paid ........... $ 0.090 $ 0.090 $ 0.090 $ 0.090
1999
High .................................. $ 24.500 $ 22.500 $ 21.375 $ 20.750
Low ................................... 17.375 17.125 18.625 12.375
Dividends declared and paid ........... $ 0.083 $ 0.083 $ 0.083 $ 0.083
There is no established public trading market for our Class B common stock. As
of March 1, 2001, 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 26 holders of Class B common stock.
We intend to declare regular quarterly cash dividends in the future, subject to
the discretion of the Board of Directors, which depends in part upon general
business conditions, legal restrictions and other factors the Board of Directors
deems relevant. It is anticipated the quarterly dividend rate during 2001 will
be $0.10 per common share.
For restrictions on dividends, see "Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity" and Note 13 to the
consolidated financial statements.
On January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau
Life Insurance Company. As consideration for the purchase, we issued 3,429,500
shares of Series C cumulative voting mandatorily redeemable preferred stock with
a fair value of $80.4 million to The Kansas Farm Bureau. Each share of Series C
preferred stock has a par value of $26.8404 and voting rights identical to that
of Class A common stock. Dividends on the Series C preferred stock are payable
quarterly at a rate equal to the common stock dividend per share then payable.
The mandatory redemption is structured so that 49.5% of the Series C preferred
stock will be redeemed at par value, or $45.6 million, on January 2, 2004 with
the remaining 50.5% redeemed at par value, or $46.5 million, on January 3, 2006.
In the event of a change in the control of the Company, at the option of the
holder, each share of Series C preferred stock is convertible into one share of
Class A common stock or redeemable for cash at par. The Series C preferred stock
is exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Interest sensitive product charges ........... $ 59,780 $ 55,363 $ 52,157 $ 47,979 $ 43,654
Traditional life insurance premiums .......... 83,830 82,569 81,752 81,188 82,198
Accident and health premiums ................. 9,654 13,361 11,721 11,340 10,582
Net investment income ........................ 221,369 225,820 228,067 220,366 208,265
Realized gains (losses) on investments ....... (25,960) (2,342) (4,878) 40,953 52,760
Total revenues ............................... 367,618 394,986 389,621 421,351 413,373
Income from continuing operations ........... 38,747 54,325 52,675 75,128 84,049
Income (loss) from discontinued operations .. -- -- 287 699 (1,165)
Gain on sale of discontinued operations ..... 600 1,385 978 -- --
Net income .................................. 39,347 55,710 53,940 75,827 82,884
Net income applicable to common stock ....... 39,197 55,560 53,790 73,656 80,634
Per common share:
Income from continuing operations ......... 1.27 1.68 1.56 2.01 1.90
Income from continuing operations -
assuming dilution ....................... 1.25 1.65 1.52 1.97 1.89
Earnings .................................. 1.29 1.72 1.60 2.03 1.87
Earnings - assuming dilution .............. 1.27 1.69 1.56 1.99 1.86
Cash dividends ............................ 0.36 0.33 0.30 0.20 0.04
Weighted average common shares
outstanding - assuming dilution ........... 30,799,891 32,829,972 34,400,513 36,971,236 43,270,392
CONSOLIDATED BALANCE SHEET DATA:
Total investments ........................... $ 2,870,659 $ 2,950,200 $ 3,031,436 $ 2,940,911 $ 2,829,517
Assets held in separate accounts ............ 327,407 256,028 190,111 138,409 79,043
Total assets ................................ 3,704,046 3,662,331 3,650,960 3,601,526 3,368,192
Long-term debt .............................. 40,000 40,000 71 24,577 24,581
Total liabilities ........................... 3,130,101 3,060,178 2,965,869 2,894,708 2,724,867
Company-obligated mandatorily redeemable
preferred stock of subsidiary trust ....... 97,000 97,000 97,000 97,000 --
Total stockholders' equity .................. 476,803 505,008 583,588 605,315 638,522
Book value per common share ................. 17.35 15.94 17.75 16.77 14.28
Book value per common share excluding
unrealized appreciation (depreciation)(1).. 18.13 17.46 16.14 15.36 13.75
OTHER DATA (UNAUDITED):
Adjusted operating income (2) ............... $ 54,482 $ 55,351 $ 56,148 $ 49,148 $ 44,745
Adjusted operating income per common
share - assuming dilution (2) ............. 1.76 1.68 1.63 1.27 0.98
Statutory capital and surplus (3) ........... 311,901 301,542 376,929 360,782 344,965
Net statutory premiums collected (4) ........ 312,854 291,281 310,247 274,105 261,121
Life insurance in force ..................... 20,544,870 19,198,748 18,367,078 17,132,235 16,113,121
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 $25.0 million
in 2000, $17.1 million in 1999, $29.5 million in 1998, $14.1 million in 1997
and $3.6 million in 1996.
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, and traditional life insurance
and traditional and variable annuity products. Through December 31, 2000, these
products were principally marketed through a core distribution force consisting
of approximately 1,645 exclusive Farm Bureau agents in 14 midwestern and western
states. On January 1, 2001, our agency force and geographic marketing territory
expanded with the acquisition of the assets and liabilities of Kansas Farm
Bureau Life Insurance Company, a single-state life insurance company selling
traditional life and annuity products in the state of Kansas. At December 31,
2000, Kansas Farm Bureau Life had 336 exclusive agents and held the largest
market share of combined life insurance and annuity business in the state of
Kansas.
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 accounting principles generally accepted in the United States
(GAAP), 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 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 traditional 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
15
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.
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 14 of the
Notes to Consolidated Financial Statements for additional information regarding
segment information.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
Net income totaled $39.3 million in 2000, $55.7 million in 1999 and $53.9
million in 1998. The decrease in net income in 2000 is generally attributable to
an increase in realized losses on investments, due principally to writedowns for
other-than-temporary impairments in value. In addition, net investment income
decreased due primarily to a decrease in fee income from mortgage loan
prepayments and bond calls. These items are partially offset by an increase in
equity income. The increase in net income in 1999 is primarily the result of a
decrease in realized losses on investments and increased equity income. 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. Adjusted operating income, 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 $54.5
million in 2000, $55.4 million in 1999 and $56.1 million in 1998. The following
is a reconciliation of net income to adjusted operating income.
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income ................................................. $ 39,347 $ 55,710 $ 53,940
Adjustments:
Net realized losses on investments ...................... 15,735 1,026 3,186
Gain on disposal of property-casualty operations ........ (600) (1,385) (978)
------------ ------------ ------------
Adjusted operating income .................................. $ 54,482 $ 55,351 $ 56,148
============ ============ ============
Earnings per common share - assuming dilution .............. $ 1.27 $ 1.69 $ 1.56
============ ============ ============
Adjusted operating earnings per common share -
assuming dilution ....................................... $ 1.76 $ 1.68 $ 1.63
============ ============ ============
The adjustment for realized 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.
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, 2000. Weighted average common shares
outstanding, assuming dilution, totaled 30,799,891 in 2000, 32,829,972 in 1999
and 34,400,513 in 1998. These decreases are the result of acquisitions of common
stock by the Company. Weighted average shares outstanding in 2001 will be
similarly impacted by the acquisition of 3,750,018 shares during the fourth
quarter of 2000.
Our acquisition of the assets and liabilities of Kansas Farm Bureau Life on
January 1, 2001 impacts our financial position and results of operations. See
"Kansas Farm Bureau Life Insurance Company Acquisition - Subsequent Event" for
additional information regarding the acquisition.
16
Effective September 1, 2000, we entered into a 100% coinsurance agreement to
reinsure our individual disability income business with an unaffiliated insurer.
As a result, the Consolidated Statements of Income include the operating results
from our individual accident and health business only through August 31, 2000. A
loss of $0.7 million on the coinsurance transaction has been deferred and is
being recognized over the term of the underlying policies. Effective September
1, 2000, our agents began to offer a long-term disability income product
underwritten by one of our variable alliance partners. We do not share in the
risks, costs or profits of the new product, but earn a commission on new sales.
We still have a small block of group long-term disability income business that
has annualized premiums of approximately $0.9 million.
A summary of our premiums and product charges is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ................. $ 59,780 $ 55,363 $ 52,157
Traditional life insurance premiums ................ 83,830 82,569 81,752
Accident and health premiums ....................... 9,654 13,361 11,721
------------ ------------ ------------
Total ........................................... $ 153,264 $ 151,293 $ 145,630
============ ============ ============
INTEREST SENSITIVE PRODUCT CHARGES increased 8.0% in 2000 to $59.8 million and
6.1% in 1999 to $55.4 million. These increases are primarily due 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
increased 18.3% in 2000 to $2.5 million and decreased 27.6% in 1999 to $2.1
million as a result of changes in the level of interest sensitive product
surrenders.
TRADITIONAL LIFE INSURANCE PREMIUMS increased 1.5% in 2000 to $83.8 million and
1.0% in 1999 to $82.6 million. Management believes the modest increase in the
sale of traditional life insurance products is 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 14.4%
to $48.3 million in 2000 and 11.8% to $42.3 million in 1999.
ACCIDENT AND HEALTH PREMIUMS decreased 27.7% in 2000 to $9.7 million and
increased 14.0% in 1999 to $13.4 million. The decrease in 2000 is the result of
our exit from the individual disability income business effective September 1,
2000. The increase in 1999 is primarily the result of the recapture of certain
reinsurance ceded business.
NET INVESTMENT INCOME, which excludes investment income on separate account
assets relating to variable products, decreased 2.0% in 2000 to $221.4 million
and 1.0% in 1999 to $225.8 million. The decreases are attributable to decreases
in yield, partially offset by increases in average invested assets. Average
invested assets (based on assets excluding the impact of recording certain fixed
maturity securities at market value) totaled $2,991.3 million in 2000, $2,982.1
million in 1999 and $2,895.5 million in 1998. The annualized yield earned on
average invested assets was 7.40% in 2000 compared to 7.57% in 1999 and 7.88% in
1998. The yield during 2000 and 1999 declined due to changing market conditions
and a reduction in the amount of prepayment and bond call fee income. Fee income
from mortgage loan prepayments and bond calls totaled $0.4 million in 2000, $5.2
million in 1999 and $9.8 million in 1998. In addition, we recorded $1.7 million
in interest income during 1999 relating to the settlement of a fixed maturity
security that had been in default. We had discontinued the accrual of interest
on this security during 1996. Net investment income in 2001 will be impacted by
our acquisition of 3,750,018 FBL Class A common shares for $75.3 million during
the fourth quarter of 2000.
REALIZED LOSSES ON INVESTMENTS increased to $26.0 million in 2000 and decreased
to $2.3 million in 1999. Realized losses include writedowns of investments that
became other-than-temporarily impaired totaling $24.5 million in 2000, $7.2
million in 1999 and $9.4 million in 1998. These writedowns are the result of
sustained operating losses, defaults on loan payments, declarations of
bankruptcy, unsuccessful efforts to raise capital and various other operational
or economic factors that became evident in the respective years. Approximately
$14.4 million of the realized losses in 2000 were from eight securities that
were of investment grade when acquired. The level of realized
17
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 6.3% in 2000 to $18.9 million and 2.8% in 1999 to $20.2
million. The decrease in 2000 is primarily due to a decrease in the level of
leasing and investment advisory services provided to affiliates and third
parties. The decrease in 1999 is primarily due to a decrease in rental income. A
summary of our policy benefits is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive products benefits ................................. $ 127,605 $ 123,231 $ 122,527
Traditional life insurance and accident and health benefits .......... 60,229 57,941 55,880
Increase in traditional life and accident and health future policy
benefits ......................................................... 19,066 19,556 21,264
Distributions to participating policyholders ......................... 25,043 25,360 25,818
------------ ------------ ------------
Total ............................................................ $ 231,943 $ 226,088 $ 225,489
============ ============ ============
INTEREST SENSITIVE PRODUCT BENEFITS increased 3.5% in 2000 to $127.6 million and
0.6% in 1999 to $123.2 million. The components of interest sensitive product
benefits, along with selected average contractual interest crediting rates, are
as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Interest credited to account balances ................................... $ 104,896 $ 105,121 $ 105,604
Death benefits in excess of related account balances .................... 22,709 18,110 16,923
Weighted average contractual crediting rates:
Universal life liabilities ........................................... 5.99% 6.01% 6.12%
Annuity liabilities .................................................. 5.75 5.69 6.05
The average crediting rate on our product portfolio has been relatively
consistent during 2000 and 1999. However, due to competitive factors, we did
increase the crediting rate on our flexible premium deferred annuity 0.25% in
September 2000. In addition, we decreased the crediting rate on our universal
life contracts 0.15% in November 2000. During 1998 we reduced the crediting rate
on many of our products, in response to the general decline in market interest
rates during that year. Interest sensitive death benefits increased due to an
increase in the amount of insurance in force. Interest sensitive death benefits
can tend to fluctuate from year to year as a result of mortality experience.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE
RELATED CHANGES IN RESERVES, increased 2.3% in 2000 to $79.3 million and 0.5% in
1999 to $77.5 million. Death and surrender benefits on traditional products
increased 6.1% in 2000 to $52.2 million and 2.1% in 1999 to $49.2 million. These
increases were offset by a decrease in the change in reserves on life policies.
Accident and health benefits, including the related change in reserves,
increased 65.9% in 2000 to $9.7 million and increased 2.1% in 1999 to $5.8
million. 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. As stated above, effective September 1, 2000, all individual
disability income benefits are ceded to a third party.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 1.3% in 2000 to $25.0
million and 1.8% in 1999 to $25.4 million. The decrease for 2000 is primarily
attributable to a decrease in the amount of participating business in force. The
decrease for 1999 is principally due to a decrease in the average interest rate
used in the dividend formula for these policies. This average interest rate was
5.72% at December 31, 2000 and 1999 and 5.84% at December 31, 1998.
18
A summary of our underwriting, acquisition and insurance expenses is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ............................... $ 9,951 $ 9,740 $ 9,125
Amortization of deferred policy acquisition costs .................. 10,821 12,434 10,171
Other underwriting, acquisition and insurance expenses, net of
deferrals ....................................................... 52,158 48,002 44,687
---------- ---------- ----------
Total ........................................................... $ 72,930 $ 70,176 $ 63,983
========== ========== ==========
COMMISSION EXPENSE increased 2.2% in 2000 to $10.0 million and 6.7% in 1999 to
$9.7 million. Commission expense increased during the periods due primarily to
an increase in direct life insurance premiums collected.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS decreased 13.0% in 2000 to
$10.8 million and increased 22.2% in 1999 to $12.4 million. Amortization
decreased during 2000 due principally to the impact of realized losses on
investments backing the related policyholder liabilities. The increase in 1999
is due partly to 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. For both 2000 and 1999, amortization increased due to an
increase in the unamortized acquisition cost asset due to growth in the volume
of business in force.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 8.7% in 2000 to
$52.2 million and 7.4% in 1999 to $48.0 million. Salaries, benefits and other
operating expenses increased in 2000 and 1999 primarily due to increased
operating expenses associated with administering our variable product business
and developing variable product alliances. In addition, other information system
expenses, agent training and retirement benefit costs increased in 2000 compared
to 1999. Other items impacting the comparison of expenses include (i)
restructuring charges of $1.2 million in 1999 and related cost savings in 2000
relating to the closing of an administrative service center, (ii) expenses
totaling $0.8 million in 1999 and $2.2 million in 1998 to modify our computer
systems to prepare for the Year 2000 date conversion and (iii) a credit of $1.2
million in 1998 due to changes in the amounts and timing of estimated guaranty
fund assessments. Other underwriting, acquisition and insurance expenses
includes goodwill amortization totaling $0.7 million in 2000, 1999 and 1998. See
"Restructuring" discussion below.
INTEREST EXPENSE increased 43.2% in 2000 to $3.7 million and 51.1% in 1999 to
$2.6 million due primarily to increases in average debt outstanding.
OTHER EXPENSES decreased 5.4% in 2000 to $14.2 million and 2.8% in 1999 to $15.0
million due primarily to a decrease in the level of leasing and investment
advisory services provided to affiliates and third parties.
INCOME TAXES decreased 47.5 % in 2000 to $13.6 million and 1.9% in 1999 to $25.9
million. The effective tax rate was 30.3% for 2000, 31.9% for 1999 and 31.8% for
1998. The effective tax rates were lower than the federal statutory rate of 35%
due primarily to the tax benefit associated with the payment of dividends on
mandatorily redeemable preferred stock of subsidiary trust, tax-exempt interest
and tax-exempt dividend income in 2000, 1999 and 1998. The impact of these
permanent differences, which are relatively consistent from year to year, on the
effective tax rate is more significant in 2000 due to the decrease in pre-tax
income.
EQUITY INCOME, NET OF RELATED INCOME TAXES, increased 207.0% in 2000 to $12.2
million and 215.7% in 1999 to $4.0 million. Equity income includes our
proportionate share of gains and losses attributable to our ownership interest
in partnerships, joint ventures and certain companies where we exhibit some
control but have a minority ownership interest. Given the timing of availability
of financial information from these entities, we will consistently use
information that is as much as three months in arrears for certain of these
entities. Several of these entities are venture capital investment companies,
whose operating results are derived primarily from unrealized and realized gains
and losses generated by their investment portfolios. The income in 2000 is
primarily driven by unrealized appreciation on two internet-related equity
securities owned by two of these venture capital investment companies. A
substantial portion of the positions held by the equity investees in these two
entities was distributed to us and subsequently sold during 2000. As is normal
with these types of entities, the level of these gains and losses is subject to
fluctuation from period to period depending on the prevailing economic
environment, changes in prices of equity securities held by the investment
partnerships, timing and success of initial public offerings and other exit
strategies, and the timing of the sale of investments held by the partnerships
and joint ventures. Equity income includes goodwill amortization totaling $0.4
million in 2000, 1999 and 1998.
19
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 for related severance benefits, lease costs and other
costs primarily associated with closing the service center.
DISCONTINUED OPERATIONS
We recorded a gain of $0.6 million in 2000, $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 from discontinued operations totaled $0.3 million for 1998 and revenues
from discontinued operations totaled $12.9 million through the date of sale in
1998.
KANSAS FARM BUREAU LIFE INSURANCE COMPANY ACQUISITION - SUBSEQUENT EVENT
Revenues, benefits and expenses will increase in 2001 as a result of our
acquisition of the assets and liabilities of Kansas Farm Bureau Life Insurance
Company. As a privately held company, Kansas Farm Bureau Life did not prepare
financial statements in accordance with GAAP. Accordingly, historical GAAP
financial statements and pro forma results assuming the acquisition on a
historical basis are not available. Net income, based on statutory accounting
principles, totaled $1.7 million in 2000, $4.8 million in 1999 and $4.7 million
in 1998. We believe the acquisition will be slightly accretive to earnings per
share in 2001.
The acquisition will be accounted for using purchase accounting. A condensed
statement of the assets and liabilities acquired as of January 1, 2001, on a
GAAP basis, is as follows (dollars in thousands):
ASSETS LIABILITIES AND STOCKHOLDER'S EQUITY
Investments.......................... $ 620,856 Policy liabilities and accruals....... $ 524,443
Value of insurance in force acquired. 52,167 Other policyholder funds.............. 76,738
Goodwill............................. 872 Other liabilities..................... 11,959
Other assets......................... 20,362 ----------
Total liabilities.................. 613,140
Stockholder's equity.................. 81,117
---------- ----------
Total........................... $ 694,257 Total............................ $ 694,257
========== ==========
As consideration for the purchase, we issued 3,429,500 shares of Series C
cumulative voting mandatorily redeemable preferred stock with an estimated fair
value of $80.4 million. Each share of Series C preferred stock has a par value
of $26.8404 and voting rights identical to that of Class A common stock.
Dividends on the Series C preferred stock are payable quarterly at a rate equal
to the common stock dividend per share then payable. The mandatory redemption is
structured so that 49.5% of the Series C preferred stock will be redeemed at par
value, or $45.6 million, on January 2, 2004 with the remaining 50.5% redeemed at
par value, or $46.5 million, on January 3, 2006. In the event of a change in the
control of the Company, at the option of the holder, each share of Series C
preferred stock is convertible into one share of Class A common stock or
redeemable for cash at par. The Series C preferred stock was issued at an $11.6
million discount to par. This discount will accrete to preferred stock dividends
during the life of the securities using the effective interest method. The
effective cost of capital is approximately 5.0%. Acquisition costs totaling $0.7
million have been deferred and are included as a component of goodwill.
20
FINANCIAL CONDITION
INVESTMENTS
Our total investment portfolio decreased 2.7% to $2,870.7 million at December
31, 2000 compared to $2,950.2 million at December 31, 1999. This decrease is
primarily the result of (i) the acquisition of our common stock, (ii) a $32.8
million net payment for reserves pursuant to the individual disability income
coinsurance arrangement, (iii) net cash outflows on interest sensitive and
variable products and (iv) an increase in writedowns on other-than-temporarily
impaired securities. These items were partially offset by positive cash flow
from operations and a decrease in net unrealized depreciation on fixed maturity
securities classified as available for sale.
Over the last several years, the mix of our life insurance business has been
shifting from traditional and interest sensitive products to variable products.
In addition, we have 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,
-----------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ---------------------------
CARRYING CARRYING CARRYING
VALUE PERCENT VALUE PERCENT VALUE PERCENT
------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public ........................ $ 1,727,513 60.2% $ 1,733,678 58.8% $ 1,852,291 61.1%
144A private placement ........ 402,877 14.0 429,269 14.6 347,499 11.5
Private placement ............. 169,042 5.9 178,445 6.0 242,542 8.0
------------ ------------ ------------ ------------ ------------ ------------
Total fixed maturities ........ 2,299,432 80.1 2,341,392 79.4 2,442,332 80.6
Equity securities ................ 30,781 1.1 35,345 1.2 35,287 1.2
Mortgage loans on real estate .... 321,862 11.2 314,523 10.7 299,372 9.9
Investment real estate:
Acquired for debt ............. 5,285 0.2 783 -- 867 --
Investment .................... 18,535 0.6 19,336 0.6 39,812 1.3
Policy loans ..................... 125,987 4.4 123,717 4.2 123,328 4.1
Other long-term investments ...... 4,118 0.1 8,575 0.3 10,210 0.3
Short-term investments ........... 64,659 2.3 106,529 3.6 80,228 2.6
------------ ------------ ------------ ------------ ------------ ------------
Total investments .......... $ 2,870,659 100.0% $ 2,950,200 100.0% $ 3,031,436 100.0%
============ ============ ============ ============ ============ ============
As of December 31, 2000, 93.4% (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, 2000, the investment in non-investment grade debt was 6.6% of fixed
maturity securities. At that time no single non-investment grade holding
exceeded 0.3% of total investments.
21
The following table sets forth the credit quality, by NAIC designation and
Standard & Poors (S & P) rating equivalents, of fixed maturity securities.
DECEMBER 31,
--------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
NAIC CARRYING CARRYING CARRYING
DESIGNATION EQUIVALENT S&P RATINGS (1) VALUE PERCENT VALUE PERCENT VALUE PERCENT
- ------------- -------------------------------- ------------ --------- ------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A) ................... $ 1,386,708 60.3% $ 1,414,868 60.4% $ 1,570,264 64.3%
2 (BBB) .......................... 761,932 33.1 781,342 33.4 738,468 30.2
------------ --------- ------------ --------- ------------ ---------
Total investment grade ......... 2,148,640 93.4 2,196,210 93.8 2,308,732 94.5
3 (BB) ........................... 120,495 5.2 107,249 4.6 105,138 4.3
4 (B) ............................ 21,762 1.0 30,490 1.3 18,005 0.7
5 (CCC, CC, C) ................... 6,478 0.3 7,293 0.3 7,060 0.3
6 In or near default ............. 2,057 0.1 150 -- 3,397 0.2
------------ --------- ------------ --------- ------------ ---------
Total below investment grade ... 150,792 6.6 145,182 6.2 133,600 5.5
------------ --------- ------------ --------- ------------ ---------
Total fixed maturities.......... $ 2,299,432 100.0% $ 2,341,392 100.0% $ 2,442,332 100.0%
============ ========= ============ ========= ============ =========
- -------------
(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, 2000, summarized by
type of security.
PERCENT
AMORTIZED CARRYING OF FIXED
COST PAR VALUE VALUE MATURITIES
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential ....................................... $ 384,182 $ 388,440 $ 387,133 16.8%
Pass through ..................................... 66,388 65,993 65,827 2.9
Planned and targeted amortization class .......... 37,745 37,878 37,734 1.6
Other ............................................ 11,240 11,485 11,236 0.5
------------ ------------ ------------ ------------
Total residential mortgage-backed securities ........ 499,555 503,796 501,930 21.8
Commercial mortgage-backed securities ............... 209,494 208,533 206,251 9.0
Other asset-backed securities ....................... 325,009 326,663 328,184 14.3
------------ ------------ ------------ ------------
Total mortgage and asset-backed securities .......... $ 1,034,058 $ 1,038,992 $ 1,036,365 45.1%
============ ============ ============ ============
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, 2000, we held $321.9 million or 11.2% 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, 2000, 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, 2000
include: Pacific (30.9%), which includes California; and West South Central
(22.5%), which includes Oklahoma and Texas. Mortgage loans on real estate are
also diversified by collateral type with office buildings (44.2%) and retail
facilities (34.3%) representing the largest holdings at December 31, 2000.
OTHER ASSETS
Securities and indebtedness of related parties decreased 14.4% to $52.5 million
at December 31, 2000 due primarily to distributions from equity investees and
unrealized depreciation on fixed maturity securities owned by an equity
investee. These items were partially offset by the impact of equity income on
the securities and indebtedness balance during 2000. Reinsurance recoverable
increased 966.3% to $51.3 million at December 31, 2000 due principally to the
reinsurance of our individual disability income business. Deferred policy
acquisition costs increased 6.2% in 2000 to $251.0 million. This increase is due
to the capitalization of costs incurred with new sales, partially offset by
amortization and an $11.8 million decrease resulting from the reinsurance of our
individual disability income business. Assets held in separate accounts
increased 27.9%, to $327.4 million at December 31, 2000 due primarily to net
transfers to the separate accounts resulting from sales of our variable
products. At December 31, 2000, we had total assets of $3,704.0 million, a 1.1%
increase from total assets at December 31, 1999.
LIABILITIES
Policy liabilities and accruals decreased 0.2% to $2,412.1 million at December
31, 2000. The slight decrease 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. In addition, future policy benefit
reserves on interest sensitive products decreased due to an increase in
surrender benefits during 2000. Other liabilities decreased 28.4% to $55.2
million at December 31, 2000 due primarily to a decrease in payables for
investment securities purchased. At December 31, 2000, we had total liabilities
of $3,130.1 million, a 2.3% increase from total liabilities at December 31,
1999.
23
STOCKHOLDERS' EQUITY
Stockholders' equity decreased 5.6%, to $476.8 million at December 31, 2000,
compared to $505.0 million at December 31, 1999. This decrease is principally
attributable to stock repurchases and dividends paid, offset, in part, by net
income and a change in net unrealized investment gains/losses.
At December 31, 2000, common stockholders' equity was $473.8 million, or $17.35
per share, compared to $502.0 million, or $15.94 per share at December 31, 1999.
Included in stockholders' equity per common share is ($0.78) at December 31,
2000 and ($1.52) at December 31, 1999 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 increased
stockholders' equity $27.5 million during 2000, 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 7.9 years at December 31, 2000 and 8.6 years at
December 31, 1999. 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 92% of our liabilities at December
31, 2000 and 93% of our liabilities at December 31, 1999. 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, 2000 and 1999, interest rate
guarantees on interest sensitive products ranged from 3.0% to 5.5%. The weighted
average guarantee was 3.7% at December 31, 2000 and 1999.
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.
24
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,
----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
Surrender charge rate:
Greater than or equal to 5% ................................ $ 281,420 $ 288,695
Less than 5%, but still subject to surrender charge ........ 235,494 266,317
Not subject to surrender charge ............................ 1,111,233 1,096,276
Not subject to surrender or discretionary withdrawal ............ 141,215 135,602
------------ ------------
Total ........................................................... $ 1,769,362 $ 1,786,890
============ ============
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 4.3 at December 31, 2000 and 4.7 at December 31, 1999. The
effective duration of the interest sensitive products was approximately 4.7 at
December 31, 2000 and 4.5 at December 31, 1999.
If interest rates were to increase 10% from levels at December 31, 2000 and
1999, our fixed maturity securities and short-term investments would decrease
approximately $54.1 million at December 31, 2000 and $75.1 million at December
31, 1999. 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,
2000 and 1999, the fair value of our debt and mandatorily redeemable preferred
stock of subsidiary trust would increase $2.8 million at December 31, 2000 and
$2.9 million at December 31, 1999.
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. The above
estimates do not attempt to measure the financial statement impact on the
resulting change in deferred policy acquisition costs, value of insurance in
force acquired, unearned revenue reserves and income taxes. 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, 2000. 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 2000 and 1999. The
mortality and expense fee rates range from 0.90% to 1.40% for 2000 and 1999. 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.
LIQUIDITY
FBL FINANCIAL GROUP, INC.
Parent company cash inflows from operations consists primarily of (i) dividends
from subsidiaries, if declared and paid, (ii) fees which it charges the various
subsidiaries and affiliates for management of their operations, (iii) expense
reimbursements from subsidiaries and affiliates and (iv) tax settlements between
the parent company and its subsidiaries. Cash outflows are principally for
salaries and other expenses related to providing these management
25
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 $5.2 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 two
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.
We acquired Class A common shares totaling 4,358,397 in 2000, 1,322,920 in 1999
and 3,497,648 in 1998 as a result of stock repurchases and an exchange of a
subsidiary owning our home office properties in 1998. These transactions reduced
stockholders' equity $85.8 million in 2000, $25.7 million in 1999 and $70.7
million in 1998.
We paid common and preferred stock dividends totaling $11.0 million in 2000,
$10.8 million in 1999 and $10.2 million in 1998. Interest payments on the parent
company's 5% Subordinated Deferrable Interest Notes (the Notes), relating to the
company-obligated mandatorily redeemable preferred stock of subsidiary trust,
totaled $5.0 million in 2000, 1999 and 1998. It is anticipated that cash
dividend requirements for 2001 will be $0.10 per quarter per common and Series C
preferred share and $0.0075 per quarter per Series B preferred share, or
approximately $12.5 million. In addition, interest payments on the Notes are
estimated to be $5.0 million for 2001.
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. In addition, it is anticipated
that dividends from Farm Bureau Life will be used to fund the scheduled
redemption of the Series C preferred stock in 2004 ($45.6 million) and 2006
($46.5 million). 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 2001, the maximum amount
legally available for distribution to FBL Financial Group, Inc. without further
regulatory approval is $49.9 million.
The parent company had available cash and investments totaling $22.2 million at
December 31, 2000. As of December 31, 2000, we had no commitments for capital
expenditures other than for the assets and liabilities of Kansas Farm Bureau
Life, which was funded with the issuance of Series C preferred stock on January
1, 2001.
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 2000, with cash inflows at levels
sufficient to provide the funds necessary to meet their obligations.
26
During 2000, the Life Companies experienced net cash outflows of $36.5 million
from continuing operations and financing activities related to interest
sensitive products. The net cash outflow is primarily a result of a $32.8
million net payment for reserves pursuant to the individual disability income
coinsurance arrangement and increased surrender benefits on interest sensitive
products and rollovers from traditional products to variable products. This cash
outflow was funded with available cash and cash provided from investing
activities. The Life Companies had net cash inflows from continuing operations
and financing activities related to interest sensitive products of $104.1
million in 1999 and $121.5 million in 1998. During 1999 and 1998, these funds
were primarily used to increase the Life Companies' short-term and fixed
maturity investment portfolios. In developing their investment strategy, the
Life Companies establish a level of cash and securities which, 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 $132.7 million as of December 31, 2000. At December 31, 2000, Farm
Bureau Life had outstanding borrowings of $40.0 million under this arrangement,
leaving a borrowing capacity of $92.7 million. Additional collateral would need
to be deposited with the FHLB in order to access this additional borrowing
capacity. 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% (6.50% at December 31, 2000). Fixed maturity securities with a
carrying value of $43.1 million are on deposit with the FHLB as collateral for
the note.
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 $9.9 million at
December 31, 2000 and $11.7 million at December 31, 1999, were used to acquire
assets that were leased to certain affiliates, including Farm Bureau Mutual.
Interest was payable at a rate equal to the prime rate of a national bank (9.50%
at December 31, 2000). During January 2001, this note was repaid through the
sale of the related assets to Farm Bureau Mutual.
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,
mortgage loans and our insurance products, are adequate to meet our anticipated
cash obligations for the foreseeable future. Our investment portfolio at
December 31, 2000, included $64.7 million of short-term investments and $271.1
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 CHANGE
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (Statement) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
Statement 138, "Accounting for Certain Derivative Instruments and Certain
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. Statement 138
amends Statement 133 to clarify the appropriate accounting for certain hedging
transactions. We adopted the Statements on January 1, 2001, their effective
dates.
Because of our minimal use of derivatives, we do not anticipate that the
adoption of the new Statements will have a significant effect on our earnings or
financial position. However, at December 31, 2000, we do own 11 convertible
fixed maturity securities with a carrying value of $36.1 million. The conversion
features on these securities are considered embedded derivatives and,
accordingly, changes in fair value of the conversion features will be reflected
in net income in future periods. The fair value of these embedded derivatives is
estimated to be $3.7 million at December 31, 2000. Since it is not possible to
predict future changes in fair value, the impact of adopting the Statements on
these securities cannot be predicted. The cumulative effect of this accounting
change on net income, representing the difference in accumulated net unrealized
capital gains (losses) under the two methods, totaled $0.5 million.
27
Effective January 1, 2001, upon adoption of the Statements, we transferred our
fixed maturity securities classified as held for investment to the
available-for-sale category. In connection with this transfer, the securities
were marked to market and the corresponding increase in carrying value totaling
$2.8 million, net of offsetting adjustments to deferred acquisition costs, value
of insurance in force acquired, unearned revenue reserve and income taxes, will
be credited to stockholders' equity during the first quarter of 2001.
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", 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, 2000, 1999 AND 1998
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 that 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.
We engage Ernst & Young LLP as independent auditors to audit our financial
statements and express their opinion thereon. Their audits include reviews and
tests of our 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.
/s/ William J. Oddy
--------------------
CHIEF EXECUTIVE OFFICER AND DIRECTOR
/s/ 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 5, 2001
31
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------------
2000 1999
------------ ------------
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 2000 - $288,661; 1999 -
$337,794) .............................................................. $ 284,253 $ 339,362
Available for sale, at market (amortized cost: 2000 - $2,038,161; 1999 -
$2,077,341) ............................................................ 2,015,179 2,002,030
Equity securities, at market (cost: 2000 - $32,629; 1999 - $38,147) ......... 30,781 35,345
Mortgage loans on real estate ............................................... 321,862 314,523
Investment real estate, less allowances for depreciation of $3,061 in 2000
and $2,300 in 1999 ........................................................ 23,820 20,119
Policy loans ................................................................ 125,987 123,717
Other long-term investments ................................................. 4,118 8,575
Short-term investments ...................................................... 64,659 106,529
------------ ------------
Total investments .............................................................. 2,870,659 2,950,200
Cash and cash equivalents ...................................................... 3,099 6,482
Securities and indebtedness of related parties ................................. 52,458 61,309
Accrued investment income ...................................................... 34,656 35,707
Accounts and notes receivable .................................................. 107 1,733
Amounts receivable from affiliates ............................................. 6,522 4,484
Reinsurance recoverable ........................................................ 51,312 4,812
Deferred policy acquisition costs .............................................. 250,971 236,263
Value of insurance in force acquired ........................................... 14,264 15,894
Property and equipment, less allowances for depreciation of $44,742 in 2000
and $40,115 in 1999 ......................................................... 59,152 60,506
Current income taxes recoverable ............................................... 8,496 --
Deferred income taxes .......................................................... -- 4,616
Goodwill, less accumulated amortization of $4,878 in 2000 and $4,181 in
1999 ........................................................................ 8,554 9,251
Other assets ................................................................... 16,389 15,046
Assets held in separate accounts ............................................... 327,407 256,028
------------ ------------
Total assets ........................................................... $ 3,704,046 $ 3,662,331
============ ============
32
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------------
2000 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products .......................................... $ 1,598,958 $ 1,626,042
Traditional life insurance and accident and health products .......... 773,372 752,733
Unearned revenue reserve ............................................. 29,382 27,650
Other policy claims and benefits ........................................ 10,378 10,019
------------ ------------
2,412,090 2,416,444
Other policyholders' funds:
Supplementary contracts without life contingencies ...................... 170,404 160,848
Advance premiums and other deposits ..................................... 81,739 83,258
Accrued dividends ....................................................... 13,385 13,554
------------ ------------
265,528 257,660
Short-term debt payable to affiliate ...................................... 9,943 11,694
Amounts payable to affiliates ............................................. 136 166
Long-term debt ............................................................ 40,000 40,000
Current income taxes payable .............................................. -- 1,002
Deferred income taxes ..................................................... 19,749 --
Other liabilities ......................................................... 55,248 77,184
Liabilities related to separate accounts .................................. 327,407 256,028
------------ ------------
Total liabilities .................................................... 3,130,101 3,060,178
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust ..................................................... 97,000 97,000
Other ..................................................................... 142 145
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 26,115,120 shares in 2000 and 30,307,232 shares
in 1999 ................................................................. 37,769 42,308
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares ................................. 7,563 7,558
Accumulated other comprehensive loss ...................................... (22,445) (49,917)
Retained earnings ......................................................... 450,916 502,059
------------ ------------
Total stockholders' equity .............................................. 476,803 505,008
------------ ------------
Total liabilities and stockholders' equity ........................... $ 3,704,046 $ 3,662,331
============ ============
See accompanying notes.
33
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Interest sensitive product charges ............................ $ 59,780 $ 55,363 $ 52,157
Traditional life insurance premiums ........................... 83,830 82,569 81,752
Accident and health premiums .................................. 9,654 13,361 11,721
Net investment income ......................................... 221,369 225,820 228,067
Realized losses on investments ................................ (25,960) (2,342) (4,878)
Other income .................................................. 18,945 20,215 20,802
------------ ------------ ------------
Total revenues .............................................. 367,618 394,986 389,621
Benefits and expenses:
Interest sensitive product benefits ........................... 127,605 123,231 122,527
Traditional life insurance and accident and health benefits ... 60,229 57,941 55,880
Increase in traditional life and accident and health future
policy benefits ............................................. 19,066 19,556 21,264
Distributions to participating policyholders .................. 25,043 25,360 25,818
Underwriting, acquisition and insurance expenses .............. 72,930 70,176 63,983
Interest expense .............................................. 3,655 2,553 1,690
Other expenses ................................................ 14,206 15,020 15,453
------------ ------------ ------------
Total benefits and expenses ................................. 322,734 313,837 306,615
------------ ------------ ------------
44,884 81,149 83,006
Income taxes ..................................................... (13,602) (25,911) (26,404)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily redeemable
preferred stock of subsidiary trust ......................... (4,850) (4,850) (4,850)
Other ......................................................... 120 (35) (335)
Equity income, net of related income taxes ....................... 12,195 3,972 1,258
------------ ------------ ------------
Income from continuing operations ................................ 38,747 54,325 52,675
Discontinued operations:
Income from property-casualty operations, net of related
income taxes ................................................ -- -- 287
Gain on disposal of property-casualty operations, net of
related income taxes ........................................ 600 1,385 978
------------ ------------ ------------
Net income ....................................................... $ 39,347 $ 55,710 $ 53,940
============ ============ ============
Earnings per common share:
Income from continuing operations ............................. $ 1.27 $ 1.68 $ 1.56
Income from discontinued operations ........................... 0.02 0.04 0.04
------------ ------------ ------------
Earnings per common share ..................................... $ 1.29 $ 1.72 $ 1.60
============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ............................. $ 1.25 $ 1.65 $ 1.52
Income from discontinued operations ........................... 0.02 0.04 0.04
------------ ------------ ------------
Earnings per common share - assuming dilution ................. $ 1.27 $ 1.69 $ 1.56
============ ============ ============
Cash dividends per common share .................................. $ 0.36 $ 0.33 $ 0.30
============ ============ ============
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, 1998 ........ $ 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
Comprehensive income:
Net income for 2000 ............. -- -- -- -- 39,347 39,347
Change in net unrealized
investment gains/losses ....... -- -- -- 27,472 -- 27,472
------------
Total comprehensive income ....... 66,819
Purchase of 4,358,397 shares
of common stock ................. -- (6,277) -- -- (79,505) (85,782)
Issuance of 166,285 shares of
common stock under stock
option plan, including
related income tax benefit ...... -- 1,709 -- -- -- 1,709
Adjustment resulting from
capital transactions of
equity investee ................. -- 29 5 -- -- 34
Dividends on preferred stock ..... -- -- -- -- (150) (150)
Dividends on common stock ........ -- -- -- -- (10,835) (10,835)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 ...... $ 3,000 $ 37,769 $ 7,563 $ (22,445) $ 450,916 $ 476,803
============ ============ ============ ============ ============ ============
See accompanying notes.
35
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES
Continuing operations:
Net income .................................................... $ 38,747 $ 54,325 $ 52,675
Adjustments to reconcile net income to net cash provided by
continuing operations:
Adjustments related to interest sensitive products:
Interest credited to account balances .................. 104,896 105,121 105,604
Charges for mortality and administration ............... (58,987) (54,229) (52,050)
Deferral of unearned revenues .......................... 2,851 2,456 2,607
Amortization of unearned revenue reserve ............... (745) (1,318) (888)
Provision for depreciation and amortization ................ 16,530 16,202 10,629
Equity income .............................................. (12,195) (3,972) (1,258)
Realized losses on investments ............................. 25,960 2,342 4,878
Increase (decrease) in traditional life and accident and
health benefit accruals, net of reinsurance ............ (23,910) 20,552 22,305
Policy acquisition costs deferred .......................... (39,954) (34,275) (31,081)
Amortization of deferred policy acquisition costs .......... 10,821 12,434 10,171
Provision for deferred income taxes ........................ 8,378 2,435 3,051
Other ...................................................... (15,444) 8,385 21,414
------------ ------------ ------------
Net cash provided by continuing operations ........................ 56,948 130,458 148,057
Discontinued operations:
Net income .................................................... 600 1,385 1,265
Adjustments to reconcile net income to net cash provided by
discontinued operations .................................... (600) (1,385) 1,207
------------ ------------ ------------
Net cash provided by discontinued operations ...................... -- -- 2,472
------------ ------------ ------------
Net cash provided by operating activities ......................... 56,948 130,458 150,529
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ........................ 55,846 154,700 151,298
Fixed maturities - available for sale ......................... 221,730 208,154 280,324
Equity securities ............................................. 20,346 10,391 24,843
Mortgage loans on real estate ................................. 41,850 53,922 75,887
Investment real estate ........................................ 644 20,080 1,349
Policy loans .................................................. 29,168 28,401 28,423
Other long-term investments ................................... 1,104 1,169 2,152
Short-term investments - net .................................. 41,870 -- --
------------ ------------ ------------
412,558 476,817 564,276
Acquisition of investments:
Fixed maturities - available for sale ......................... (222,251) (428,718) (513,992)
Equity securities ............................................. (2,491) (6,663) (5,644)
Mortgage loans on real estate ................................. (49,306) (69,606) (51,883)
Investment real estate ........................................ -- (726) (3,096)
Policy loans .................................................. (31,438) (28,790) (29,810)
Other long-term investments ................................... -- (1,014) (1,726)
Short-term investments - net .................................. -- (26,301) (48,155)
------------ ------------ ------------
(305,486) (561,818) (654,306)
36
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
INVESTING ACTIVITIES (CONTINUED)
Proceeds from disposal, repayments of advances and other
distributions from equity investees .......................... $ 8,747 $ 11,395 $ 6,254
Investments in and advances to equity investees .................. (1,505) (6,654) (5,505)
Net proceeds from sale of discontinued operations ................ 2,000 1,229 24,844
Net purchases of property and equipment and other ................ (11,526) (16,172) (26,680)
Investing activities of discontinued operations .................. -- -- (2,474)
------------ ------------ ------------
Net cash provided by (used in) investing activities .............. 104,788 (95,203) (93,591)
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited
to policyholder account balances ............................. 217,657 216,598 229,778
Return of policyholder account balances on interest sensitive
and variable products ........................................ (281,094) (224,826) (255,298)
Proceeds from short-term debt with affiliate ..................... -- 3,068 8,626
Repayments of short-term debt .................................... (1,751) (24,500) --
Proceeds from long-term debt ..................................... -- 40,000 --
Repayments of long-term debt ..................................... -- (71) (6)
Distributions on company-obligated mandatorily redeemable
preferred stock of subsidiary trust .......................... (4,850) (4,850) (4,850)
Other contributions (distributions) related to minority
interests - net .............................................. 117 (4,588) (335)
Purchase of common stock ......................................... (85,782) (25,309) (25,008)
Issuance of common stock ......................................... 1,569 1,947 2,456
Dividends paid ................................................... (10,985) (10,758) (10,182)
------------ ------------ ------------
Net cash used in financing activities ............................ (165,119) (33,289) (54,819)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ................. (3,383) 1,966 2,119
Cash and cash equivalents at beginning of year ................... 6,482 4,516 2,397
------------ ------------ ------------
Cash and cash equivalents at end of year ......................... $ 3,099 $ 6,482 $ 4,516
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ..................................................... $ 3,658 $ 2,414 $ 1,676
Income taxes ................................................. 21,374 11,781 23,683
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 15 midwestern and western states through an
exclusive agency force. 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.
On January 1, 2001, our agency force and geographic marketing territory expanded
with the acquisition of the assets and liabilities of Kansas Farm Bureau Life
Insurance Company, a single-state life insurance company selling traditional
life and annuity products in the state of Kansas. See Note 15, "Kansas Farm
Bureau Life Insurance Company Acquisition - Subsequent Event," for additional
information regarding this transaction.
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.
38
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 estimated fair value on 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 specific writedown is
taken. Such reductions are recorded as realized losses on investments.
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 industry.
Nontraditional investments include a debt-related instrument and investment
deposits which are reported at cost. In accordance with accounting practices for
the broker-dealer industry, marketable securities held by subsidiaries in this
industry are valued at market value. 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.
These partnerships and corporations operate predominately in the insurance,
broker-dealer, investment company and real estate industries. Such investments
are accounted for using the equity method. In applying the equity method, we
record our share of income or loss reported by the equity investees. For
partnerships operating in the investment company industry, this income or loss
includes changes in unrealized gains and losses in the partnerships' investment
portfolios. Changes in the value of our 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. If this review indicates a decline in market value that is
other than temporary, carrying value of the investment is reduced to its
estimated realizable value, or fair value, 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.
39
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 5.73%.
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 is computed
primarily using the straight-line method over the estimated useful lives of the
assets. Furniture and equipment had a carrying value of $38.8 million at
December 31, 2000 and $39.2 million at December 31, 1999, and estimated useful
lives that range from three to ten years. Capitalized software costs had a
carrying value of $20.4 million at December 31, 2000 and $21.3 million at
December 31, 1999, and estimated useful lives that range from two to five years.
Depreciation expense was $8.1 million in 2000, $8.6 million in 1999 and $8.5
million in 1998. Amortization expense was $4.8 million in 2000, $2.6 million in
1999 and $1.3 million in 1998.
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 2000,
1999 or 1998.
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 factors 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
7.74% in 2000, 7.83% in 1999 and 8.03% in 1998. Accrued dividends for
participating business are established for anticipated amounts earned to date
that have not been paid. The declaration of future dividends for participating
business is at the discretion of the Board of Directors. Participating business
accounted for 38% of receipts from policyholders during 2000 and represented 16%
of life insurance in force at December 31, 2000. Participating business
accounted for 40% of receipts from policyholders during 1999 (1998 - 41%) and
represented 17% of life insurance in force at December 31, 1999.
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.
40
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Interest crediting rates for interest sensitive products ranged from 4.00% to
6.50% in 2000, from 4.00% to 6.25% in 1999 and from 4.00% to 6.50% in 1998.
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 $0.1 million at December 31, 2000 and $1.3
million at December 31, 1999 to cover estimated future assessments on known
insolvencies. We had assets totaling $1.0 million at December 31, 2000 and $2.8
million at December 31, 1999 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 2000
and 1999 and ($1.2) million in 1998. It is anticipated that estimated future
guaranty fund assessments on known insolvencies will be paid during 2001 and
substantially all the related future premium tax offsets will be realized during
the five 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 for
the benefit of certain policyholders that 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, benefit claims incurred in excess of policyholder
account balances and amortization of deferred policy acquisition costs.
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.
41
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 claims and provide additional capacity for growth. The cost of
reinsurance ceded is generally amortized over the contract periods of the
reinsurance agreements.
All insurance-related revenues, benefits and expenses are reported net of
reinsurance ceded.
OTHER INCOME AND OTHER EXPENSES
Other income and other expenses consist primarily of 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 revenues generated by our insurance subsidiaries are
classified as other income. Revenues of the insurance subsidiaries included as
other income aggregated $1.2 million in 2000, $0.6 million in 1999 and $1.4
million in 1998. Lease income from leases with affiliates totaled $9.2 million
in 2000, $7.9 million in 1999 and $5.8 million in 1998. Investment advisory fee
income from affiliates totaled $1.2 million in 2000, $1.5 million in 1999 and
$1.3 million in 1998.
COMPREHENSIVE INCOME (LOSS)
Unrealized gains and losses on our available-for-sale securities are included in
accumulated 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 ($14.4) million in 2000, ($0.1) million in
1999 and ($0.9) million in 1998. 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 $9.5 million in 2000, $0.2 million in 1999 and $0.5 million in
1998.
RECLASSIFICATIONS
Certain amounts in the 1999 and 1998 consolidated financial statements have been
reclassified to conform to the 2000 financial statement presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 (FASB) issued Statement
of Financial Accounting Standards (Statement) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
Statement 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Acitivites." 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. Statement 138
amends Statement 133 to clarify the appropriate accounting for certain hedging
transactions. We adopted the Statements on January 1, 2001, their effective
dates.
42
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because of our minimal use of derivatives, we do not anticipate that the
adoption of the new Statements will have a significant effect on our earnings or
financial position. However, at December 31, 2000, we do own 11 convertible
fixed maturity securities with a carrying value of $36.1 million. The conversion
features on these securities are considered embedded derivatives and,
accordingly, changes in fair value of the conversion features will be reflected
in net income in future periods. The fair value of these embedded derivatives is
estimated to be $3.7 million at December 31, 2000. Since it is not possible to
predict future changes in fair value, the impact of adopting the Statements on
these securities cannot be predicted. The cumulative effect of this accounting
change on net income, representing the difference in accumulated net unrealized
capital gains (losses) under the two methods, totaled $0.5 million.
Effective January 1, 2001, upon adoption of the Statements, we transferred our
fixed maturity securities classified as held for investment to the
available-for-sale category. In connection with this transfer, the securities
were marked to market and the corresponding increase in carrying value totaling
$2.8 million, net of offsetting adjustments to deferred acquisition costs, value
of insurance in force acquired, unearned revenue reserve and income taxes, will
be credited to stockholders' equity during the first quarter of 2001.
2. INVESTMENT OPERATIONS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables contain amortized cost and estimated 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, 2000 (DOLLARS IN THOUSANDS)
Fixed maturities - mortgage-backed securities .... $ 284,253 $ 5,299 $ (891) $ 288,661
============== ============== ============== ==============
AVAILABLE FOR SALE
------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies ........ $ 51,285 $ 2,013 $ (61) $ 53,237
State, municipal and other governments ....... 60,456 1,530 (443) 61,543
Public utilities ............................. 124,819 4,252 (1,880) 127,191
Corporate securities ......................... 1,008,387 22,554 (50,448) 980,493
Mortgage and asset-backed securities ......... 749,805 11,227 (8,920) 752,112
Redeemable preferred stocks ...................... 43,409 527 (3,333) 40,603
-------------- -------------- -------------- --------------
Total fixed maturities ........................... $ 2,038,161 $ 42,103 $ (65,085) $ 2,015,179
============== ============== ============== ==============
Equity securities ................................ $ 32,629 $ 349 $ (2,197) $ 30,781
============== ============== ============== ==============
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
============== ============== ============== ==============
43
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
============== ============== ============== ==============
As described in Note 1, "Significant Accounting Policies - Pending Accounting
Change," effective January 1, 2001 the fixed maturity securities classified as
held for investment were transferred to the available-for-sale category.
Short-term investments have been excluded from the above schedules as amortized
cost approximates market value for these securities.
The carrying value and estimated market value of our portfolio of fixed maturity
securities at December 31, 2000, 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 ....................... $ -- $ -- $ 46,772 $ 46,719
Due after one year through five years ......... -- -- 235,638 229,276
Due after five years through ten years ........ -- -- 373,376 369,803
Due after ten years ........................... -- -- 589,161 576,666
-------------- -------------- -------------- --------------
-- -- 1,244,947 1,222,464
Mortgage and asset-backed securities .......... 284,253 288,661 749,805 752,112
Redeemable preferred stocks ................... -- -- 43,409 40,603
-------------- -------------- -------------- --------------
$ 284,253 $ 288,661 $ 2,038,161 $ 2,015,179
============== ============== ============== ==============
Net unrealized investment losses on equity securities and fixed maturity
securities classified as available for sale were comprised of the following:
DECEMBER 31,
--------------------------------
2000 1999
-------------- --------------
(DOLLARS IN THOUSANDS)
Unrealized depreciation on fixed maturity and equity securities available for
sale ........................................................................ $ (24,830) $ (78,113)
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ........................................... 2,202 5,577
Value of insurance in force acquired ........................................ 271 1,040
Unearned revenue reserve .................................................... (180) (554)
Provision for deferred income taxes ............................................. 7,888 25,217
-------------- --------------
(14,649) (46,833)
Proportionate share of net unrealized investment losses of equity investees ..... (7,796) (3,084)
-------------- --------------
Net unrealized investment losses ................................................ $ (22,445) $ (49,917)
============== ==============
44
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $18.6 million in 2000,
($64.2) million in 1999 and $1.2 million in 1998.
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,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Balance at beginning of year ............................... $ 806 $ 871 $ 812
Realized losses ........................................ -- -- 59
Uncollectible amounts written off, net of recoveries ... -- (65) --
------------ ------------ ------------
Balance at end of year ..................................... $ 806 $ 806 $ 871
============ ============ ============
The carrying value of 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) were under $0.1 million at December 31, 2000 and
1999.
NET INVESTMENT INCOME
Components of net investment income are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Held for investment ..................................... $ 24,858 $ 32,431 $ 49,176
Available for sale ...................................... 161,184 154,057 136,269
Equity securities .......................................... 2,181 2,145 2,116
Mortgage loans on real estate .............................. 24,784 23,989 25,895
Investment real estate ..................................... 2,459 5,098 5,822
Policy loans ............................................... 7,942 7,644 7,642
Other long-term investments ................................ 308 35 (42)
Short-term investments ..................................... 5,079 3,897 3,670
Other ...................................................... 1,700 6,700 8,200
------------ ------------ ------------
230,495 235,996 238,748
Less investment expenses ................................... (9,126) (10,176) (10,681)
------------ ------------ ------------
Net investment income ...................................... $ 221,369 $ 225,820 $ 228,067
============ ============ ============
45
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 industry, are summarized below:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REALIZED
Fixed maturities - available for sale .................... $ (21,795) $ (2,529) $ 318
Equity securities ........................................ (2,161) 2,307 (1,712)
Mortgage loans on real estate ............................ -- -- (59)
Investment real estate ................................... 186 (221) 381
Other long-term investments .............................. (3,500) (1,345) --
Securities and indebtedness of related parties ........... 1,310 (582) (331)
Notes receivable and other ............................... -- 28 (3,475)
------------ ------------ ------------
Realized losses on investments ........................... $ (25,960) $ (2,342) $ (4,878)
============ ============ ============
UNREALIZED
Fixed maturities:
Held for investment ................................... $ 5,976 $ (26,009) $ 724
Available for sale .................................... 52,329 (162,494) 5,555
Equity securities ........................................ 954 1,500 (1,538)
------------ ------------ ------------
Change in unrealized appreciation/depreciation of
investments ........................................... $ 59,259 $ (187,003) $ 4,741
============ ============ ============
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, 2000
Scheduled principal repayments and calls:
Available for sale ....................... $ 114,825 $ -- $ -- $ 114,825
Held for investment ...................... 55,846 -- -- 55,846
Sales - available for sale ................. 110,230 3,624 (6,949) 106,905
-------------- -------------- -------------- --------------
Total .................................... $ 280,901 $ 3,624 $ (6,949) $ 277,576
============== ============== ============== ==============
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
============== ============== ============== ==============
Realized losses on fixed maturities totaling $18.5 million in 2000, $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.
46
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income taxes (credits) include a provision of ($9.1) million in 2000, ($0.8)
million in 1999 and ($1.7) million in 1998 for the tax effect of realized gains
and losses.
OTHER
We have a common stock investment in American Equity Investment Life Holding
Company (American Equity), an insurance company that underwrites and markets
life insurance and annuity products throughout the United States. The investment
is accounted for using the equity method and is included in the securities and
indebtedness of related parties line on the consolidated balance sheets. Due to
the timing of the availability of financial information, during 2000 we switched
from recording our share of American Equity's results from a current basis to
one quarter in arrears. The impact of this change on our financial statements
was not material. The carrying value of our common stock investment in American
Equity includes goodwill totaling $5.0 million in 2000 and $5.3 million in 1999.
In addition to the common stock, during 1999 we acquired $2.3 million in
preferred stock issued by a subsidiary of American Equity. Summarized financial
information for American Equity and our common stock ownership percentage is as
follows:
AS OF OR FOR THE PERIOD ENDED
--------------------------------------------
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Total investments .................................. $ 1,922,419 $ 1,453,423 $ 634,153
Total assets ....................................... 2,265,252 1,665,503 683,012
Long-term debt ..................................... 32,100 20,600 10,000
Total liabilities .................................. 2,128,436 1,532,198 616,881
Minority interest .................................. 99,373 98,982 --
Total revenues ..................................... 83,256 79,811 37,954
Income from continuing operations .................. 2,729 2,443 244
Net income ......................................... 2,729 2,443 244
Percentage ownership of common stock ............... 32.3% 33.2% 34.1%
We reported equity income, net of tax, from APEX Investment Fund III, an equity
investee that operates in the investment company industry, totaling $7.7 million
in 2000, $1.5 million in 1999 and $1.0 million in 1998. Summarized financial
information for APEX Investment Fund III is as follows:
AS OF OR FOR THE PERIOD ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Total investments .................................. $ 99,747 $ 70,343 $ 68,522
Total net assets ................................... 101,286 72,601 71,915
Total revenues ..................................... 291,707 69,868 24,652
Income from continuing operations .................. 290,436 68,446 23,610
Net income ......................................... 290,436 68,446 23,610
Percentage ownership of partners' capital .......... 4.1% 4.0% 4.1%
During 2000, equity investees distributed to us equity securities with a fair
value totaling $14.5 million. Also during 2000, we received an interest in ten
real estate properties with a fair value of $5.0 million in satisfaction of a
fixed maturity security that had been in default. These transactions were
treated as noncash items for purposes of the 2000 statement of cash flow.
At December 31, 2000, affidavits of deposits covering investments with a
carrying value totaling $2,595.7 million were on deposit with state agencies to
meet regulatory requirements.
At December 31, 2000, we had committed to provide additional funding for
mortgage loans on real estate aggregating $8.9 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, 2000 include real estate, fixed maturities
and other long-term investments totaling $7.7 million.
47
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2000.
3. 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 the fair value of
our 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.
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 HELD IN SEPARATE ACCOUNTS: Separate account assets are reported at
estimated fair value in our 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 estimated 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.
LIABILITIES RELATED TO SEPARATE ACCOUNTS: Separate account liabilities are
estimated at cash surrender value, the cost we would incur to extinguish the
liability.
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.
48
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Fixed maturities:
Held for investment .................... $ 284,253 $ 288,661 $ 339,362 $ 337,794
Available for sale ..................... 2,015,179 2,015,179 2,002,030 2,002,030
Equity securities ......................... 30,781 30,781 35,345 35,345
Mortgage loans on real estate ............. 321,862 311,175 314,523 301,309
Policy loans .............................. 125,987 143,469 123,717 135,888
Other long-term investments ............... 4,118 4,118 8,575 8,864
Cash and short-term investments ........... 67,758 67,758 113,011 113,011
Securities and indebtedness of related
parties ................................ 1,067 1,088 4,179 4,278
Assets held in separate accounts .......... 327,407 327,407 256,028 256,028
LIABILITIES
Future policy benefits .................... $ 984,441 $ 969,323 $ 1,024,285 $ 1,006,155
Other policyholders' funds ................ 251,172 251,172 243,076 243,076
Short-term debt payable to affiliate ...... 9,943 9,943 11,694 11,694
Long-term debt ............................ 40,000 40,000 40,000 40,000
Liabilities related to separate accounts .. 327,407 317,838 256,028 249,838
MINORITY INTEREST IN SUBSIDIARIES
Company-obligated mandatorily redeemable
preferred stock of subsidiary trust .... $ 97,000 $ 37,461 $ 97,000 $ 44,477
4. 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 $2,059.0 million (9.1% of total life
insurance in force) at December 31, 2000 and $1,826.3 million (8.7% of total
life insurance in force) at December 31, 1999.
Reinsurance contracts do not relieve us of our 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 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.
49
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective September 1, 2000, we entered into a 100% coinsurance agreement to
reinsure our individual disability income business with an unaffiliated insurer.
At September 1, 2000, the related accident and health reserves totaled $43.6
million and deferred acquisition costs totaled $11.8 million. We settled this
transaction by transferring cash and investments equal to the reserves on this
business at September 1, 2000. In addition, we received $11.1 million in cash as
consideration for the transaction. A loss of $0.7 million on the transaction has
been deferred and is being recognized over the term of the underlying policies.
In total, insurance premiums and product charges have been reduced by $9.5
million in 2000, $5.3 million in 1999 and $5.9 million in 1998 and insurance
benefits have been reduced by $6.2 million in 2000, $2.4 million in 1999 and
$2.2 million in 1998 as a result of cession agreements.
We assume variable annuity business from American Equity and another alliance
partner through a modified coinsurance arrangement. Product charges from this
business totaled $0.1 million in 2000 and less than $0.1 million in 1999 and
1998. In 1998, we assumed a block of ordinary annuity policies with reserves
totaling $22.0 million from another alliance partner.
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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Unpaid claims liability, net of related reinsurance, at
beginning of year .......................................... $ 20,433 $ 20,706 $ 21,199
Add:
Provision for claims occurring in the current year ......... 6,087 6,630 5,520
Decrease in estimated expense for claims occurring in the
prior years ............................................. (1,756) (1,417) (519)
------------ ------------ ------------
Incurred claim expense during the current year ................ 4,331 5,213 5,001
Deduct expense payments for claims occurring during:
Current year ............................................... 1,711 2,274 2,200
Prior years ................................................ 2,680 3,212 3,294
Deduct claim reserves transferred under 100% coinsurance
arrangement ................................................ 19,071 -- --
------------ ------------ ------------
23,462 5,486 5,494
------------ ------------ ------------
Unpaid claims liability, net of related reinsurance, at end
of year .................................................... 1,302 20,433 20,706
Active life reserve ........................................... 176 19,705 17,632
------------ ------------ ------------
Net accident and health reserves .............................. 1,478 40,138 38,338
Reinsurance ceded ............................................. 46,456 853 612
------------ ------------ ------------
Gross accident and health reserves ............................ $ 47,934 $ 40,991 $ 38,950
============ ============ ============
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.
50
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
An analysis of the value of insurance in force acquired is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Excluding impact of net unrealized investment gains and
losses:
Balance at beginning of year ................................. $ 14,854 $ 15,839 $ 17,105
Accretion of interest during the year ........................ 823 877 973
Amortization of asset ........................................ (1,684) (1,862) (2,239)
------------ ------------ ------------
Balance prior to impact of net unrealized investment gains and
losses ....................................................... 13,993 14,854 15,839
Impact of net unrealized investment gains and losses ............ 271 1,040 (1,306)
------------ ------------ ------------
Balance at end of year .......................................... $ 14,264 $ 15,894 $ 14,533
============ ============ ============
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: 2001 - $1.1 million; 2002 - $1.0 million; 2003 - $1.0 million;
2004 - $0.9 million; 2005 - $0.8 million; and thereafter, through 2023 - $9.2
million.
5. 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 results in profitable companies recognizing a tax
provision as if the individual company filed a separate return and loss
companies recognizing a benefit 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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(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 ................................................. $ 5,224 $ 23,604 $ 23,432
Deferred ................................................ 8,378 2,307 2,972
------------ ------------ ------------
13,602 25,911 26,404
Equity income:
Current ................................................. 6,476 2,010 575
Deferred ................................................ 92 128 79
------------ ------------ ------------
6,568 2,138 654
Taxes provided in consolidated statements of changes in
stockholders' equity:
Change in net unrealized investment gains/losses -
deferred ................................................ 14,792 (53,750) 1,570
Adjustment resulting from capital transaction of equity
investee - deferred ..................................... 19 -- (33)
Adjustment resulting from the issuance of shares under
stock option plan - current ............................. (140) (140) (1,286)
------------ ------------ ------------
14,671 (53,890) 251
------------ ------------ ------------
$ 34,841 $ (25,841) $ 27,309
============ ============ ============
51
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Income from continuing operations before income taxes,
minority interest in earnings of subsidiaries and equity
income ..................................................... $ 44,884 $ 81,149 $ 83,006
============ ============ ============
Income tax at federal statutory rate (35%) .................... $ 15,709 $ 28,402 $ 29,052
Tax effect (decrease) of:
Dividends on company-obligated mandatorily
redeemable preferred stock of subsidiary trust ........... (1,698) (1,698) (1,698)
Tax-exempt interest income ................................. (175) (226) (280)
Tax-exempt dividend income ................................. (956) (598) (229)
State income taxes ......................................... 276 (193) (207)
Other items ................................................ 446 224 (234)
------------ ------------ ------------
Income tax expense ............................................ $ 13,602 $ 25,911 $ 26,404
============ ============ ============
The tax effect of temporary differences giving rise to our deferred income tax
assets and liabilities is as follows:
DECEMBER 31,
----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
Deferred income tax liabilities:
Deferred policy acquisition costs ......................................... $ 71,451 $ 67,275
Value of insurance in force acquired ...................................... 4,992 5,563
Other ..................................................................... 17,017 15,077
------------ ------------
93,460 87,915
Deferred income tax assets:
Fixed maturity and equity securities ...................................... (6,271) (22,799)
Future policy benefits .................................................... (42,378) (44,136)
Accrued dividends ......................................................... (2,854) (3,851)
Accrued pension costs ..................................................... (8,217) (9,848)
Other ..................................................................... (13,991) (11,897)
------------ ------------
(73,711) (92,531)
------------ ------------
Deferred income tax liability (asset) ......................................... $ 19,749 $ (4,616)
============ ============
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, 2000 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 $511.9 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.
6. CREDIT ARRANGEMENTS
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0
million at December 31, 2000 and December 31, 1999. 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% (6.50% at December 31, 2000 and 5.77%
at December 31, 1999). Fixed maturity securities with a carrying value of $43.1
million are on deposit with the FHLB as collateral for the note. As an investor
in the FHLB, we have the ability to borrow an additional $92.7 million from the
FHLB at December 31, 2000 with appropriate increased collateral deposits.
52
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $9.9 million at December 31, 2000 and
$11.7 million at December 31, 1999 were used to acquire assets that were leased
to certain affiliates, including Farm Bureau Mutual. Interest was payable at a
rate equal to the prime rate of a national bank (9.50% at December 31, 2000 and
8.50% at December 31, 1999). Rental income from the related leases included a
provision for interest on the carrying value of the assets. During January 2001,
this note was paid off, principally by transferring the underlying assets to
Farm Bureau Mutual. No gain or loss was recorded on this transaction, as fair
value of the assets was equal to book value on the transfer date.
7. MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Minority interest in the consolidated balance sheets includes $97.0 million of
5% Preferred Securities issued by FBL Financial Group Capital Trust (the Trust),
one of our wholly-owned subsidiaries. FBL Financial Group, Inc. (parent company)
issued 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes)
with a principal amount of $100.0 million to support the 5% Preferred
Securities. 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, 2000 and 1999, 97,000 shares of 5% Preferred Securities were outstanding,
all of which we unconditionally guarantee.
The 5% Preferred Securities were originally issued to the Iowa Farm Bureau
Federation, our majority stockholder. On October 31, 1999, the Iowa Farm Bureau
Federation exchanged the 5% Preferred Securities 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.
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.
The Iowa Farm Bureau Federation owns our Series B preferred stock. 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.
We repurchased 4,358,397 shares in 2000, 1,322,920 shares in 1999 and 961,536
shares in 1998 of Class A common stock in accordance with repurchase plans and a
tender offer approved by our Board of Directors. The cost of the repurchases
totaled $85.8 million in 2000, $25.7 million in 1999 and $25.0 million in 1998.
Of the shares repurchased in 2000 and 1998, 3,745,471 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.
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
53
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
our Class B common stock are governed by a Class B Shareholder Agreement which
results in the Iowa Farm Bureau Federation, which owns 69.0% of our voting stock
as of December 31, 2000, 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.
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 $5.2 million in 2000, $4.5 million
in 1999 and $5.7 million in 1998.
We participate with several affiliates in a 401(k) defined contribution plan
which covers substantially all employees. We contribute FBL Financial Group,
Inc. stock in the amount equal to 50% of an employee's contributions up to 4% of
the annual salary contributed by the employees. Costs are allocated among the
affiliates on a basis of time incurred by the respective employees for each
company. Related expense totaled $0.4 million in 2000 and $0.3 million in 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. Liabilities for these plans are accrued as the
related benefits are earned.
Certain of the assets related to these plans are on deposit with us 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 us on behalf of
affiliates.
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 $0.1 million in 2000, $0.2 million in 1999 and $0.1 million in 1998.
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 us.
54
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information relating to stock options is as follows:
WEIGHTED-
NUMBER OF AVERAGE EXERCISE TOTAL
SHARES PRICE PER SHARE EXERCISE PRICE
---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Shares under option at January 1, 1998...................... 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
Granted................................................. 454,334 15.79 7,174
Exercised............................................... 166,285 9.44 1,570
Forfeited............................................... 40,054 12.36 495
-------------- --------------
Shares under option at December 31, 2000.................... 1,664,843 11.79 $ 19,635
============== ==============
Exercisable options:
December 31, 1998....................................... 610,258 9.87 6,022
December 31, 1999....................................... 840,163 9.92 8,334
December 31, 2000....................................... 1,059,168 10.56 11,185
Information regarding stock options outstanding at December 31, 2000 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..................... 965,743 5.55 $ 8.75 802,702 $ 8.75
$8.76 - $14.00............... 125,243 6.27 12.21 88,803 12.20
$14.01 - $19.25.............. 512,695 8.73 16.20 122,656 16.96
$19.26 - $24.25.............. 61,162 7.65 22.15 45,007 22.13
------------ ------------
$8.75 - $24.25............... 1,664,843 6.66 11.79 1,059,168 10.56
============ ============
At December 31, 2000, shares of Class A common stock available for grant as
additional awards under the Plan totaled 1,220,050.
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 our options.
55
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
-------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Risk-free interest rate....................................... 6.70% 4.73% 5.40%
Dividend yield................................................ 2.20% 2.10% 1.40%
Volatility factor of the expected market price................ 0.15 0.13 0.12
Weighted-average expected life................................ 5.1 years 5.0 years 4.9 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.
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,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income - as reported ........................................ $ 39,347 $ 55,710 $ 53,940
Net income - pro forma .......................................... 38,385 55,028 53,273
Earnings per common share - as reported ......................... 1.29 1.72 1.60
Earnings per common share - pro forma ........................... 1.26 1.70 1.58
Earnings per common share - assuming dilution, as reported ...... 1.27 1.69 1.56
Earnings per common share - assuming dilution, pro forma ........ 1.25 1.68 1.55
Weighted-average fair value of options granted during the year
(per common share) ............................................ 3.14 3.31 3.27
The pro forma impact is likely to increase in future years as additional options
are granted and amortized ratably over the vesting period.
9. 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 $1.1 million in 2000, $0.8 million in 1999 and
$0.5 million in 1998. In addition, Farm Bureau Management Corporation, a
wholly-owned subsidiary of the Iowa Farm Bureau Federation, provides certain
management services to us under a separate arrangement. We incurred related
expenses totaling $0.9 million in 2000, $0.5 million in 1999 and $0.7 million in
1998.
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 $6.0 million in 2000, $5.0 million in 1999 and $4.5 million in
1998 to the property-casualty companies under these arrangements.
56
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $0.7
million in 2000, $0.9 million in 1999 and $0.7 million in 1998 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 $1.2
million in 2000 and $1.0 million in 1999 and 1998.
We have administrative services agreements with American Equity under which we
provide underwriting, claims processing, accounting, compliance and other
administrative services primarily relating to certain variable insurance
products underwritten by them. Fee income from performing these services totaled
$0.3 million in 2000 and 1999 and $0.2 million in 1998
10. 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, 2000, 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, 2000 are as follows:
2001 - $2.1 million; 2002 - $2.1 million; 2003 - $2.3 million; 2004 - $2.4
million; 2005 - $2.4 million and thereafter, through 2013 - $18.8 million. Rent
expense for the lease totaled $3.1 million in 2000, $2.3 million in 1999 and
$1.3 million in 1998. These amounts are net of $1.4 million in 2000 and 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 7).
11. 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 $0.6 million in 2000, $1.4 million in 1999 and $1.0 million in
1998. The 2000 and 1999 gains and $0.8 million of the 1998 gain were earned in
connection with an earn-out provision included in the underlying sales
agreement. The gains are net of income taxes (credits) totaling $1.4 million in
2000, $0.6 million in 1999 and ($0.5) million in 1998.
We may earn additional consideration during each of the two 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 two-year period ending December 31, 2002 as
such amounts, if any, cannot be reasonably estimated as of December 31, 2000.
Receipts as a result of the earn-out provision are recorded as an adjustment to
the gain on the disposal of the discontinued segment.
Income from discontinued operations in 1998 was comprised of revenues totaling
$12.9 million and benefits and expenses totaling $12.6 million.
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 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.
57
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income from continuing operations ....................... $ 38,747 $ 54,325 $ 52,675
Income from discontinued operations ..................... 600 1,385 1,265
------------ ------------ ------------
Net income .............................................. 39,347 55,710 53,940
Dividends on Series B preferred stock ................... (150) (150) (150)
------------ ------------ ------------
Numerator for earnings per common share-income
available to common stockholders ................. $ 39,197 $ 55,560 $ 53,790
============ ============ ============
Denominator:
Denominator for earnings per common share - weighted-
average shares ....................................... 30,399,401 32,213,154 33,568,852
Effect of dilutive securities - employee stock options .. 400,490 616,818 831,661
------------ ------------ ------------
Denominator for diluted earnings per common share -
adjusted weighted-average shares ................. 30,799,891 32,829,972 34,400,513
============ ============ ============
Earnings per common share:
Income from continuing operations ....................... $ 1.27 $ 1.68 $ 1.56
Income from discontinued operations ..................... 0.02 0.04 0.04
------------ ------------ ------------
Earnings per common share ............................... $ 1.29 $ 1.72 $ 1.60
============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ....................... $ 1.25 $ 1.65 $ 1.52
Income from discontinued operations ..................... 0.02 0.04 0.04
------------ ------------ ------------
Earnings per common share - assuming dilution ........... $ 1.27 $ 1.69 $ 1.56
============ ============ ============
13. STATUTORY INFORMATION
The financial statements of the Life Companies 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
58
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 Companies, as determined in accordance with statutory
accounting practices, was $28.9 million in 2000, $40.4 million in 1999 and $52.5
million in 1998. Statutory net gain from operations for the life insurance
subsidiaries, which excludes realized gains and losses, totaled $49.8 million in
2000, $41.2 million in 1999 and $56.0 million in 1998. Statutory capital and
surplus, after appropriate elimination of intercompany accounts, totaled $311.9
million at December 31, 2000 and $301.5 million at December 31, 1999.
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 2001, Farm Bureau Life could pay dividends to the parent company of
approximately $49.9 million without prior approval of insurance regulatory
authorities.
The National Association of Insurance Commissioners has revised the ACCOUNTING
PRACTICES AND PROCEDURES MANUAL, the guidance that defines statutory accounting
principles. The revised manual will be effective January 1, 2001, and has been
adopted by the State of Iowa, our Life Companies' state of domicile. The revised
manual will result in changes to the accounting practices that the Life
Companies use to prepare their statutory-basis financial statements. Management
believes the impact of these changes to the Life Companies' statutory-basis
capital and surplus as of January 1, 2001 will not be significant.
14. 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 us
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 11, "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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Revenues from external customers:
Life insurance .................................... $ 347,328 $ 374,980 $ 371,230
All other ......................................... 46,795 41,619 36,939
------------ ------------ ------------
394,123 416,599 408,169
Eliminations ...................................... (26,505) (21,613) (18,548)
------------ ------------ ------------
Consolidated ...................................... $ 367,618 $ 394,986 $ 389,621
============ ============ ============
Intersegment revenues:
Life insurance .................................... $ 2,108 $ 1,677 $ 934
All other ......................................... 24,397 19,936 17,614
------------ ------------ ------------
26,505 21,613 18,548
Eliminations ...................................... (26,505) (21,613) (18,548)
------------ ------------ ------------
Consolidated ...................................... $ -- $ -- $ --
============ ============ ============
Net investment income:
Life insurance .................................... $ 218,913 $ 225,040 $ 228,494
All other ......................................... 4,545 2,091 216
------------ ------------ ------------
223,458 227,131 228,710
Eliminations ...................................... (2,089) (1,311) (643)
------------ ------------ ------------
Consolidated ...................................... $ 221,369 $ 225,820 $ 228,067
============ ============ ============
Depreciation and amortization:
Life insurance .................................... $ 5,456 $ 5,688 $ 1,111
All other ......................................... 11,074 10,514 9,518
------------ ------------ ------------
Consolidated ...................................... $ 16,530 $ 16,202 $ 10,629
============ ============ ============
Income tax expense (benefit):
Life insurance .................................... $ 13,215 $ 25,686 $ 27,196
All other ......................................... 387 225 (792)
------------ ------------ ------------
Consolidated ...................................... $ 13,602 $ 25,911 $ 26,404
============ ============ ============
Income (loss) from continuing operations:
Life insurance .................................... $ 37,206 $ 53,926 $ 53,661
All other ......................................... 1,541 399 (986)
------------ ------------ ------------
Consolidated ...................................... $ 38,747 $ 54,325 $ 52,675
============ ============ ============
Assets:
Life insurance .................................... $ 3,654,440 $ 3,558,366
All other ......................................... 195,875 249,677
------------ ------------
3,850,315 3,808,043
Eliminations ...................................... (146,269) (145,712)
------------ ------------
Consolidated ...................................... $ 3,704,046 $ 3,662,331
============ ============
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 7 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 2000, 1999 or 1998.
60
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. KANSAS FARM BUREAU LIFE INSURANCE COMPANY ACQUISITION - SUBSEQUENT
EVENT
On January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau
Life Insurance Company for $81.1 million. The acquisition will be accounted for
using purchase accounting. Goodwill recorded in connection with the transaction
will be amortized using the straight-line method over a 20-year period. A
condensed statement of the assets and liabilities acquired as of January 1,
2001, is as follows (dollars in thousands - unaudited):
ASSETS LIABILITIES AND STOCKHOLDER'S EQUITY
Investments.......................... $ 620,856 Policy liabilities and accruals....... $ 524,443
Value of insurance in force acquired. 52,167 Other policyholder funds.............. 76,738
Goodwill............................. 872 Other liabilities..................... 11,959
Other assets......................... 20,362 ----------
Total liabilities.................. 613,140
Stockholder's equity.................. 81,117
---------- ----------
Total........................... $ 694,257 Total............................ $ 694,257
========== ==========
As consideration for the purchase, we issued 3,429,500 shares of Series C
cumulative voting mandatorily redeemable preferred stock with an estimated fair
value of $80.4 million. Each share of Series C preferred stock has a par value
of $26.8404 and voting rights identical to that of Class A common stock.
Dividends on the Series C preferred stock are payable quarterly at a rate equal
to the common stock dividend per share then payable. The mandatory redemption is
structured so that 49.5% of the Series C preferred stock will be redeemed at par
value, or $45.6 million, on January 2, 2004 with the remaining 50.5% redeemed at
par value, or $46.5 million, on January 3, 2006. In the event of a change in the
control of the Company, at the option of the holder, each share of Series C
preferred stock is convertible into one share of Class A common stock or
redeemable for cash at par. The Series C preferred stock was issued at an $11.6
million discount to par. This discount will accrete to preferred stock dividends
during the life of the securities using the effective interest method.
Acquisition costs totaling $0.7 million have been deferred and are included as a
component of goodwill.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly results of operations are as follows:
2000
------------------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Premiums and product charges ............. $ 38,725 $ 42,626 $ 36,988 $ 34,925
Net investment income .................... 54,683 55,373 55,579 55,734
Realized losses on investments ........... (61) (4,148) (15,353) (6,398)
Total revenues ........................... 97,845 98,810 82,090 88,873
Income from continuing operations ........ 18,134 9,665 1,881 9,067
Discontinued operations .................. -- -- -- 600
Net income ............................... 18,134 9,665 1,881 9,667
Earnings per common share:
Income from continuing operations ..... $ 0.58 $ 0.31 $ 0.06 $ 0.32
Income from discontinued operations ... -- -- -- 0.02
------------ ------------ ------------ ------------
Earnings per common share ............. $ 0.58 $ 0.31 $ 0.06 $ 0.34
============ ============ ============ ============
Earnings per common share - assuming
dilution:
Income from continuing operations ..... $ 0.57 $ 0.31 $ 0.06 $ 0.31
Income from discontinued operations ... -- -- -- 0.02
------------ ------------ ------------ ------------
Earnings per common share - assuming
dilution ............................ $ 0.57 $ 0.31 $ 0.06 $ 0.33
============ ============ ============ ============
61
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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
============ ============ ============ ============
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.
62
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, 2000.
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.
3 Restated Articles of Incorporation
3.1 Articles of Amendment -- Series A Cumulative Voting
Preferred Stock
3.2 Articles of Amendment -- Series B Cumulative Voting
Preferred Stock
3.3 Articles of Correction -- Series B Cumulative Voting
Preferred Stock
3.4 Articles of Amendment -- Series C Voting Preferred
Stock
23 Consent of Independent Auditors
(b) Reports on Form 8-K.
On January 12, 2001, a Form 8-K was filed in connection with the
closing of the acquisition of Kansas Farm Bureau Life Insurance
Company's assets and liabilities. Filed with the Form 8-K was the
Articles of Amendment - Certificate of Designations Series C Voting
Preferred Stock of FBL Financial Group, Inc.
63
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 13th day of March,
2001.
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 Executive
- ------------------- Officer) and Director March 13, 2001
William J. Oddy
/s/ JAMES W. NOYCE Chief Financial Officer (Principal Financial and
- ------------------ Accounting Officer) March 13, 2001
James W. Noyce
/s/ EDWARD M. WIEDERSTEIN Chairman of the Board and Director March 13, 2001
- -------------------------
Edward M. Wiederstein
/s/ KAREN J. HENRY Second Vice Chair and Director March 13, 2001
- ------------------
Karen J. Henry
Director March 13, 2001
- -----------------------
Eric K. Aasmundstad
/s/ STANLEY R. AHLERICH Director March 13, 2001
- -----------------------
Stanley R. Ahlerich
/s/ KENNETH R. ASHBY Director March 13, 2001
- --------------------
Kenneth R. Ashby
/s/ JERRY L. CHICOINE Director March 13, 2001
- ---------------------
Jerry L. Chicoine
/s/ O. AL CHRISTOPHERSON Director March 13, 2001
- ------------------------
O. Al Christopherson
/s/ JOHN W. CREER Director March 13, 2001
- -----------------
John W. Creer
/s/ KENNY J. EVANS Director March 13, 2001
- ------------------
Kenny J. Evans
/s/ ALAN L. FOUTZ Director March 13, 2001
- -----------------
Alan L. Foutz
64
Signature Title Date
- ------------------------------ ------------------------------------------------- -----------------
/s/ RICHARD G. KJERSTAD Director March 13, 2001
- -----------------------
Richard G. Kjerstad
/s/ G. STEVEN KOUPLEN Director March 13, 2001
- ---------------------
G. Steven Kouplen
/s/ DAVID L. MCCLURE Director March 13, 2001
- --------------------
David L. McClure
/s/ BRYCE P. NEIDIG Director March 13, 2001
- -------------------
Bryce P. Neidig
/s/ HOWARD D. POULSON First Vice Chair and Director March 13, 2001
- ---------------------
Howard D. Poulson
/s/ FRANK S. PRIESTLEY Director March 13, 2001
- ----------------------
Frank S. Priestley
/s/ JOHN J. VAN SWEDEN Director March 13, 2001
- ----------------------
John J. Van Sweden
/s/ JOHN E. WALKER Director March 13, 2001
- ------------------
John E. Walker
/s/ JERRY C. DOWNIN Senior Vice President, Secretary, Treasurer and
- ------------------- Director March 13, 2001
Jerry C. Downin
/s/ STEPHEN M. MORAIN Senior Vice President, General Counsel and
- --------------------- Director March 13, 2001
Stephen M. Morain
65
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 December31, 2000 and 1999, 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, 2000, and have issued our report thereon dated
February 5, 2001 (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 5, 2001
66
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER
THAN INVESTMENTS IN RELATED PARTIES
FBL FINANCIAL GROUP, INC.
DECEMBER 31, 2000
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..................... $ 284,253 $ 288,661 $ 284,253
=====================
Fixed maturity securities, available for sale:
Bonds:
United States Government and agencies........ 51,285 53,237 53,237
State, municipal and other governments....... 60,456 61,543 61,543
Public utilities............................. 124,819 127,191 127,191
Corporate securities......................... 974,997 948,640 948,640
Mortgage and asset-backed securities......... 749,805 752,112 752,112
Convertible bonds............................ 33,390 31,853 31,853
Redeemable preferred stocks.................... 43,409 40,603 40,603
--------------------- --------------------- --------------------
Total..................................... 2,038,161 $ 2,015,179 2,015,179
=====================
Equity securities, available-for-sale:
Common stocks:
Banks, trusts, and insurance companies....... 6,636 6,636 6,636
Industrial, miscellaneous, and all other..... 18,303 16,793 16,793
Nonredeemable preferred stocks................. 7,690 7,352 7,352
--------------------- --------------------- --------------------
Total..................................... 32,629 $ 30,781 30,781
=====================
Mortgage loans on real estate................... 322,668 321,862 (2)
Investment real estate:
Acquired for debt............................ 5,285 5,285
Investment................................... 18,535 18,535
Policy loans.................................... 125,987 125,987
Other long-term investments..................... 4,658 4,118 (3)
Short-term investments.......................... 64,659 64,659
--------------------- --------------------
$ 2,896,835 $ 2,870,659
===================== ====================
(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.
67
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------------
2000 1999
------------ ------------
ASSETS
Cash and cash equivalents .................................................. $ 253 $ 247
Amounts receivable from affiliates ......................................... 5,479 3,196
Amounts receivable from subsidiaries (eliminated in consolidation) ......... 1,184 816
Accrued investment income .................................................. 317 956
Current income taxes recoverable ........................................... 229 2,256
Deferred income taxes ...................................................... 281 1,493
Other assets ............................................................... 4,207 3,746
Short-term investments ..................................................... 9,688 46,588
Fixed maturities - available for sale, at market (amortized cost: 2000 -
$12,236; 1999 - $25,962) ................................................ 12,224 25,851
Investments in subsidiaries (eliminated in consolidation) .................. 561,811 527,434
------------ ------------
Total assets ......................................................... $ 595,673 $ 612,583
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities ................................. $ 6,679 $ 4,235
Amounts payable to affiliates .......................................... 102 159
Amounts payable to subsidiaries (eliminated in consolidation) .......... 12,089 3,181
Long-term debt (eliminated in consolidation) ........................... 100,000 100,000
------------ ------------
Total liabilities ................................................... 118,870 107,575
Stockholders' equity:
Preferred stock ........................................................ 3,000 3,000
Class A common stock ................................................... 37,769 42,308
Class B common stock ................................................... 7,563 7,558
Accumulated other comprehensive loss ................................... (22,445) (49,917)
Retained earnings ...................................................... 450,916 502,059
------------ ------------
Total stockholders' equity .......................................... 476,803 505,008
------------ ------------
Total liabilities and stockholders' equity .................... $ 595,673 $ 612,583
============ ============
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 INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Net investment income ..................................... $ 3,738 $ 1,810 $ 242
Realized gains on investments ............................. 245 -- --
Dividends from subsidiaries (eliminated in consolidation) 32,150 104,945 59,244
Management fee income from affiliates ..................... 1,134 780 538
Management fee income from subsidiaries (eliminated in
consolidation) ......................................... 834 619 392
------------ ------------ ------------
Total revenues ......................................... 38,101 108,154 60,416
Expenses:
Interest expense (eliminated in consolidation) ............ 5,000 5,000 5,000
General and administrative expenses ....................... 2,018 1,404 1,083
------------ ------------ ------------
Total expenses ......................................... 7,018 6,404 6,083
------------ ------------ ------------
31,083 101,750 54,333
Income taxes (credits) ........................................ (651) (1,117) (1,795)
------------ ------------ ------------
Income before equity in undistributed income (dividends in
excess of equity income) of subsidiaries and discontinued
operations ................................................ 31,734 102,867 56,128
Equity in undistributed income (dividends in excess of equity
income) of subsidiaries (eliminated in consolidation) ..... 7,013 (48,542) (3,453)
------------ ------------ ------------
Income from continuing operations ............................. 38,747 54,325 52,675
Discontinued operations:
Equity income from property-casualty subsidiary, net of
related income taxes ................................... -- -- 287
Gain on disposal of property-casualty subsidiary, net of
related income taxes ................................... 600 1,385 978
------------ ------------ ------------
Net income .................................................... $ 39,347 $ 55,710 $ 53,940
============ ============ ============
See accompanying notes to condensed financial statements.
69
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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............ $ 10,357 $ 1,036 $ (4,526)
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Short-term investments - net ............................... 36,900 997 --
Fixed maturities - availiable for sale - net ............... 13,797 -- --
Investment in subsidiaries (eliminated in consolidation) ....... -- (583) --
Net proceeds from sale of subsidiary - discontinued operations . 2,000 1,229 25,000
Dividends from subsidiaries (eliminated in consolidation) ...... 32,150 29,945 13,594
------------ ------------ ------------
Net cash provided by investing activities ...................... 84,847 31,588 38,594
FINANCING ACTIVITIES
Purchase of common stock ....................................... (85,782) (25,309) (25,008)
Issuance of common stock ....................................... 1,569 1,947 2,456
Dividends paid ................................................. (10,985) (10,758) (10,182)
------------ ------------ ------------
Net cash used in financing activities .......................... (95,198) (34,120) (32,734)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ............... 6 (1,496) 1,334
Cash and cash equivalents at beginning of year ................. 247 1,743 409
------------ ------------ ------------
Cash and cash equivalents at end of year ....................... $ 253 $ 247 $ 1,743
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash received (paid) during the year for income taxes .......... $ (2,553) $ (786) $ 1,853
Noncash financing activity - dividends from subsidiary ......... -- 75,000 45,650
See accompanying notes to condensed financial statements.
70
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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 $32.2 million in 2000, $29.9
million in 1999 and $13.6 million in 1998.
71
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------------- -------------- --------------- -------------- ---------------
FUTURE POLICY
DEFERRED BENEFITS,
POLICY LOSSES, OTHER
ACQUISITION CLAIMS AND UNEARNED POLICYHOLDER PREMIUM
COSTS LOSS EXPENSES REVENUES FUNDS REVENUE
-------------- -------------- --------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
December 31, 2000:
Life insurance................... $ 250,971 $ 2,382,708 $ 29,382 $ 265,528 $ 153,264
============== ============== =============== ============== ===============
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
============== ============== =============== ============== ===============
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J
-------- -------------- -------------- --------------- --------------
BENEFITS, AMORTIZATION
CLAIMS, OF DEFERRED
NET LOSSES AND POLICY OTHER
INVESTMENT SETTLEMENT ACQUISITION OPERATING
INCOME (1) EXPENSES COSTS EXPENSES
-------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
December 31, 2000:
Life insurance................... $ 218,913 $ 206,900 $ 10,821 $ 62,109
Other, including eliminations.... 2,456 -- -- --
-------------- -------------- --------------- --------------
Total............................ $ 221,369 $ 206,900 $ 10,821 $ 62,109
============== ============== =============== ==============
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
============== ============== =============== ==============
(1) Net investment income is allocated to the segments based upon the
investments held by the respective segment.
72
SCHEDULE IV - REINSURANCE
FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------------- -------------- -------------- -------------- --------------
CEDED TO ASSUMED FROM PERCENT OF
OTHER OTHER AMOUNT
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED TO NET
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Year ended December 31, 2000:
Life insurance in force, at end
of year......................... $ 22,601,417 $ 2,058,980 $ 2,432 $ 20,544,869 -- %
============== ============== ============== ============== ==============
Insurance premiums and other
considerations:
Interest sensitive product
charges....................... $ 61,727 $ 2,049 $ 102 $ 59,780 --
Traditional life insurance
premiums...................... 86,684 2,854 -- 83,830
Accident and health premiums.... 14,220 4,566 -- 9,654 --
-------------- -------------- -------------- -------------- --------------
$ 162,631 $ 9,469 $ 102 $ 153,264 -- %
============== ============== ============== ============== ==============
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
premiums...................... 85,689 3,120 -- 82,569
Accident and health premiums.... 13,731 370 -- 13,361 --
-------------- -------------- -------------- -------------- --------------
$ 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
premiums...................... 84,554 2,802 -- 81,752
Accident and health premiums.... 13,037 1,316 -- 11,721 --
-------------- -------------- -------------- -------------- --------------
$ 151,567 $ 5,938 $ 1 $ 145,630 -- %
============== ============== ============== ============== ==============
73