UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
--------------
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
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FBL Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Iowa 42-1411715
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
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(Address of principal executive offices) (Zip Code)
(515) 225-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. |_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 26,472,240 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of August 5, 2002.
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Investments:
Fixed maturities - available for sale, at market (amortized cost: 2002 -
$4,060,770; 2001 - $3,560,988) .............................................. $ 4,167,581 $ 3,636,150
Equity securities, at market (cost: 2002 - $40,439; 2001 - $39,019) ........... 39,542 39,733
Mortgage loans on real estate ................................................. 403,573 385,307
Investment real estate, less allowances for depreciation of $4,262 in 2002
and $3,862 in 2001 .......................................................... 20,898 20,056
Policy loans .................................................................. 180,653 181,054
Other long-term investments ................................................... 5,674 5,693
Short-term investments ........................................................ 43,426 32,863
------------ ------------
Total investments ................................................................ 4,861,347 4,300,856
Cash and cash equivalents ........................................................ 159,405 271,459
Securities and indebtedness of related parties ................................... 27,025 57,781
Accrued investment income ........................................................ 53,769 51,207
Accounts and notes receivable .................................................... 267 235
Amounts receivable from affiliates ............................................... 1,784 3,504
Reinsurance recoverable .......................................................... 89,152 101,287
Deferred policy acquisition costs ................................................ 421,488 360,156
Value of insurance in force acquired ............................................. 51,223 50,129
Property and equipment, less allowances for depreciation of $49,057 in 2002
and $48,413 in 2001 ........................................................... 37,223 40,385
Current income taxes recoverable ................................................. 10,081 --
Goodwill ......................................................................... 11,170 11,170
Other assets ..................................................................... 37,943 24,572
Assets held in separate accounts ................................................. 363,993 356,448
------------ ------------
Total assets ............................................................. $ 6,125,870 $ 5,629,189
============ ============
1
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive and equity-indexed products ........................ $ 3,182,132 $ 2,679,088
Traditional life insurance and accident and health products ........... 1,084,104 1,063,930
Unearned revenue reserve .............................................. 31,307 30,870
Other policy claims and benefits ......................................... 21,522 22,009
------------ ------------
4,319,065 3,795,897
Other policyholders' funds:
Supplementary contracts without life contingencies ....................... 296,079 261,554
Advance premiums and other deposits ...................................... 112,283 112,518
Accrued dividends ........................................................ 14,782 15,965
------------ ------------
423,144 390,037
Amounts payable to affiliates .............................................. 639 886
Long-term debt ............................................................. 40,000 40,000
Current income taxes ....................................................... -- 444
Deferred income taxes ...................................................... 59,434 59,634
Other liabilities .......................................................... 159,273 240,228
Liabilities related to separate accounts ................................... 363,993 356,448
------------ ------------
Total liabilities ..................................................... 5,365,548 4,883,574
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust ...................................................... 97,000 97,000
Other ...................................................................... 162 131
Series C redeemable preferred stock, $26.8404 par and redemption value per
share - authorized 3,752,100 shares, issued and outstanding 3,411,000
shares ..................................................................... 84,085 82,691
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 26,461,536 shares in 2002 and 26,215,685 shares
in 2001 .................................................................. 42,553 39,446
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares .................................. 7,553 7,563
Accumulated other comprehensive income ..................................... 31,699 39,364
Retained earnings .......................................................... 494,270 476,420
------------ ------------
Total stockholders' equity ............................................... 579,075 565,793
------------ ------------
Total liabilities and stockholders' equity ............................ $ 6,125,870 $ 5,629,189
============ ============
See accompanying notes.
2
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Interest sensitive product charges ...................... $ 19,608 $ 17,550 $ 38,380 $ 33,517
Traditional life insurance premiums ..................... 33,677 31,024 63,140 58,862
Accident and health premiums ............................ 178 1,072 270 2,222
Net investment income ................................... 82,977 71,116 162,514 137,816
Derivative loss ......................................... (8,655) (58) (9,437) (866)
Realized gains (losses) on investments .................. (5,823) 253 (3,577) (1,269)
Other income ............................................ 4,338 4,115 8,797 8,375
------------ ------------ ------------ ------------
Total revenues ....................................... 126,300 125,072 260,087 238,657
Benefits and expenses:
Interest sensitive product benefits ..................... 42,958 40,830 91,226 78,684
Traditional life insurance and accident and health
benefits ............................................. 19,286 20,838 36,668 41,357
Increase in traditional life and accident and health
future policy benefits ............................... 11,659 8,065 19,504 12,832
Distributions to participating policyholders ............ 7,696 7,595 15,667 14,500
Underwriting, acquisition and insurance expenses ........ 23,681 24,527 48,372 48,723
Interest expense ........................................ 181 457 358 1,094
Other expenses .......................................... 2,824 2,672 6,100 6,588
------------ ------------ ------------ ------------
Total benefits and expenses .......................... 108,285 104,984 217,895 203,778
------------ ------------ ------------ ------------
18,015 20,088 42,192 34,879
Income taxes ................................................ (5,450) (5,928) (13,121) (10,554)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily
redeemable preferred stock of subsidiary trust ....... (1,212) (1,212) (2,425) (2,425)
Other ................................................... (62) (54) (95) (56)
Equity income (loss), net of related income taxes ........... 679 (630) (1,036) (26)
------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle .................................... 11,970 12,264 25,515 21,818
Cumulative effect of change in accounting for
derivative instruments .................................. -- -- -- 344
------------ ------------ ------------ ------------
Net income .................................................. 11,970 12,264 25,515 22,162
Dividend on Series B and C preferred stock .................. (1,080) (1,046) (2,151) (2,085)
------------ ------------ ------------ ------------
Net income applicable to common stock ....................... $ 10,890 $ 11,218 $ 23,364 $ 20,077
============ ============ ============ ============
Earnings per common share:
Income before accounting change ......................... $ 0.39 $ 0.41 $ 0.85 $ 0.72
Cumulative effect of change in accounting for
derivative instruments ............................... -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share ............................... $ 0.39 $ 0.41 $ 0.85 $ 0.73
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income before accounting change ......................... $ 0.39 $ 0.40 $ 0.83 $ 0.71
Cumulative effect of change in accounting for
derivative instruments ............................... -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share - assuming dilution ........... $ 0.39 $ 0.40 $ 0.83 $ 0.72
============ ============ ============ ============
Cash dividends per common share ............................ $ 0.10 $ 0.10 $ 0.20 $ 0.20
============ ============ ============ ============
See accompanying notes.
3
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
SERIES B CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME (LOSS) EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 2001 ............. $ 3,000 $ 37,769 $ 7,563 $ (22,445) $ 450,916 $ 476,803
Comprehensive income:
Net income for six months ended
June 30, 2001 ..................... -- -- -- -- 22,162 22,162
Cumulative effect of change in
accounting for derivative
instruments ....................... -- -- -- 2,406 -- 2,406
Change in net unrealized
investment gains/losses ........... -- -- -- 37,178 -- 37,178
------------
Total comprehensive income ............ 61,746
Issuance of 63,642 shares of
common stock under compensation
and stock option plans, including
related income tax benefit .......... -- 691 -- -- -- 691
Adjustment resulting from capital
transactions of equity investee ..... -- 5 1 -- -- 6
Dividends on preferred stock .......... -- -- -- -- (2,085) (2,085)
Dividends on common stock ............. -- -- -- -- (5,473) (5,473)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2001 ............... $ 3,000 $ 38,465 $ 7,564 $ 17,139 $ 465,520 $ 531,688
============ ============ ============ ============ ============ ============
Balance at January 1, 2002 ............. $ 3,000 $ 39,446 $ 7,563 $ 39,364 $ 476,420 $ 565,793
Comprehensive income (loss):
Net income for six months ended
June 30, 2002 ..................... -- -- -- -- 25,515 25,515
Change in net unrealized
investment gains/losses ........... -- -- -- (7,665) -- (7,665)
------------
Total comprehensive income ............ 17,850
Issuance of 245,851 shares of
common stock under compensation
and stock option plans, including
related income tax benefit .......... -- 3,162 -- -- -- 3,162
Adjustment resulting from capital
transactions of equity investee ..... -- (55) (10) -- -- (65)
Dividends on preferred stock .......... -- -- -- -- (2,151) (2,151)
Dividends on common stock ............. -- -- -- -- (5,514) (5,514)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2002 ............... $ 3,000 $ 42,553 $ 7,553 $ 31,699 $ 494,270 $ 579,075
============ ============ ============ ============ ============ ============
Comprehensive income totaled $45.8 million in the second quarter of 2002 and
$7.8 million in the second quarter of 2001.
See accompanying notes.
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income ............................................................................ $ 25,515 $ 22,162
Adjustments to reconcile net income to net cash provided by operating
activities:
Adjustments related to interest sensitive products:
Interest credited to account balances, excluding bonus interest ................ 76,454 66,533
Charges for mortality and administration ....................................... (37,428) (32,688)
Deferral of unearned revenues .................................................. 1,221 1,227
Amortization of unearned revenue reserve ....................................... (728) (772)
Provision for depreciation and amortization ....................................... 1,603 7,899
Equity loss ....................................................................... 1,036 26
Realized losses on investments .................................................... 3,577 1,269
Increase in traditional life and accident and health benefit accruals ............. 19,504 12,832
Policy acquisition costs deferred ................................................. (78,207) (21,666)
Amortization of deferred policy acquisition costs ................................. 10,403 8,352
Provision for deferred income taxes ............................................... 3,956 3,277
Other ............................................................................. 127 14,980
------------ ------------
Net cash provided by operating activities ............................................. 27,033 83,431
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - available for sale ............................................. 400,714 277,420
Equity securities ................................................................. 4,387 6,349
Mortgage loans on real estate ..................................................... 39,597 16,152
Investment real estate ............................................................ -- 1,528
Policy loans ...................................................................... 22,145 20,947
Other long-term investments ....................................................... 501 86
Short-term investments - net ...................................................... -- 78,639
------------ ------------
467,344 401,121
Acquisition of investments:
Fixed maturities - available for sale ............................................. (997,185) (315,217)
Equity securities ................................................................. -- (6,392)
Mortgage loans on real estate ..................................................... (57,869) (22,903)
Investment real estate ............................................................ (1,331) --
Policy loans ...................................................................... (21,744) (22,220)
Other long-term investments ....................................................... (506) (1,252)
Short-term investments - net ...................................................... (10,563) --
------------ ------------
(1,089,198) (367,984)
Proceeds from disposal, repayments of advances and other distributions from
equity investees .................................................................. 1,901 6,130
Investments in and advances to equity investees ....................................... -- (1,102)
Net proceeds from sale of discontinued operations ..................................... -- 2,000
Net cash received in acquisition ...................................................... -- 3,202
Net purchases of property and equipment and other ..................................... (2,171) (2,621)
------------ ------------
Net cash provided by (used in) investing activities ................................... (622,124) 40,746
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2002 2001
------------ ------------
FINANCING ACTIVITIES
Receipts from interest sensitive, equity-indexed and variable products credited to
policyholder account balances ..................................................... $ 647,688 $ 151,029
Return of policyholder account balances on interest sensitive, equity-indexed and
variable products ................................................................. (158,578) (148,923)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust .................................................................. (2,425) (2,425)
Other distributions related to minority interests - net ............................... (64) (24)
Issuance of common stock .............................................................. 2,687 608
Dividends paid ........................................................................ (6,271) (6,232)
------------ ------------
Net cash provided by (used in) financing activities ................................... 483,037 (5,967)
------------ ------------
Increase (decrease) in cash and cash equivalents ...................................... (112,054) 118,210
Cash and cash equivalents at beginning of period ...................................... 271,459 3,099
------------ ------------
Cash and cash equivalents at end of period ............................................ $ 159,405 $ 121,309
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest .......................................................................... $ 361 $ 1,034
Income taxes ...................................................................... 18,657 4,962
Non-cash operating activity:
Deferral of bonus interest credited to account balances ........................... 9,131 --
See accompanying notes.
6
FBL Financial Group, Inc. June 30, 2002
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of FBL Financial
Group, Inc. (we or the Company) have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP) for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. Our financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of our financial position and results of operations. Operating
results for the three- and six-month periods ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. We encourage you to refer to our consolidated financial
statements and notes for the year ended December 31, 2001 included in our annual
report on Form 10-K for a complete description of our material accounting
policies. Also included in the Form 10-K is a description of areas of judgements
and estimates and other information necessary to understand our financial
position and results of operations.
2. ACCOUNTING CHANGES
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (Statement) No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Under the new
Statements, goodwill is no longer amortized, but is subject to annual impairment
tests in accordance with the Statements. In addition, Statement No. 142 requires
the identification and amortization of certain intangible assets that had
previously been included as a component of goodwill. We adopted the Statements
effective January 1, 2002. Based on testing performed as of January 1, 2002,
none of our goodwill is deemed to be impaired. In addition, we have no
intangible assets included as a component of goodwill that require separate
accounting.
Goodwill totaled $17.0 million at June 30, 2002 and December 31, 2001,
consisting of $11.2 million separately identified on the consolidated balance
sheets and $5.8 million in equity method goodwill included in the securities and
indebtedness of related parties line on the balance sheets. On a pro forma basis
without goodwill amortization, net income applicable to common stock for the
second quarter of 2001 would have been $11.5 million ($0.42 per share - basic
and $0.41 per share - assuming dilution) and for the six months ended June 30,
2001 would have been $20.6 million ($0.75 per share - basic and $0.74 - assuming
dilution).
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 144 provides a
single accounting model for long lived assets to be disposed of and changes the
criteria that must be met to classify an asset as held-for-sale. Statement No.
144 also requires expected future operating losses from discontinued operations
to be displayed in discontinued operations in the period(s) in which losses are
incurred rather than as of the measurement date as presently required. Adopting
Statement No. 144 on January 1, 2002 did not have any effect on our financial
position or results of operations.
3. INVESTMENT OPERATIONS
All of our fixed maturity securities, comprised of bonds and redeemable
preferred stocks, are designated as "available for sale" and are reported at
market value. Unrealized gains and losses on these securities, with the
exception of unrealized gains and losses relating to the conversion feature
embedded in convertible fixed maturity securities, are included directly in
stockholders' equity as a component of accumulated other comprehensive income or
loss. Unrealized gains and losses relating to the conversion feature embedded in
convertible fixed maturity securities are recorded as a component of derivative
income (loss) in the consolidated statements of income. The unrealized gains and
losses 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
7
FBL Financial Group, Inc. June 30, 2002
income had such amounts been realized. 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.
Net unrealized investment gains on equity securities and fixed maturity
securities classified as available for sale and recorded directly to
stockholders' equity were comprised of the following:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Unrealized appreciation on fixed maturity and equity securities available for
sale ........................................................................ $ 105,914 $ 75,876
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ........................................... (21,164) (5,561)
Value of insurance in force acquired ........................................ (7,928) (8,954)
Unearned revenue reserve .................................................... 313 257
Provision for deferred income taxes ............................................. (26,997) (21,566)
------------ ------------
50,138 40,052
Proportionate share of net unrealized investment losses of equity investees ..... (18,439) (688)
------------ ------------
Net unrealized investment gains ................................................. $ 31,699 $ 39,364
============ ============
4. CREDIT ARRANGEMENTS
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0
million at June 30, 2002 and at December 31, 2001. 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% (1.79% at June 30, 2002 and 1.85% at
December 31, 2001). Fixed maturity securities with a carrying value of $41.2
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 $36.9 million on the
line of credit from the FHLB at June 30, 2002 with appropriate increased
collateral deposits.
5. CONTINGENCIES
In the normal course of business, we may be involved in litigation where amounts
are alleged that are substantially more than contractual policy benefits or
certain other agreements. At June 30, 2002, management is not aware of any
claims for which a material loss is reasonably possible.
We seek to limit our exposure to loss on any single insured or event and to
recover a portion of benefits paid by ceding insurance to other insurance
enterprises. 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.
Through July 1, 2002, we participated with various unaffiliated life insurance
companies in a reinsurance pool to mitigate the impact of a catastrophic event
on our financial position and results of operations. Members of the pool shared
in the eligible catastrophic losses based on their size and contribution to the
pool. Under the pool arrangement, we were able to cede catastrophic losses after
other reinsurance and a deductible of $0.4 million, subject to a pool cap of
$125.0 million per event. We have a liability totaling $1.6 million at June 30,
2002 and December 31, 2001 for anticipated losses from this pool resulting from
the terrorist acts on September 11, 2001. We no longer participate in this pool
due to structural changes in the pool, including an increase in the cap on
losses.
8
FBL Financial Group, Inc. June 30, 2002
We self-insure our employee health and welfare claims, however claims in excess
of self-insurance levels are fully insured. We fund insurance claims through a
self-insurance trust. Deposits to the trust are made at an amount equal to our
best estimate of claims incurred during the period. Accordingly, no accruals are
recorded on our financial statements for unpaid claims and claims incurred but
not reported. Adjustments, if any, resulting in changes in the estimate of
claims incurred will be reflected in operations in the periods in which such
adjustments are known.
On March 31, 1998, we sold our wholly-owned subsidiary, Utah Farm Bureau
Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance Company
(Farm Bureau Mutual). We may earn additional consideration during 2002 in
accordance with an earn-out provision included in the related sales agreement.
Under the earn-out arrangement, the Company and Farm Bureau Mutual share equally
in the dollar amount by which the incurred losses on direct business written in
the state of Utah, 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 2002 as such amounts, if any, cannot be reasonably
estimated as of June 30, 2002. Receipts as a result of the earn-out provision
are recorded as an adjustment to the gain on the disposal of the discontinued
segment.
6. STOCK OPTION PLAN
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, up to 10 years. 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.
Information relating to stock option grants during the six months ended June 30,
2002 is as follows:
NUMBER OF
SECURITIES WEIGHTED-AVERAGE
UNDERLYING EXERCISE PRICE
OPTIONS GRANTED PER SHARE
--------------- --------------
William J. Oddy, Chief Executive Officer ................... 30,078 $ 17.97
Stephen M. Morain, Senior Vice President and General
Counsel ................................................ 17,183 17.97
James W. Noyce, Chief Financial Officer .................... 19,844 17.97
Timothy J. Hoffman, Chief Administrative Officer ........... 16,745 17.97
John M. Paule, Chief Marketing Officer ..................... 11,118 17.97
Non-employee members of the Board of Directors ............. 18,000 17.98
Officers, employees and other .............................. 310,790 17.98
------------
Total ................................................. 423,758 17.98
============
9
FBL Financial Group, Inc. June 30, 2002
7. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income before accounting change .................... $ 11,970 $ 12,264 $ 25,515 $ 21,818
Cumulative effect of change in accounting for
derivative instruments ...................... -- -- -- 344
------------ ------------ ------------ ------------
Net income ......................................... 11,970 12,264 25,515 22,162
Dividends on Series B and C preferred stock ........ (1,080) (1,046) (2,151) (2,085)
------------ ------------ ------------ ------------
Numerator for earnings per common
share-income available to common
stockholders ................................ $ 10,890 $ 11,218 $ 23,364 $ 20,077
============ ============ ============ ============
Denominator:
Weighted average shares ............................ 27,585,372 27,357,101 27,524,325 27,337,353
Deferred common stock units related to
directors compensation plan ..................... 14,443 10,675 13,960 10,208
------------ ------------ ------------ ------------
Denominator for earnings per common
share - weighted-average shares ............. 27,599,815 27,367,776 27,538,285 27,347,561
Effect of dilutive securities - employee stock
options ......................................... 625,877 460,771 571,231 435,534
------------ ------------ ------------ ------------
Denominator for diluted earnings per
common share - adjusted weighted-
average shares .............................. 28,225,692 27,828,547 28,109,516 27,783,095
============ ============ ============ ============
Earnings per common share:
Income before accounting change .................... $ 0.39 $ 0.41 $ 0.85 $ 0.72
Cumulative effect of change in accounting for
derivative instruments .......................... -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share .......................... 0.39 0.41 0.85 0.73
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income before accounting change .................... $ 0.39 $ 0.40 $ 0.83 $ 0.71
Cumulative effect of change in accounting for
derivative instruments .......................... -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share .......................... $ 0.39 $ 0.40 $ 0.83 $ 0.72
============ ============ ============ ============
Based upon the provisions of the underlying agreement and the application of the
"two class" method to our capital structure, we have not allocated any
undistributed net income to the Class C preferred stock since the Class C
preferred stockholder's participation in dividends with the common stockholders
is limited to the amount of the annual regular dividend.
8. SEGMENT INFORMATION
Management analyzes operations by reviewing financial information regarding
products that are aggregated into three product segments. These segments are (1)
traditional annuity, (2) traditional and universal life insurance and (3)
variable. We also have various support operations and corporate capital that is
aggregated into a corporate and other segment.
10
FBL Financial Group, Inc. June 30, 2002
The traditional annuity segment consists of traditional annuities,
equity-indexed annuities and supplementary contracts (some of which involve life
contingencies). Traditional and equity-indexed annuities provide for
tax-deferred savings and supplementary contracts provide for the systematic
repayment of funds that accumulate interest. Traditional annuities consist
primarily of flexible premium deferred annuities, but also include single
premium deferred and immediate contracts. With traditional annuities, we bear
the underlying investment risk and credit interest to the contracts at rates we
determine, subject to interest rate guarantees. With equity-indexed annuity
products, we bear the underlying investment risk and credit interest in an
amount equal to the greater of a guaranteed interest rate or a percentage of the
gain in a specified market index.
The traditional and universal life insurance segment consists of whole life,
term life and universal life policies. These policies provide benefits upon the
death of the insured and may also allow the customer to build cash value on a
tax-deferred basis.
The variable segment consists of variable universal life insurance and variable
annuity contracts. These products are similar to universal life insurance and
traditional annuity contracts, except the contract holder has the option to
direct the cash value of the contract to a wide range of investment
sub-accounts, thereby passing the investment risk to the contract holder.
The corporate and other segment consists of the following corporate items and
products/services that do not meet the quantitative threshold for separate
segment reporting:
* Investments and related investment income not specifically allocated
to our product segments;
* Interest expense and minority interest pertaining to distributions on
trust preferred securities;
* Accident and health insurance products, primarily long-term disability
income insurance;
* Advisory services for the management of investments and other
companies;
* Marketing and distribution services for the sale of mutual funds and
insurance products not issued by us; and
* Leasing services, primarily with affiliates.
11
FBL Financial Group, Inc. June 30, 2002
Financial information concerning our operating segments is as follows.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Operating revenues:
Traditional annuity .......................... $ 34,778 $ 31,317 $ 73,099 $ 61,071
Traditional and universal life ............... 80,225 75,982 156,802 143,938
Variable ..................................... 11,633 10,475 22,572 20,528
Corporate and other .......................... 5,487 7,103 11,187 14,450
------------ ------------ ------------ ------------
132,123 124,877 263,660 239,987
Realized gains (losses) on investments (A) ...... (5,823) 195 (3,573) (1,330)
------------ ------------ ------------ ------------
Consolidated revenues ........................ $ 126,300 $ 125,072 $ 260,087 $ 238,657
============ ============ ============ ============
Pre-tax operating income (loss) from continuing
operations:
Traditional annuity .......................... $ 5,602 $ 5,544 $ 11,572 $ 9,592
Traditional and universal life ............... 13,250 12,102 28,373 23,294
Variable ..................................... 1,872 935 2,590 1,945
Corporate and other .......................... 855 (923) (2,265) (715)
------------ ------------ ------------ ------------
21,579 17,658 40,270 34,116
Income taxes on operating income ............. (7,144) (5,523) (13,331) (11,158)
Realized gains (losses) on investments,
net (A) .................................... (2,465) 129 (1,424) (1,140)
------------ ------------ ------------ ------------
Consolidated income from continuing
operations ............................. $ 11,970 $ 12,264 $ 25,515 $ 21,818
============ ============ ============ ============
(A) Amounts are net of adjustments, as applicable, to amortization of unearned
revenue reserves, deferred policy acquisition costs, value of insurance
in-force acquired and income taxes attributable to gains and losses on
investments.
We analyze our segment results based on pre-tax operating income. Accordingly,
income taxes are not allocated to the segments. In addition, operating results
are analyzed net of any transactions between the segments.
Our investment in equity method investees and the related equity income are
attributable to the corporate and other segment. Goodwill for June 30, 2002 and
December 31, 2001 is allocated among the segments as follows: traditional
annuity ($3.9 million), traditional and universal life ($6.1 million), variable
($1.2 million) and corporate and other ($5.8 million).
12
FBL Financial Group, Inc. June 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION INCLUDES 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. 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).
PLEASE READ THIS DISCUSSION IN CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES. IN ADDITION, WE ENCOURAGE YOU TO REFER
TO OUR 2001 FORM 10-K FOR A COMPLETE DESCRIPTION OF OUR SIGNIFICANT ACCOUNTING
POLICIES AND ESTIMATES. FAMILIARITY WITH THIS INFORMATION IS IMPORTANT IN
UNDERSTANDING OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS.
SIGNIFICANT TRANSACTIONS IMPACTING THE COMPARABILITY OF RESULTS
During 2001, we entered into a coinsurance agreement with American Equity
Investment Life Insurance Company (American Equity) whereby we assumed 70% of
certain fixed and equity-indexed annuity business written by American Equity
from August 1, 2001 to December 31, 2001. The agreement also provides for
reinsuring 40% of certain new business written by American Equity during 2002
and 2003. This agreement was accounted for as the reinsurance of an in force
block of business as of October 1, 2001, and the regular coinsurance of the
business written thereafter. Reserves transferred to us in connection with the
assumption of the in force block of business totaled $138.7 million on October
1, 2001. Collected premiums assumed as a result of this agreement totaled $424.5
million for the six months ended June 30, 2002 and $280.0 million for the fourth
quarter of 2001.
Effective May 1, 2001, we entered into a coinsurance agreement with National
Travelers Life Company (NTL) whereby we assumed 90% of NTL's traditional life,
universal life and annuity business in force. In addition, we agreed to assume
50% of NTL's traditional life, universal life and annuity business issued
subsequent to May 1, 2001. Assets acquired on May 1, 2001 in connection with
this transaction totaled $337.2 million. Collected premiums assumed as a result
of this agreement totaled $10.4 million for the six months ended June 30, 2002
compared to $3.4 million for the respective period in 2001.
Revenues and expenses for the three and six months ended June 30, 2002 increased
compared to the respective periods in 2001 as a result of the American Equity
and NTL transactions. Operating income increased approximately $1.2 million, or
$0.04 per common share, during the second quarter of 2002 and $2.7 million, or
$0.10 per common share, during the six months ended June 30, 2002 as a result of
this new business. For the second quarter of 2001, operating income increased
approximately $0.4 million, or $0.01 per common share, as a result of the NTL
transaction.
Consistent with our objective to exit the disability income line of business,
effective September 1, 2001, we entered into a 100% coinsurance agreement to
reinsure the individual disability income business acquired through the
acquisition of Kansas Farm Bureau Life Insurance Company (Kansas Farm Bureau
Life) on January 1, 2001. Revenues and expenses for the 2002 period decreased
compared to the 2001 period as a result of this reinsurance agreement. The
underlying disability income business did not have a material impact on our 2001
net operating results.
RESULTS OF OPERATIONS
We use both net income and operating income to measure our performance.
Operating income represents net income excluding the impact of realized gains
and losses on investments and cumulative effect of change in accounting
principle. The impact of realized gains and losses on investments includes
adjustments for income taxes and that portion of amortization of deferred policy
acquisition costs, unearned revenue reserve and value of insurance in force
acquired attributable to such gains and losses. While operating income is
commonly used in the insurance industry as a measure of on-going earnings
performance, it is not a substitute for net income determined in accordance with
accounting principles generally accepted in the United States.
13
FBL Financial Group, Inc. June 30, 2002
THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2001
NET INCOME applicable to common stock decreased 2.9% in the second quarter of
2002 to $10.9 million and increased 16.4% in the six months ended June 30, 2002
to $23.4 million. Operating income applicable to common stock increased 20.4% in
the second quarter of 2002 to $13.4 million and 18.8% in the six months ended
June 30, 2002 to $24.8 million. Net income for the six months and operating
income for the second quarter and six months increased due to the positive
impact of the American Equity and NTL transactions and slightly improved
mortality experience on our direct business. Operating income in the second
quarter of 2002 also benefited from an increase in equity income. Net income for
the second quarter decreased due principally to an increase in realized losses
on investments, partially offset by the impact of the American Equity and NTL
transactions, improved mortality experience and the increase in equity income.
The following is a reconciliation of net income to operating income.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income applicable to common stock ..... $ 10,890 $ 11,218 $ 23,364 $ 20,077
Adjustments:
Net realized losses (gains) on
investments ........................ 2,465 (129) 1,424 1,140
Cumulative effect of change in
accounting for derivative
instruments ........................ -- -- -- (344)
------------ ------------ ------------ ------------
Operating income applicable to common
stock ................................. $ 13,355 $ 11,089 $ 24,788 $ 20,873
============ ============ ============ ============
Earnings per common share - assuming
dilution .............................. $ 0.39 $ 0.40 $ 0.83 $ 0.72
============ ============ ============ ============
Operating income per common share -
assuming dilution ..................... $ 0.47 $ 0.40 $ 0.88 $ 0.75
============ ============ ============ ============
A summary of our premiums and product charges is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ......... $ 19,608 $ 17,550 $ 38,380 $ 33,517
Traditional life insurance premiums ........ 33,677 31,024 63,140 58,862
Accident and health premiums ............... 178 1,072 270 2,222
------------ ------------ ------------ ------------
Total premiums and product charges ...... $ 53,463 $ 49,646 $ 101,790 $ 94,601
============ ============ ============ ============
PREMIUMS AND PRODUCT CHARGES increased 7.7% in the second quarter to $53.5
million and 7.6% in the six months ended June 30, 2002 to $101.8 million. These
increases are due primarily to the addition of the NTL and American Equity
business. Revenues from the NTL business in the six-month periods included
interest sensitive product charges of $5.0 million in 2002 and $1.8 million in
2001, and traditional life insurance premiums of $2.4 million in 2002 and $0.9
million in 2001. Revenues in the six-month period of 2002 from the American
Equity business included interest product charges of $0.4 million. In addition,
cost of insurance charges, which are included in interest sensitive product
charges, increased as a result of an increase in the volume and age of business
in force. Mortality and expense charge fee income increased 8.9% in the
six-month period to $2.0 million due to an increase in separate account assets.
Accident and health premiums decreased as a result of the 100% coinsurance
agreement to reinsure our individual long-term disability income business
effective September 1, 2001.
14
FBL Financial Group, Inc. June 30, 2002
NET INVESTMENT INCOME, which excludes investment income on separate account
assets relating to variable products, increased 16.7% in the second quarter of
2002 to $83.0 million and 17.9% in the six months ended June 30, 2002 to $162.5
million due to an increase in average invested assets. Average invested assets
in the six-month period of 2002 increased 24.5% to $4,562.1 million (based on
securities at amortized cost) due primarily to the cash and investments acquired
with the NTL and American Equity transactions. The annualized yield earned on
average invested assets decreased to 7.25% in the six months ended June 30, 2002
from 7.61% in the respective 2001 period due principally to a decrease in market
interest rates and a decrease in fee income from bond calls and mortgage loan
prepayments. Fee income from bond calls and mortgage loan prepayments totaled
$0.3 million in the six months ended June 30, 2002 compared to $3.1 million in
the respective period in 2001.
DERIVATIVE LOSS totaled $8.7 million in the second quarter of 2002 compared to
$0.1 million in the second quarter of 2001. For the six months ended June 30,
2002, derivative loss totaled $9.4 million compared to $0.9 million in the 2001
period. Our derivative loss consists of unrealized gains and losses on the value
of the conversion feature embedded in convertible fixed maturity securities and
on the value of call options used to fund returns on our equity-indexed annuity
contracts assumed from American Equity. The increases in derivative loss are due
to the increase in equity-indexed business assumed from American Equity and a
decline in the value of the related call options resulting from a general
decline in the equity markets during 2002. The derivative loss on call options
is partially offset by decreases in the value of the embedded derivatives in the
underlying equity-indexed contracts. Changes in the value of these embedded
derivatives are recorded as a component of interest sensitive product benefits.
Derivative loss will fluctuate based on market conditions and could result in
income or loss.
REALIZED GAINS (LOSSES) ON INVESTMENTS totaled ($5.8) million in the second
quarter of 2002 compared to $0.3 million in the second quarter of 2001. For the
six months ended June 30, 2002, realized losses increased 181.9% to $3.6
million. Realized gains (losses) during the six month periods include writedowns
of investments that became other-than-temporarily impaired totaling $14.0
million in 2002 and $4.5 million in 2001. These writedowns are the result of the
issuers of the securities having deteriorating operating trends, alleged
corporate fraud, decreases in debt ratings, defaults on loan payments,
unsuccessful efforts to raise capital and various other operational or economic
factors that became evident in the respective periods. Approximately $8.5
million of the realized losses in the second quarter of 2002 were from
securities issued by or affiliated with WorldCom Inc., including $1.9 million of
losses assumed from a variable alliance partner. The level of realized gains
(losses) is subject to fluctuation from period to period depending on the
prevailing interest rate and economic environment and the timing of the sale of
investments.
OTHER INCOME and OTHER EXPENSES include revenues and expenses, respectively,
relating primarily to our non-insurance operations. These operations include
management, advisory, marketing and distribution services and leasing
activities. Fluctuations in these financial statement line items are generally
attributable to fluctuations in the level of these services provided during the
periods.
A summary of our policy benefits is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive product benefits ................ $ 42,958 $ 40,830 $ 91,226 $ 78,684
Traditional life insurance and accident and health
benefits ........................................ 19,286 20,838 36,668 41,357
Increase in traditional and accident and health
future policy benefits .......................... 11,659 8,065 19,504 12,832
Distributions to participating policyholders ....... 7,696 7,595 15,667 14,500
------------ ------------ ------------ ------------
Total ........................................... $ 81,599 $ 77,328 $ 163,065 $ 147,373
============ ============ ============ ============
POLICY BENEFITS increased 5.5% in the second quarter of 2002 to $81.6 million
and 10.6% in the six months ended June 30, 2002 to $163.1 million. These
increases are due primarily to the addition of the NTL and American Equity
business. Benefits incurred from this additional business for the six months
ended June 30, included interest sensitive product benefits of $13.8 million for
2002 and $3.7 million for 2001, traditional life insurance benefits, including
15
FBL Financial Group, Inc. June 30, 2002
change in reserves, of $2.5 million for 2002 and $0.8 million for 2001 and
distributions to participating policyholders of $0.6 million for 2002 and $0.2
million for 2001. Partially offsetting these increases was a decrease in death
benefits on our direct business and the impact of a reduction in the interest
crediting rates on many of our products. Crediting rates were decreased 15 basis
points effective December 1, 2001 and 20 basis points effective June 1, 2002 to
5.40% on our primary fixed annuity product. Crediting rates were decreased 25
basis points effective December 1, 2001 and 15 basis points effective June 1,
2002 to 5.70% on our primary universal life insurance product. Other crediting
rate decreases were made as of January 1, 2002 and October 1, 2001 on products
formerly issued by Kansas Farm Bureau Life. These crediting rate changes were
made in response to a declining investment portfolio yield. Accident and health
benefits decreased as a result of the 100% coinsurance of our long-term
disability income business during 2001. Changes in the value of the embedded
derivatives included in the equity-indexed annuity contracts resulted in a
decrease in the reserve for interest sensitive products totaling $4.6 million
for the second quarter of 2002 and $3.7 million for the six months ended June
30, 2002. Policy benefits can tend to fluctuate from period to period as a
result of changes in mortality experience.
A summary of the underwriting, acquisition and insurance expenses is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals .............. $ 3,241 $ 2,910 $ 6,199 $ 5,921
Amortization of deferred policy acquisition costs . 5,323 4,461 10,403 8,352
Amortization of value of insurance in force
acquired ....................................... (896) 1,014 (68) 2,311
Other underwriting, acquisition and insurance
expenses, net of deferrals ..................... 16,013 16,142 31,838 32,139
------------ ------------ ------------ ------------
Total .......................................... $ 23,681 $ 24,527 $ 48,372 $ 48,723
============ ============ ============ ============
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES decreased 3.4% in the second
quarter of 2002 to $23.7 million and 0.7% in the six months ended June 30, 2002
to $48.4 million. The decrease for the six-month period is due to (i) a $2.4
million decrease in amortization of value of insurance in force acquired
resulting principally from the impact of realized losses on investments backing
the related policyholder liabilities, (ii) a $0.4 million reduction in other
underwriting expenses due to the discontinuation of the amortization of goodwill
and (iii) a reduction in expenses as a result of the 100% coinsurance of our
long-term disability income business during 2001. These decreases are partially
offset by an increase in expenses due to the addition of the NTL and American
Equity business. Expenses from this additional business for the six months ended
June 30 include commission and expense allowances totaling $1.9 million for 2002
compared to $0.5 million for 2001 and amortization of deferred policy
acquisition costs totaling $3.0 million for 2002 compared to $0.4 million for
2001.
INTEREST EXPENSE decreased 60.4% in the second quarter of 2002 to $0.2 million
and 67.3% in the six months ended June 30, 2002 to $0.4 million primarily due to
a decrease in the average interest rate on our $40.0 million of variable-rate
debt.
INCOME TAXES decreased 8.1% in the second quarter of 2002 to $5.5 million and
increased 24.3% in the six months ended June 30, 2002 to $13.1 million. The
effective tax rate for the six months ended June 30, 2002 was 31.1% compared to
30.3% for the respective 2001 period. The effective tax rate was 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.
EQUITY INCOME (LOSS), NET OF RELATED INCOME TAXES, increased in the second
quarter to $0.7 million in 2002 from ($0.6) million in 2001. Equity loss for the
six-month periods totaled $1.0 million in 2002 and was less than $0.1 million in
2001. Equity income (loss) 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
16
FBL Financial Group, Inc. June 30, 2002
capital investment companies, whose operating results are derived primarily from
unrealized and realized gains and losses generated by their investment
portfolios. 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. The losses in the six-month periods and second
quarter of 2001 are due principally to two venture capital investment
partnerships. As a result of our common stock investment in American Equity
Investment Life Holding Company, equity income (loss) for the second quarter
includes $0.7 million in 2002 and ($0.1) million in 2001, representing our share
of its net income (loss). Our share of American Equity Investment Life Holding
Company income (loss) for the six-month periods totaled ($0.1) million in 2002
and $0.2 million in 2001. See the "Other Assets" section following for
additional information regarding the composition of our equity investees.
SEGMENT INFORMATION
Management utilizes financial information regarding products that are aggregated
into three product segments. These segments are (1) traditional annuity, (2)
traditional and universal life insurance and (3) variable. We also have various
support operations and corporate capital that is aggregated into a corporate and
other segment. See Note 8 of the Notes to Consolidated Financial Statements for
additional information regarding segment information. A discussion of our
operating results, by segment, follows.
TRADITIONAL ANNUITY SEGMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges ............ $ 213 $ 179 $ 418 $ 539
Net investment income ......................... 42,865 31,109 81,887 60,629
Derivative income (loss) ...................... (8,300) 29 (9,206) (97)
------------ ------------ ------------ ------------
34,778 31,317 73,099 61,071
Benefits and expenses ............................. 29,176 25,773 61,527 51,479
------------ ------------ ------------ ------------
Pre-tax operating income ................... $ 5,602 $ 5,544 $ 11,572 $ 9,592
============ ============ ============ ============
OTHER DATA
Annuity premiums collected, net of reinsurance .... $ 288,099 $ 25,863 $ 525,504 $ 50,837
Policy liabilities and accruals, end of period .... 2,594,996 1,597,305
Pre-tax operating income for the traditional annuity segment increased 1.0% in
the second quarter of 2002 to $5.6 million and 20.6% in the six months ended
June 30, 2002 to $11.6 million. Revenues, benefits, expenses and the volume of
business in force increased primarily due to the addition of the American Equity
and NTL business. Premiums collected in the six-month period of 2002, totaled
$424.5 million from American Equity and $2.3 million from NTL. Collected
premiums from NTL totaled $0.4 million in the first six months of 2001. Direct
premiums collected increased 103.6% in the second quarter of 2002 to $51.9
million and 95.7% in the six months ended June 30, 2002 to $98.8 million. As
noted in the policy benefits discussion above, we decreased crediting rates on
our primary annuity contract effective June 1, 2002 and December 1, 2001 in
response to a decline in our investment portfolio yield.
17
FBL Financial Group, Inc. June 30, 2002
TRADITIONAL AND UNIVERSAL LIFE INSURANCE SEGMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges ............ $ 10,716 $ 9,669 $ 21,389 $ 17,806
Traditional life insurance premiums and other
income ..................................... 33,677 31,024 63,140 58,862
Net investment income ......................... 36,179 35,590 72,391 68,089
Derivative loss ............................... (347) (301) (118) (819)
------------ ------------ ------------ ------------
80,225 75,982 156,802 143,938
Benefits and expenses ............................. 66,975 63,880 128,429 120,644
------------ ------------ ------------ ------------
Pre-tax operating income ................... $ 13,250 $ 12,102 $ 28,373 $ 23,294
============ ============ ============ ============
OTHER DATA
Life premiums collected, net of reinsurance ....... $ 47,140 $ 43,194 $ 89,817 $ 82,042
Policy liabilities and accruals, end of period .... 1,917,140 1,869,821
Pre-tax operating income for the traditional and universal life insurance
segment increased 9.5% in the second quarter of 2002 to $13.3 million and 21.8%
in the six months ended June 30, 2002 to $28.4 million . Revenues, benefits,
expenses and pre-tax operating income increased due principally to the addition
of the NTL business. Death benefits, excluding the impact of NTL, increased 4.0%
in the second quarter of 2002 to $13.1 million and decreased 5.4% in the six
months ended June 30, 2002 to $26.3 million. As noted in the policy benefits
discussion above, we decreased crediting rates on our primary universal life
product effective June 1, 2002 and December 1, 2001 in response to a decline in
our investment portfolio yield.
VARIABLE SEGMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges ............. $ 8,679 $ 7,760 $ 16,569 $ 15,233
Net investment income .......................... 2,736 2,505 5,584 4,890
Other income ................................... 218 210 419 405
------------ ------------ ------------ ------------
11,633 10,475 22,572 20,528
Benefits and expenses .............................. 9,761 9,540 19,982 18,583
------------ ------------ ------------ ------------
Pre-tax operating income .................... $ 1,872 $ 935 $ 2,590 $ 1,945
============ ============ ============ ============
OTHER DATA
Variable premiums collected, net of reinsurance and
internal rollovers ............................. $ 39,719 $ 28,483 $ 72,166 $ 53,075
Policy liabilities and accruals, end of period ..... 167,524 134,214
Separate account assets, end of period ............. 363,993 347,721
Pre-tax operating income for the variable segment increased 100.2% in the second
quarter of 2002 to $1.9 million and 33.2% in the six months ended June 30, 2002
to $2.6 million. The increase in the second quarter of 2002 is attributable to a
37.2% decrease in death benefits in excess of related account values on variable
universal life policies, to $0.9 million. The increase is also attributable to
an increase in interest sensitive product charges resulting from growth in the
volume of business in force. During the second quarter, we decreased our
crediting rates 20-to-25 basis points on the fixed account portion (held in our
general account) of certain variable products. These rate decreases were made in
response to a decline in our investment portfolio yield. The variable segment
does not currently contribute significantly to our bottom line due to the fee
income structure of these products and the significant administrative costs
associated with the sale and processing of this business. Profitability of this
18
FBL Financial Group, Inc. June 30, 2002
line of business is expected to increase as the volume of business grows and the
significant fixed costs of administering the business are spread over a larger
block of policies.
CORPORATE AND OTHER SEGMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME (LOSS)
Operating revenues:
Accident and health insurance premiums ........ $ 178 $ 1,072 $ 270 $ 2,222
Net investment income ......................... 1,197 2,126 2,652 4,258
Derivative loss ............................... (8) -- (113) --
Other income .................................. 4,120 3,905 8,378 7,970
------------ ------------ ------------ ------------
5,487 7,103 11,187 14,450
Benefits and expenses ............................. 4,403 5,791 9,339 12,644
------------ ------------ ------------ ------------
1,084 1,312 1,848 1,806
Minority interest ................................. (1,274) (1,266) (2,520) (2,481)
Equity income (loss), before tax .................. 1,045 (969) (1,593) (40)
------------ ------------ ------------ ------------
Pre-tax operating income (loss) ............ $ 855 $ (923) $ (2,265) $ (715)
============ ============ ============ ============
Pre-tax operating income (loss) increased in the second quarter to $0.9 million
in 2002 from ($0.9) million in 2001. Pre-tax operating loss for the six-month
periods totaled ($2.3) million in 2002 and ($0.7) million in 2001. The
fluctuations in pre-tax operating income (loss) are due primarily to
fluctuations in our share of results from equity investees. See the equity
income (loss) discussion above for additional information regarding these
results and the other assets discussion that follows for information regarding
the underlying investments. The decrease in operating revenues and benefits and
expenses is due primarily to the 100% coinsurance agreement to reinsure our
individual long-term disability income business effective September 1, 2001.
FINANCIAL CONDITION
INVESTMENTS
Our total investment portfolio increased 13.0% to $4,861.3 million at June 30,
2002 compared to $4,300.9 million at December 31, 2001. This increase is
primarily the result of net cash received from interest sensitive and
equity-indexed products and positive cash flow provided by operating activities.
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.
19
FBL Financial Group, Inc. June 30, 2002
Our investment portfolio is summarized in the table below:
JUNE 30, 2002 DECEMBER 31, 2001
-------------------------------- --------------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public ............................ $ 3,281,340 67.5% $ 2,773,290 64.5%
144A private placement ............ 611,508 12.6 590,867 13.7
Private placement ................. 274,733 5.6 271,993 6.3
-------------- -------------- -------------- --------------
Total fixed maturities ............ 4,167,581 85.7 3,636,150 84.5
Equity securities ................... 39,542 0.8 39,733 0.9
Mortgage loans on real estate ....... 403,573 8.3 385,307 9.0
Investment real estate:
Acquired for debt ................. 2,822 0.1 2,321 0.1
Investment ........................ 18,076 0.4 17,735 0.4
Policy loans ........................ 180,653 3.7 181,054 4.2
Other long-term investments ......... 5,674 0.1 5,693 0.1
Short-term investments .............. 43,426 0.9 32,863 0.8
-------------- -------------- -------------- --------------
Total investments .............. $ 4,861,347 100.0% $ 4,300,856 100.0%
============== ============== ============== ==============
As of June 30, 2002, 95.2% (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, which is
invested in non-investment grade debt securities (NAIC designations 3 through
6). As of June 30, 2002, the investment in non-investment grade debt was 4.8% of
fixed maturity securities. At that time no single non-investment grade holding
exceeded 0.2% of total investments.
The following table sets forth the credit quality, by NAIC designation and
Standard & Poors (S & P) rating equivalents, of fixed maturity securities:
JUNE 30, 2002
--------------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS (1) CARRYING VALUE PERCENT
- ------------------------ ---------------------------------------------- -------------- --------------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A).................................. $ 2,781,343 66.7%
2 (BBB)......................................... 1,188,275 28.5
-------------- --------------
Total investment grade........................ 3,969,618 95.2
3 (BB).......................................... 124,903 3.0
4 (B)........................................... 55,816 1.4
5 (CCC, CC, C).................................. 8,548 0.2
6 In or near default............................ 8,696 0.2
-------------- --------------
Total below investment grade.................. 197,963 4.8
-------------- --------------
Total fixed maturities........................ $ 4,167,581 100.0%
============== ==============
- -------------
(1) The Securities Valuation Office of the NAIC generally rates private
placement securities. 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.
20
FBL Financial Group, Inc. June 30, 2002
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at June 30, 2002:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies ... $ 148,383 $ 3,433 $ (535) $ 151,281
State, municipal and other governments .. 95,241 4,325 (219) 99,347
Public utilities ........................ 144,133 5,184 (4,077) 145,240
Corporate securities .................... 1,776,621 81,787 (33,645) 1,824,763
Mortgage and asset-backed securities .... 1,838,025 55,362 (6,818) 1,886,569
Redeemable preferred stocks ................. 58,367 3,329 (1,315) 60,381
-------------- -------------- -------------- --------------
Total fixed maturities ...................... $ 4,060,770 $ 153,420 $ (46,609) $ 4,167,581
============== ============== ============== ==============
Equity securities ........................... $ 40,439 $ 1,220 $ (2,117) $ 39,542
============== ============== ============== ==============
The carrying value and estimated market value of our portfolio of fixed maturity
securities at June 30, 2002, 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.
ESTIMATED
AMORTIZED COST MARKET VALUE
-------------- --------------
(DOLLARS IN THOUSANDS)
Due in one year or less .................... $ 43,752 $ 41,229
Due after one year through five years ...... 423,455 436,491
Due after five years through ten years ..... 619,349 640,407
Due after ten years ........................ 1,077,822 1,102,504
-------------- --------------
2,164,378 2,220,631
Mortgage and asset-backed securities ....... 1,838,025 1,886,569
Redeemable preferred stocks ................ 58,367 60,381
-------------- --------------
$ 4,060,770 $ 4,167,581
============== ==============
Mortgage and other asset-backed securities constitute a significant portion of
our portfolio of securities. These securities are purchased at times when, we
believe, these types of investments provide 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 increase 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 slow 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
21
FBL Financial Group, Inc. June 30, 2002
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 generally 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. However, we did acquire Z securities
with a carrying value of $34.5 million at June 30, 2002 in connection with our
acquisition of Kansas Farm Bureau Life on January 1, 2001. These securities
generally tend to have more duration risk (risk the security's price will change
significantly with a given change in market interest rates) than the other types
of mortgage-backed securities in our portfolio.
The following table sets forth the amortized cost, par value and carrying value
of our mortgage and asset-backed securities at June 30, 2002, summarized by type
of security.
PERCENT
OF FIXED
AMORTIZED COST PAR VALUE CARRYING VALUE MATURITIES
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential ................................... $ 1,066,179 $ 1,085,436 $ 1,091,131 26.2%
Pass through ................................. 99,990 99,631 102,916 2.5
Planned and targeted amortization class ...... 125,043 127,027 128,064 3.1
Other ........................................ 42,580 43,824 45,114 1.1
-------------- -------------- -------------- --------------
Total residential mortgage-backed securities .... 1,333,792 1,355,918 1,367,225 32.9
Commercial mortgage-backed securities ........... 279,707 277,681 288,314 6.9
Other asset-backed securities ................... 224,526 225,337 231,030 5.5
-------------- -------------- -------------- --------------
Total mortgage and asset-backed securities ...... $ 1,838,025 $ 1,858,936 $ 1,886,569 45.3%
============== ============== ============== ==============
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 June 30, 2002, we held $403.6 million or 8.3% 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 June 30, 2002,
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 June 30, 2002 include:
Pacific (26.3%) which includes California; and West South Central (19.6%) which
includes Oklahoma and Texas. Mortgage loans on real estate are also diversified
by collateral type with office buildings (43.7%) and retail facilities (32.5%)
representing the largest holdings at June 30, 2002.
Our asset-liability management program includes (i) designing and developing
products that encourage persistency and, as a result, create a stable liability
structure, and (ii) structuring the investment portfolio with duration and cash
flow characteristics consistent with the duration and cash flow characteristics
of our insurance liabilities. At June 30, 2002, the weighted average life of the
fixed maturity portfolio, based on market values and excluding convertible
bonds, was approximately 7.9 years. Based on calculations utilizing our fixed
income analytical system, including our mortgage backed prepayment assumptions,
the effective duration of the fixed income portfolio was 5.3 as of June 30,
2002.
22
FBL Financial Group, Inc. June 30, 2002
OTHER ASSETS
Cash and cash equivalents, which includes securities with a maturity date of
three months or less when acquired, decreased 41.3% to $159.4 million at June
30, 2002. The relatively high cash and cash equivalent balance at June 30, 2002
and December 31, 2001 reflects the increased cash received in connection with
the American Equity reinsurance agreement. Deferred policy acquisition costs
increased 17.0% to $421.5 million at June 30, 2002 due to the capitalization of
costs incurred with new sales, principally from the American Equity coinsurance
agreement. Assets held in separate accounts increased 2.1%, to $364.0 million at
June 30, 2002 due primarily to the transfer of net premiums to the separate
accounts. At June 30, 2002, we had total assets of $6,125.9 million, an 8.8%
increase from total assets at December 31, 2001.
The securities and indebtedness of related parties line on the balance sheet,
which includes the investments that generate our equity income (loss), is
comprised of the following:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
American Equity Investment Life Holding Company, common and preferred
stock ...................................................................... $ 29,569 $ 29,883
Berthel Fisher and Company and affiliates ...................................... 6,177 6,177
Venture capital investment partnerships (8 in 2002 and 2001) ................... 3,293 5,553
Real estate investment partnerships (7 in 2002 and 2001) ....................... 15,043 15,556
Mortgage loans and other ....................................................... 1,251 1,648
------------ ------------
55,333 58,817
Proportionate share of net unrealized investment losses of equity investees .... (28,308) (1,036)
------------ ------------
Securities and indebtedness of related parties ................................. $ 27,025 $ 57,781
============ ============
Securities and indebtedness of related parties decreased 53.2% to $27.0 million
due principally to an increase in our share of unrealized investment losses on
investments (primarily fixed maturity securities) owned by American Equity
Investment Life Holding Company. Since we record American Equity Investment Life
Holding Company's results one quarter in arrears, this reflects the valuation of
its investments as of March 31, 2002.
LIABILITIES AND REDEEMABLE PREFERRED STOCK
Policy liabilities and accruals and other policyholders' funds increased 13.3%
to $4,742.2 million at June 30, 2002 primarily due to the addition of the
American Equity business during the six-month period and growth in the volume of
business in force from our core distribution system. Other liabilities decreased
33.7% to $159.3 million at June 30, 2002 due principally to an $82.9 million
decrease in payables for security purchases. At June 30, 2002, we had total
liabilities of $5,365.5 million, a 9.9% increase from total liabilities at
December 31, 2001.
Series C redeemable preferred stock increased 1.7% to $84.1 million at June 30,
2002 from $82.7 million at December 31, 2001. This increase represents the
accretion of the discount on these securities. The Series C redeemable preferred
stock was issued at an $11.6 million discount. The mandatory redemption is
structured so that 49.5% of the Series C preferred stock will be redeemed at par
value, or $45.3 million, on January 2, 2004 with the remaining 50.5% redeemed at
par value, or $46.3 million, on January 3, 2006.
STOCKHOLDERS' EQUITY
At June 30, 2002, common stockholders' equity was $576.1 million, or $20.83 per
share, compared to $562.8 million, or $20.53 per share at December 31, 2001.
Included in stockholders' equity per common share is $1.15 at June 30, 2002 and
$1.43 at December 31, 2001 attributable to net unrealized investment gains
resulting from marking our available-for-sale securities to market value. The
change in unrealized appreciation of fixed maturity and equity securities
decreased stockholders' equity $7.7 million during the six months ended June 30,
2002, after related adjustments to deferred policy acquisition costs, value of
insurance in force acquired, unearned revenue reserve and deferred income taxes.
23
FBL Financial Group, Inc. June 30, 2002
LIQUIDITY
FBL FINANCIAL GROUP, INC.
Parent company cash inflows from operations consist primarily of (i) dividends
from subsidiaries, if declared and paid, (ii) fees that 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 services,
dividends on outstanding stock and interest on parent company debt issued to a
subsidiary. In addition, the parent company will on occasion enter into capital
transactions such as the acquisition of our common stock.
We may receive consideration during the first quarter of 2003 in accordance with
an earn-out provision related to our sale in 1998 of Utah Farm Bureau Insurance
Company (Utah Insurance) to Farm Bureau Mutual Insurance Company (Farm Bureau
Mutual). Under the earn-out arrangement, we and Farm Bureau Mutual share equally
in the dollar amount by which the incurred losses on direct business written in
the state of Utah, 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. Earn-out settlements
received, on a pre-tax basis, totaled $2.0 million in the 2001 period. We did
not receive any settlements in 2002 as the loss ratio of Utah Insurance in 2001
was higher than the threshold loss ratio in the earn-out calculation.
We paid cash dividends on our common and preferred stock during the six months
ended June 30, totaling $6.3 million in 2002 and $6.2 million in 2001. It is
anticipated quarterly cash dividend requirements for the remainder of 2002 will
be $0.10 per common and Series C redeemable preferred share and $0.0075 per
Series B preferred share, or approximately $6.3 million. In addition, interest
payments on the parent company debt issued to a subsidiary are estimated to be
$2.5 million for the remainder of 2002.
FBL Financial Group, Inc. expects to rely on available cash resources and
dividends from Farm Bureau Life to make any dividend payments to its
stockholders and interest payments on its Notes. In addition, we expect to use
these sources and borrowings, if needed, to fund the redemption of the Series C
redeemable preferred stock in 2004 and 2006.
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 the remainder of 2002, the maximum amount legally
available for distribution to FBL Financial Group, Inc. without further
regulatory approval is approximately $27.8 million.
We may from time to time review potential acquisition opportunities. It is
anticipated that funding for any such acquisition would be provided from
available cash resources, debt or equity financing. As of June 30, 2002, we had
no material commitments for capital expenditures. The parent company had
available cash and investments totaling $20.1 million at June 30, 2002.
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
24
FBL Financial Group, Inc. June 30, 2002
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 the six-month period ended June 30, 2002,
with cash inflows at levels sufficient to provide the funds necessary to meet
their obligations.
For the life insurance operations, cash outflow requirements for operations are
typically met from normal premium and deposit cash inflows. This has been the
case for all reported periods as the Life Companies' continuing operations and
financing activities relating to interest sensitive products provided funds
amounting to $513.2 million in the six months ended June 30, 2002 and $87.8
million in the six months ended June 30, 2001. Positive cash flow from
operations is generally used to increase the insurance companies' fixed maturity
securities and other 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 collateralized 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 $76.9 million as of June 30, 2002. At June 30,
2002, Farm Bureau Life had borrowings outstanding of $40.0 million under this
arrangement, leaving a borrowing capacity of $36.9 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% (1.79% at June 30, 2002). Fixed maturity
securities with a carrying value of $41.2 million are on deposit with the FHLB
as collateral for the note.
In the normal course of business, we enter into financing transactions, lease
agreements, or other commitments which are necessary or beneficial to our
operations. These commitments may obligate us to certain cash flows during
future periods. As of December 31, 2001, we had contractual obligations totaling
$190.4 million with payments due as follows: less than one year - $32.9 million,
one-to-three years - $92.4 million, four-to-five years - $4.8 million and after
five years - $60.3 million. There have been no material changes to these
contractual obligations since December 31, 2001.
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 its insurance products, are adequate to meet our anticipated
cash obligations for the foreseeable future. Our investment portfolio at June,
30, 2002, included $43.4 million of short-term investments, $159.4 million of
cash (consisting primarily of securities purchased with a maturity of three
months or less) and $513.3 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.
25
FBL Financial Group, Inc. June 30, 2002
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, which include words such as "expect", "anticipate",
"believe", "intend", and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. 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 customers and agents (including the agents of our
alliance partners) accept our products will influence 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in the market risks of our financial
instruments since December 31, 2001.
26
FBL Financial Group, Inc. June 30, 2002
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual shareholders meeting was held on May 14,
2002.
(b) and (c) (i) Election of the following Class A directors to the Company's
Board of Directors:
FOR WITHHELD
------------- ------------
Jerry L. Chicoine............ 36,050,017 1,859,495
John W. Creer................ 36,049,080 1,860,432
John E. Walker............... 36,049,860 1,859,652
(ii) Election of the following Class B directors to the Company's
Board of Directors:
FOR WITHHELD
------------- ------------
Eric K. Aasmundstad.......... 1,192,990 -
Steve Baccus................. 1,192,990 -
O. Al Christopherson......... 1,192,990 -
Jerry C. Downin.............. 1,192,990 -
Kenny J. Evans............... 1,192,990 -
Alan L. Foutz................ 1,192,990 -
Karen J. Henry............... 1,192,990 -
Craig D. Hill................ 1,192,990 -
Leland J. Hogan.............. 1,192,990 -
Richard G. Kjerstad.......... 1,192,990 -
G. Steven Kouplen............ 1,192,990 -
Craig A. Lange............... 1,192,990 -
David L. McClure............. 1,192,990 -
Bryce P. Neidig.............. 1,192,990 -
William J. Oddy.............. 1,192,990 -
Howard D. Poulson............ 1,192,990 -
Frank S. Priestley........... 1,192,990 -
John J. Van Sweden........... 1,192,990 -
(iii) Approval of an amendment to the 1996 Class A Common Stock
Compensation Plan. Shareholders cast 33,190,593 votes for and
5,011,932 against the amendment to the Director Compensation
Plan. There were 19,299 abstentions and no broker non-votes.
(iv) Approval of the appointment of Ernst & Young LLP as
independent auditors for the Company for the year 2002.
Shareholders cast 39,018,624 votes for and 77,150 votes
against the appointment of Ernst & Young LLP. There were 6,725
abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.3 Form of Change In Control Agreement Form A, dated as of April
22, 2002 between the Company and each of William J. Oddy,
James W. Noyce, Stephen M. Morain, John M. Paule, Timothy J.
Hoffman and JoAnn Rumelhart.
27
FBL Financial Group, Inc. June 30, 2002
99.4 Form of Change in Control Agreement Form B, dated as of April
22, 2002 between the Company and each of James P. Brannen,
Thomas E. Burlingame, Douglas W. Gumm, Barbara J. Moore and
Lou Ann Sandburg.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2002:
None
28
FBL Financial Group, Inc. June 30, 2002
SIGNATURES
Pursuant to the requirements 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.
Date: August 6, 2002
FBL FINANCIAL GROUP, INC.
By /s/ William J. Oddy
--------------------------------------------------
William J. Oddy
Chief Executive Officer (Principal Executive Officer)
By /s/ James W. Noyce
--------------------------------------------------
James W. Noyce
Chief Financial Officer (Principal Financial and
Accounting Officer)
29