| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
We participate with several affiliates in various multiemployer defined benefit plans. Our share of net periodic pension cost for the plans recorded in our consolidated income statements for the second quarter totaled $1.6 million for 2005 and 2004 and for the six months ended June 30 totaled $3.1 million for 2005 and $3.2 million for 2004. Components of net periodic pension cost for all employers in the multiemployer plans are as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | (Dollars in thousands) | |
| Service cost | | $ | 2,161 | | | $ | 1,942 | | | $ | 4,323 | | | $ | 3,885 | |
| Interest cost | | | 3,409 | | | | 3,342 | | | | 6,818 | | | | 6,684 | |
| Expected return on assets | | | (2,712 | ) | | | (2,501 | ) | | | (5,424 | ) | | | (5,002 | ) |
| Amortization of prior service cost | | | 395 | | | | 824 | | | | 791 | | | | 1,647 | |
| Amortization of actuarial loss | | | 1,047 | | | | 704 | | | | 2,093 | | | | 1,408 | |
| | | | | | | | | |
| Net periodic pension cost — all employers | | $ | 4,300 | | | $ | 4,311 | | | $ | 8,601 | | | $ | 8,622 | |
| | | | | | | | | |
| | |
| 3. | | Commitments and 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 those contained in certain other agreements. At June 30, 2005, 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 a portion of our exposure to other insurance enterprises or reinsurers. 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.
We participate in a reinsurance pool with various unaffiliated life insurance companies to mitigate the impact of a catastrophic event on our financial position and results of operations. Members of the pool share in the eligible catastrophic losses based on their size and contribution to the pool. Under the pool arrangement, we will be able to cede approximately 60% of catastrophic losses after other reinsurance and a deductible of $0.7 million. Pool losses are capped at $7.6 million per event and the maximum loss we could incur as a result of losses assumed from other pool members is $2.7 million per event.
We self-insure our employee health and dental 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.
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
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, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | (Dollars in thousands, except per share data) | |
| Numerator: | | | | | | | | | | | | | | | | |
| Net income | | $ | 18,295 | | | $ | 13,013 | | | $ | 35,500 | | | $ | 26,195 | |
| Dividends on Series B preferred stock | | | (37 | ) | | | (37 | ) | | | (75 | ) | | | (75 | ) |
| | | | | | | | | |
| Numerator for earnings per common share-income available to common stockholders | | $ | 18,258 | | | $ | 12,976 | | | $ | 35,425 | | | $ | 26,120 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | | | | | |
| Weighted average shares | | | 28,820,591 | | | | 28,582,129 | | | | 28,776,672 | | | | 28,475,730 | |
| Deferred common stock units related to directors compensation plan | | | 28,903 | | | | 22,958 | | | | 27,924 | | | | 22,338 | |
| | | | | | | | | |
| Denominator for earnings per common share — weighted-average shares | | | 28,849,494 | | | | 28,605,087 | | | | 28,804,596 | | | | 28,498,068 | |
| Effect of dilutive securities — employee stock options | | | 477,412 | | | | 549,744 | | | | 495,810 | | | | 595,515 | |
| | | | | | | | | |
| Denominator for diluted earnings per common share — adjusted weighted-average shares | | | 29,326,906 | | | | 29,154,831 | | | | 29,300,406 | | | | 29,093,583 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Earnings per common share | | $ | 0.63 | | | $ | 0.45 | | | $ | 1.23 | | | $ | 0.92 | |
| | | | | | | | | |
| Earnings per common share — assuming dilution | | $ | 0.62 | | | $ | 0.45 | | | $ | 1.21 | | | $ | 0.90 | |
| | | | | | | | | |
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 Series C preferred stock since the Series C preferred stockholder’s participation in dividends with the common stockholders is limited to the amount of the quarterly regular dividend.
We analyze operations by reviewing financial information regarding products that are aggregated into four product segments. The product segments are: (1) Traditional Annuity — Exclusive Distribution (“Exclusive Annuity”), (2) Traditional Annuity — Independent Distribution (“Independent Annuity”), (3) Traditional and Universal Life Insurance and (4) Variable. We also have various support operations and corporate capital that are aggregated into a Corporate and Other segment. Our segment results for 2004 have been refined to reflect a change in the composition of our reportable segments. Prior to the fourth quarter of 2004, amounts now reported in the Exclusive Annuity segment and the Independent Annuity segment were reported together in a single Traditional Annuity segment. This change was made to better reflect how the business is managed and has no impact on our consolidated financial statements for any period reported.
We analyze our segment results based on pre-tax operating income (loss). Accordingly, income taxes are not allocated to the segments. In addition, operating results are generally reported net of any transactions between the segments. Operating income (loss) represents net income excluding the impact of realized and unrealized gains and losses on investments and changes in net unrealized gains and losses on derivatives. Prior to 2005, operating
11
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
income included the changes in net unrealized gains and losses on derivatives that were not designated as hedges. The operating results for 2004 have been modified to conform to the 2005 presentation.
We use operating income, in addition to net income, to measure our performance since realized and unrealized gains and losses on investments and the change in net unrealized gains and losses on derivatives can fluctuate greatly from quarter to quarter. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income. For example, call options relating to our index business are generally one-year assets while the embedded derivative in the index contracts represents the rights of the contract holder to receive index credits over the entire period the index annuities are expected to be in force. For our other embedded derivatives in the product segments, the embedded derivatives are marked to market, but the associated insurance liabilities are not marked to market. A view of our operating performance without the impact of these mismatches enhances the analysis of our results.
Financial information concerning our operating segments is as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | (Dollars in thousands) | |
| Operating revenues: | | | | | | | | | | | | | | | | |
| Traditional Annuity — Exclusive Distribution | | $ | 37,396 | | | $ | 32,371 | | | $ | 73,287 | | | $ | 64,941 | |
| Traditional Annuity — Independent Distribution | | | 39,454 | | | | 30,969 | | | | 72,487 | | | | 64,305 | |
| Traditional and Universal Life | | | 83,851 | | | | 79,823 | | | | 163,321 | | | | 158,273 | |
| Variable | | | 14,142 | | | | 12,922 | | | | 27,937 | | | | 25,774 | |
| Corporate and Other | | | 7,571 | | | | 6,826 | | | | 15,232 | | | | 12,279 | |
| | | | | | | | | |
| | | | 182,414 | | | | 162,911 | | | | 352,264 | | | | 325,572 | |
| Realized/unrealized gains on investments (A) | | | 2,876 | | | | 583 | | | | 3,287 | | | | 649 | |
| Change in net unrealized gains/losses on derivatives (A) | | | 2,454 | | | | (1,937 | ) | | | (3,599 | ) | | | (1,314 | ) |
| | | | | | | | | |
| Consolidated revenues | | $ | 187,744 | | | $ | 161,557 | | | $ | 351,952 | | | $ | 324,907 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Pre-tax operating income (loss): | | | | | | | | | | | | | | | | |
| Traditional Annuity — Exclusive Distribution | | $ | 9,536 | | | $ | 4,974 | | | $ | 18,310 | | | $ | 11,222 | |
| Traditional Annuity — Independent Distribution | | | 5,848 | | | | 2,350 | | | | 10,989 | | | | 6,562 | |
| Traditional and Universal Life | | | 14,838 | | | | 12,005 | | | | 27,651 | | | | 24,408 | |
| Variable | | | (818 | ) | | | 684 | | | | (283 | ) | | | (81 | ) |
| Corporate and Other | | | (1,102 | ) | | | (1,900 | ) | | | (2,479 | ) | | | (4,713 | ) |
| | | | | | | | | |
| | | | 28,302 | | | | 18,113 | | | | 54,188 | | | | 37,398 | |
| Income taxes on operating income | | | (9,957 | ) | | | (4,589 | ) | | | (18,998 | ) | | | (11,182 | ) |
| Realized/unrealized gains on investments, net (A) | | | 1,274 | | | | 306 | | | | 1,801 | | | | 96 | |
| Change in net unrealized gains/losses on derivatives (A) | | | (1,324 | ) | | | (817 | ) | | | (1,491 | ) | | | (117 | ) |
| | | | | | | | | |
| Consolidated net income | | $ | 18,295 | | | $ | 13,013 | | | $ | 35,500 | | | $ | 26,195 | |
| | | | | | | | | |
| | |
| (A) | | Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and income taxes attributable to gains and losses on investments and derivatives. |
Beginning in 2005, we changed the allocation of capital among our segments to be consistent with a change in how we manage capital at the segment level. This change, coupled with a refinement in the allocation of accrued investment income and certain other assets and liabilities among the segments, resulted in an increase (decrease) in investments in our segments as of January 1, 2005 as follows: Exclusive Annuity — $41.9 million; Independent Annuity — $19.8
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| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
million; Traditional and Universal Life Insurance — ($69.4) million; Variable — ($12.5) million and Corporate and Other — $20.2 million. Accordingly, operating revenues and pre-tax operating income (loss) by segment for the 2005 periods are impacted by the income on the investments transferred. An estimate of the impact of this asset transfer on operating revenues and pre-tax operating income (loss) for the second quarter is as follows: Exclusive Annuity — $0.6 million; Independent Annuity - - $0.3 million; Traditional and Universal Life Insurance — ($1.1) million; Variable — ($0.1) million and Corporate and Other — $0.3 million. An estimate of the impact of this asset transfer on operating revenues and pre-tax operating income (loss) for the six-month period is as follows: Exclusive Annuity — $1.3 million; Independent Annuity — $0.6 million; Traditional and Universal Life Insurance — ($2.2) million; Variable — ($0.3) million and Corporate and Other — $0.6 million.
Also beginning in 2005, we changed the method in which indirect expenses (those expenses for which we do not have a reliable basis such as time studies for allocating the costs) are allocated among the segments from a pro rata method based on allocated capital to a pro rata method based on direct expenses. The change in allocating indirect expenses was made in conjunction with our change in allocating capital to better reflect the effort and resources required to operate the separate segments. The exact impact of this change is not determinable as it was not practicable to calculate required capital under both the new and old capital allocation methodologies during 2005. The most significant impact of this change was to shift approximately $1.0 million in the second quarter and $2.0 million in the six months ended June 30, 2005 of other underwriting expenses from the Corporate and Other segment to the Traditional and Universal Life Insurance and Variable segments. The impact on the Exclusive Annuity and Independent Annuity segments is not believed to be significant with slight reductions in other underwriting expenses resulting from this change.
Our investment in equity method investees and the related equity income are attributable to the Corporate and Other segment. Goodwill at June 30, 2005 and December 31, 2004 is allocated among the segments as follows: Exclusive Annuity ($3.9 million), Traditional and Universal Life Insurance ($6.1 million) and Variable ($1.2 million).
6. Subsequent Event — Consolidation of Life Operations
In July 2005, we announced the closing of our life insurance processing unit in Manhattan, Kansas. As a result of the closure and some unrelated terminations, in the second half of 2005 we expect to record a one time pre-tax charge of approximately $2.3 million, related mainly to severance and early retirement benefits. As a result of efficiencies gained with these activities, we expect to achieve pre-tax annual savings of approximately $4.0 million.
13
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
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 Life) (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 2004Form 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.
Results of Operations for the Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended June 30, 2004
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | (Dollars in thousands, except per share data) | |
| Revenues | | $ | 187,744 | | | $ | 161,557 | | | $ | 351,952 | | | $ | 324,907 | |
| Benefits and expenses | | | 159,801 | | | | 144,611 | | | | 297,073 | | | | 288,251 | |
| | | | | | | | | |
| | | | 27,943 | | | | 16,946 | | | | 54,879 | | | | 36,656 | |
| Income taxes | | | (9,829 | ) | | | (4,187 | ) | | | (19,203 | ) | | | (10,907 | ) |
| Minority interest and equity income (loss) | | | 181 | | | | 254 | | | | (176 | ) | | | 446 | |
| | | | | | | | | |
| Net income | | | 18,295 | | | | 13,013 | | | | 35,500 | | | | 26,195 | |
| Less dividends on Series B preferred stock | | | (37 | ) | | | (37 | ) | | | (75 | ) | | | (75 | ) |
| | | | | | | | | |
| Net income applicable to common stock | | $ | 18,258 | | | $ | 12,976 | | | $ | 35,425 | | | $ | 26,120 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Earnings per common share | | $ | 0.63 | | | $ | 0.45 | | | $ | 1.23 | | | $ | 0.92 | |
| | | | | | | | | |
| Earnings per common share — assuming dilution | | $ | 0.62 | | | $ | 0.45 | | | $ | 1.21 | | | $ | 0.90 | |
| | | | | | | | | |
14
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | (Dollars in thousands) | |
Other data | | | | | | | | | | | | | | | | |
| Direct premiums collected, net of reinsurance ceded: | | | | | | | | | | | | | | | | |
| Traditional Annuity — Exclusive Distribution (1) | | $ | 51,503 | | | $ | 59,193 | | | $ | 99,826 | | | $ | 116,980 | |
| Traditional Annuity — Independent Distribution (1) | | | 233,126 | | | | 124,403 | | | | 418,465 | | | | 139,636 | |
| Traditional and Universal Life Insurance | | | 45,950 | | | | 44,497 | | | | 89,385 | | | | 88,046 | |
| Variable Annuity and Variable Universal Life (2) | | | 45,609 | | | | 38,350 | | | | 85,259 | | | | 71,881 | |
| Reinsurance assumed and other | | | 5,537 | | | | 103,332 | | | | 11,424 | | | | 179,605 | |
| | | | | | | | | |
| Total | | $ | 381,725 | | | $ | 369,775 | | | $ | 704,359 | | | $ | 596,148 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Direct life insurance in force, end of quarter (in millions) | | | | | | | | | | $ | 34,893 | | | $ | 32,637 | |
| Life insurance lapse rates | | | | | | | | | | | 7.2 | | | | 7.6 | |
| Withdrawal rates — individual traditional annuity: | | | | | | | | | | | | | | | | |
| Exclusive Distribution (1) | | | | | | | | | | | 3.5 | | | | 3.5 | |
| Independent Distribution (1) | | | | | | | | | | | 5.2 | | | | 4.3 | |
| | |
| (1) | | The 2004 amounts reflect changes in the composition of our reportable product segments. See the “Segment Information” section that follows for additional discussion of these changes. |
| |
| (2) | | Amounts are net of portion ceded to and include amounts assumed from alliance partners. |
Premiums collected is not a measure used in financial statements prepared according to U.S. generally accepted accounting principles (GAAP). There is no comparable GAAP financial measure. We use premiums collected to measure the productivity of our exclusive and independent agents. Total premiums collected increased 3.2% to $381.7 million in the second quarter of 2005 and 18.2% to $704.4 million in the six months ended June 30, 2005 due primarily to the continued growth of our EquiTrust Life independent distribution channel. Reinsurance assumed and other premiums collected decreased during 2005 due to the suspension of our coinsurance agreement (the coinsurance agreement) with American Equity Investment Life Insurance Company (American Equity) effective August 1, 2004.
Net income applicable to common stockincreased 40.7% in the second quarter of 2005 to $18.3 million and 35.6% in the six months ended June 30, 2005 to $35.4 million. Net income applicable to common stock for the 2005 periods was positively impacted by growth in the volume of business in force, increased spreads earned on our universal life and individual traditional annuity products, increases in realized gains on investments and decreases in operating expenses. These increases to net income are partially offset by a decrease in equity income and increases in death benefits, our effective tax rate and the value of the embedded derivatives in our index annuities. In addition, amortization of deferred policy acquisition costs increased from changing assumptions in the calculation of the amortization of deferred policy acquisition costs, deferred sales inducements and unearned revenues.
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| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
The spreads earned on our universal life and individual traditional annuity products are as follows:
| | | | | | | | | |
| | | Six months ended June 30, | |
| | | 2005 | | | 2004 | |
| Weighted average yield on cash and invested assets | | | 6.29 | % | | | 6.19 | % |
| Weighted average interest crediting rate/index cost | | | 3.94 | | | | 4.09 | |
| | | | | |
| Spread | | | 2.35 | % | | | 2.10 | % |
| | | | | |
The weighted average yield on cash and invested assets represents the yield on cash and investments backing the universal life and individual traditional annuity products net of investment expenses. The weighted average crediting rate/index cost and spread are computed including the impact of the amortization of deferred sales inducements. With respect to our index annuities, index costs represent the expenses we incur to fund the annual income credits through the purchase of options and minimum guaranteed interest credited on the index business. See the “Segment Information” section that follows for a discussion of our spreads.
We periodically revise the key assumptions used in the calculation of the amortization of deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired and unearned revenues for participating life insurance and interest sensitive products, as applicable, through an “unlocking” process. Revisions are made based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually with different blocks of business unlocked in different quarters.
The impact of unlocking is as follows:
| | | | | | | | | |
| | | Three and Six months ended June 30, | |
| | | 2005 | | | 2004 | |
| | | (Dollars in thousands) | |
| Amortization of deferred policy acquisition costs | | $ | (850 | ) | | $ | 425 | |
| Amortization of deferred sales inducements | | | 79 | | | | — | |
| Amortization of unearned revenues | | | 11 | | | | — | |
| | | | | |
| Increase (decrease) to pre-tax income | | $ | (760 | ) | | $ | 425 | |
| | | | | |
Key assumption changes impacting the results by segment include changes to the assumptions regarding persistency experience, expense levels and spreads. See “Segment Information” following for details regarding the impact of unlocking on our segments.
Premiums and product chargesare as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| Premiums and product charges: | | | | | | | | | | | | | | | | |
| Interest sensitive and index product charges | | $ | 24,293 | | | $ | 22,301 | | | $ | 48,061 | | | $ | 44,320 | |
| Traditional life insurance premiums | | | 36,915 | | | | 34,738 | | | | 70,248 | | | | 68,472 | |
| Accident and health premiums | | | 186 | | | | 184 | | | | 206 | | | | 258 | |
| | | | | | | | | |
| Total | | $ | 61,394 | | | $ | 57,223 | | | $ | 118,515 | | | $ | 113,050 | |
| | | | | | | | | |
Premiums and product charges increased 7.3% in the second quarter of 2005 period to $61.4 million and 4.8% in the six months ended June 30, 2005 to $118.5 million. The increases in interest sensitive and index product charges are driven principally by surrender charges on annuity and universal life products, cost of insurance charges on variable universal life and universal life products and mortality and expense fees on variable products. Surrender charges increased due to an increase in surrenders relating to growth in the volume and aging of business in force. Cost of insurance charges increased due to aging of the business in force. Mortality and expense fees increased due to an
16
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
increase in the separate account balances on which fees are based. Traditional life insurance premiums increased due primarily to increases in sales of term and whole life products by our exclusive agency force.
Net investment income,which excludes investment income on separate account assets relating to variable products, increased 17.5% in the second quarter of 2005 period to $117.9 million and 16.6% in the six months ended June 30, 2005 to $232.0 million due primarily to an increase in average invested assets. Average invested assets in the six-month period of 2005 increased 14.3% to $7,413.3 million (based on securities at amortized cost) due principally to net premium inflows from Farm Bureau Life and EquiTrust Life. The annualized yield earned on average invested assets increased to 6.36% in the six months ended June 30, 2005 from 6.23% in the respective 2004 period due primarily to increases in fee income. Market conditions in the first six months of 2005 and the full year of 2004 impacted our investment portfolio yield as market investment rates were, in general, lower than our portfolio yield or yield on investments maturing or being paid down. Fee income from bond calls, tender offers and mortgage loan prepayments totaled $3.3 million in the six months ended June 30, 2005 compared to $0.5 million in the respective 2004 period. We recorded $0.9 million in net investment income during the first six months of 2005, representing past due interest that had not been accrued, relating to the redemption of a fixed maturity security that had been impaired in a prior period. For the six months ended June 30, net investment income includes ($0.3) million in 2005 and ($0.5) million in 2004, representing a reversal of net discount accretion on mortgage and asset-backed securities resulting from changing prepayment speed assumptions as of the end of each respective period. See the “Financial Condition — Investments” section that follows for a description of how changes in prepayment speeds impact net investment income.
Derivative income (loss)is as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | (Dollars in thousands) | |
| Derivative income (loss): | | | | | | | | | | | | | | | | |
| Components of derivative income (loss) from call options: | | | | | | | | | | | | | | | | |
| Gains received at expiration | | $ | 7,726 | | | $ | 5,637 | | | $ | 10,601 | | | $ | 13,988 | |
| Change in the difference between fair value and remaining option cost at beginning and end of period | | | 2,469 | | | | (881 | ) | | | (3,442 | ) | | | (1,656 | ) |
| Cost of money for call options | | | (10,175 | ) | | | (5,790 | ) | | | (19,412 | ) | | | (10,418 | ) |
| | | | | | | | | |
| | | | 20 | | | | (1,034 | ) | | | (12,253 | ) | | | 1,914 | |
| Other | | | 100 | | | | (1,025 | ) | | | (27 | ) | | | 239 | |
| | | | | | | | | |
| Total | | $ | 120 | | | $ | (2,059 | ) | | $ | (12,280 | ) | | $ | 2,153 | |
| | | | | | | | | |
The increase in gains received at expiration in the second quarter of 2005 is primarily attributable to the impact of growth in the volume of index annuities in force. The decrease in the gains received at expiration for the six months ended June 30, 2005 is attributable to less appreciation in the underlying equity market indices on which our options are based partially offset by the impact of growth in the volume of index annuities in force. The changes in the difference between the fair value of the call options and the remaining option costs for 2005 are caused primarily by the general change in the S&P 500 Index (upon which the majority of our options are based). For the second quarter of 2005, the S&P 500 Index increased on a point-to-point basis by 0.9%, compared to a point-to-point increase of 1.3% for the 2004 period. For the six months ended June 30, 2005, the S&P 500 Index decreased on a point to point basis by 1.7%, compared to a point-to-point increase of 2.6% for the 2004 period. While the difference between the fair value of the call options and the remaining option costs generally corresponds to the point-to-point change in the S&P 500 Index, the change in fair value is also impacted by options based on daily or monthly S&P 500 averages and options which are based on other underlying indices. Furthermore, the timing of option settlements also impacts the change in fair value. The cost of money for call options increased due primarily to the impact of growth in the volume of index annuities in force. Other derivative income (loss) is comprised of changes in the value of (i) the conversion feature embedded in convertible fixed maturity securities, (ii) the embedded derivative included in our modified coinsurance contracts and (iii) the forward commitments for the purchase of certain when-issued securities. Approximately ($0.9) million of other derivative income (loss) for the second quarter of 2004 period is attributable
17
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
to a change in the value of the conversion feature of one convertible fixed maturity security. Derivative income (loss) will fluctuate based on market conditions.
Realized/unrealized gains (losses) on investmentsare as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
| Realized/unrealized gains (losses) on investments: | | | | | | | | | | | | | | | | |
| Realized gains on sales | | $ | 4,646 | | | $ | 4,463 | | | $ | 6,921 | | | $ | 6,796 | |
| Realized losses on sales | | | (34 | ) | | | (404 | ) | | | (1,897 | ) | | | (814 | ) |
| Realized losses due to impairments | | | (1,732 | ) | | | (3,430 | ) | | | (1,732 | ) | | | (5,289 | ) |
| Unrealized losses on trading securities | | | (4 | ) | | | — | | | | (4 | ) | | | — | |
| | | | | | | | | |
| Total realized/unrealized gains | | $ | 2,876 | | | $ | 629 | | | $ | 3,288 | | | $ | 693 | |
| | | | | | | | | |
The level of realized/unrealized 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. See “Financial Condition — Investments” for details regarding our unrealized gains and losses on available for sale securities at June 30, 2005 and December 31, 2004.
We monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certain investment grade securities on which we have concerns regarding credit quality. In determining whether or not an unrealized loss on an available for sale security is other than temporary, we review factors such as:
| | • | | historical operating trends; |
| |
| | • | | business prospects; |
| |
| | • | | status of the industry in which the company operates; |
| |
| | • | | analyst ratings on the issuer and sector; |
| |
| | • | | quality of management; |
| |
| | • | | size of the unrealized loss; |
| |
| | • | | length of time the security has been in an unrealized loss position; and |
| |
| | • | | our intent and ability to hold the security. |
18
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
If we determine that an unrealized loss on an available for sale security is other than temporary, the security is written down to its fair value at the time of impairment, with the difference between amortized cost and fair value recognized as a realized loss. Details regarding our significant investment impairments for the six months ended June 30, 2005 and 2004, including the circumstances requiring the write downs, are summarized in the following table:
| | | | | | | | | |
| | | | | | | | | Impact on Other |
| General Description | | Impairment Loss | | Circumstance | | Material Investments |
| | | (Dollars in | | | | |
| | | thousands) | | | | |
Six months ended June 30, 2005: | | | | | | | | |
| | | | | | | | | |
| Major United States automaker | | $ | 1,295 | | | During the second quarter, adverse details regarding the financial status of the company became available. | | Negative trends in this segment of the industry were considered in our analysis, which is done on an issue-by-issue basis. We concluded that there is no impact on other material investments in addition to amounts already written down. |
| | | | | | | | | |
Six months ended June 30, 2004: | | | | | | | | |
| | | | | | | | | |
| Major United States airline | | $ | 3,430 | | | In June, the company was negotiating labor costs and we determined there was a high probability of restructuring and possible bankruptcy filing. | | Negative industry trends were considered in our analysis, which is done on an issue-by-issue basis. We concluded that there is no impact on other material investments in addition to amounts already written down. |
| | | | | | | | | |
| Textile manufacturer | | $ | 1,632 | | | In March, we noted disappointing fiscal second quarter 2004 results and a 9% decrease in sales. | | Credit specific issues with no impact on other material investments. |
Other incomeandother expensesinclude 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.
19
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
Interest sensitive and index product benefitsare as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
| Interest sensitive and index product benefits: | | | | | | | | | | | | | | | | |
| Interest credited | | $ | 47,583 | | | $ | 41,933 | | | $ | 95,046 | | | $ | 85,070 | |
| Index credits | | | 8,914 | | | | 11,581 | | | | 12,058 | | | | 21,709 | |
| Change in value of embedded derivative | | | 9,712 | | | | (177 | ) | | | 3,012 | | | | (1,219 | ) |
| Amortization of deferred sales inducements | | | 491 | | | | 1,295 | | | | 2,847 | | | | 2,828 | |
| Interest sensitive death benefits | | | 8,652 | | | | 8,319 | | | | 17,947 | | | | 17,833 | |
| | | | | | | | | |
| Total | | $ | 75,352 | | | $ | 62,951 | | | $ | 130,910 | | | $ | 126,221 | |
| | | | | | | | | |
Interest sensitive and index product benefits increased 19.7% in the second quarter of 2005 to $75.4 million and 3.7% in the six months ended June 30, 2005 to $130.9 million due to increases in the volume of annuity business in force and change in the value of embedded derivative on index annuity products, partially offset by a decrease in index credits. Interest credited increased due primarily to growth in the volume of annuity business in force, partially offset by decreases in interest crediting rates on many of our products during 2004 and 2005. The weighted average interest crediting rate/index cost for universal life and individual traditional annuity products, excluding the impact of the amortization of deferred sales inducements, was 3.74% for the six-month period of 2005 and 3.94% for the respective 2004 period. The decreases in interest crediting rates were made in response to declining yields on the investment portfolios backing these products. The decreases in index credits are due primarily to less appreciation in the underlying equity market indices on which our options are based, partially offset by the impact of an increase in the volume of index annuities in force. The change in the value of the embedded derivative is impacted by the change in expected index credits on the next policy anniversary dates, which are related to the change in the fair value of the options acquired to fund these index credits as discussed above under “Derivative income (loss).” The value of the embedded derivative is also impacted by the timing of the posting of index credits and changes in reserve discount rates and assumptions used in estimating future call option costs. The increase in the value of the embedded derivatives in the second quarter of 2005 is due primarily to the impact of a decrease in the reserve discount rates, which are based on market interest rates. Interest sensitive death benefits increased 4.0% to $8.7 million for the three months ended June 30, 2005 and 0.6% to $17.9 million for the six months ended June 30, 2005. Interest sensitive and index product benefits can tend to fluctuate from period to period primarily as a result of changes in mortality experience and the impact of changes in the equity markets on index credits and the value of the embedded derivatives in our index annuities.
Traditional life insurance and accident and health policy benefitsare as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
| Traditional life insurance and accident and health policy benefits: | | | | | | | | | | | | | | | | |
| Traditional life insurance and accident and health benefits | | $ | 23,166 | | | $ | 21,057 | | | $ | 43,937 | | | $ | 42,882 | |
| Increase in traditional life and accident and health future policy benefits | | | 10,408 | | | | 10,819 | | | | 18,658 | | | | 17,551 | |
| Distributions to participating policyholders | | | 5,678 | | | | 6,108 | | | | 11,842 | | | | 12,831 | |
| | | | | | | | | |
| Total | | $ | 39,252 | | | $ | 37,984 | | | $ | 74,437 | | | $ | 73,264 | |
| | | | | | | | | |
Traditional life insurance and accident and health policy benefits increased 3.3% in the second quarter of 2005 to $39.3 million and 1.6% in the six months ended June 30, 2005 to $74.4 million. Traditional life insurance death benefits increased 16.3% to $13.4 million and traditional life insurance surrenders increased 9.4% to $8.7 million in the second quarter of 2005. Distributions to participating policyholders decreased due to reductions in our dividend crediting rates in response to a declining investment portfolio yield on the investments backing these products.
20
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
Traditional life insurance and accident and health policy benefits can fluctuate from period to period primarily as a result of changes in mortality experience.
Underwriting, acquisition and insurance expensesare as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
| Underwriting, acquisition and insurance expenses: | | | | | | | | | | | | | | | | |
| Commission expense, net of deferrals | | $ | 3,466 | | | $ | 3,833 | | | $ | 7,129 | | | $ | 7,486 | |
| Amortization of deferred policy acquisition costs | | | 13,572 | | | | 11,350 | | | | 27,703 | | | | 25,047 | |
| Amortization of value of insurance in force acquired | | | 886 | | | | 1,105 | | | | 1,639 | | | | 1,916 | |
| Other underwriting, acquisition and insurance expenses, net of deferrals | | | 19,114 | | | | 19,891 | | | | 39,035 | | | | 40,089 | |
| | | | | | | | | |
| Total | | $ | 37,038 | | | $ | 36,179 | | | $ | 75,506 | | | $ | 74,538 | |
| | | | | | | | | |
Underwriting, acquisition and insurance expenses increased 2.4% in the second quarter of 2005 to $37.0 million and 1.3% in the six months ended June 30, 2005 to $75.5 million. Commission expense decreased in the 2005 periods primarily due to an increase in commission allowances on reinsurance ceded. Amortization of deferred policy acquisition costs increased due primarily to an increase in the volume of business in force. Amortization of deferred acquisition costs also increased $0.9 million in the second quarter of 2005 compared to a decrease of $0.4 million in the 2004 period due to changes in assumptions used to calculate deferred policy acquisition costs. See “Net income applicable to common stock” for a discussion of these changes. Other underwriting, acquisition and insurance expenses decreased in the six months ended June 30, 2005 partially due to a $1.1 million decrease in outside data processing expenses for records imaging and consulting expenses, a $0.7 million decrease in losses on sales of fixed assets and a $0.6 million decrease in depreciation and amortization expenses. These decreases were partially offset by an increase in salaries and employee benefits and other expenses associated with our growing business.
Interest expensetotaled $3.4 million in the second quarter of 2005 compared to $3.0 million in the 2004 period. Interest expense for the six-month periods totaled $6.7 million in 2005 and $5.0 million in 2004. Interest expense increased in the 2005 periods due to the issuance of $75.0 million of 5.85% Senior Notes in April 2004, and as a result of an increase in the variable rate on our line of credit.
Income taxesincreased 134.8% in the 2005 period to $9.8 million and 76.1% in the six-month period of 2005 to $19.2 million. These increases are due primarily to increases in pre-tax income and to a tax accrual reversal totaling $1.6 million in the second quarter of 2004. Based on events and analysis performed, we determined that this tax accrual was no longer necessary. The effective tax rate for the six months ended June 30, 2005 was 35.0% compared to 34.2% for the 2004 period, excluding the impact of the tax accrual reversal. The increase in the effective tax rate for the 2005 period is primarily due to an increase in state income taxes.
Equity income (loss), net of related income taxes,totaled $0.2 million for the second quarter of 2005 and 2004 and ($0.1) million for the six-month period of 2005 compared to $0.5 million in the 2004 period. 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 our equity investees, we will consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are 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.
21
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
Segment Information
We analyze operations by reviewing financial information regarding products that are aggregated into four product segments. The product segments are: (1) Traditional Annuity — Exclusive Distribution (“Exclusive Annuity”), (2) Traditional Annuity — Independent Distribution (“Independent Annuity”), (3) Traditional and Universal Life Insurance and (4) Variable. We also have various support operations and corporate capital that are aggregated into a Corporate and Other segment. Our segment results for 2004 have been refined to reflect a change in the composition of our reportable segments. Prior to the fourth quarter of 2004, amounts now reported in the Exclusive Annuity segment and the Independent Annuity segment were reported together in a single Traditional Annuity segment. This change was made to better reflect how the business is managed and has no impact on our consolidated financial statements for any period reported.
We analyze our segment results based on pre-tax operating income (loss). Accordingly, income taxes are not allocated to the segments. In addition, operating results are generally reported net of any transactions between the segments. Operating income (loss) represents net income excluding the impact of realized and unrealized gains and losses on investments and changes in net unrealized gains and losses on derivatives. Prior to 2005, operating income included the changes in net unrealized gains and losses on derivatives that were not designated as hedges. The operating results for 2004 have been modified to conform to the 2005 presentation. See Note 5 to the consolidated financial statements for a summary of the impact of these changes for 2004. The impact of realized and unrealized gains and losses on investments and unrealized gains and losses on derivatives includes adjustments for income taxes and that portion of amortization of deferred policy acquisition costs, deferred sales inducements, unearned revenue reserve and value of insurance in force acquired attributable to such gains or losses.
We use operating income, in addition to net income, to measure our performance since realized and unrealized gains and losses on investments and the change in net unrealized gains and losses on derivatives can fluctuate greatly from quarter to quarter. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income. For example, call options relating to our index business are generally one year assets while the embedded derivative in the index contracts represents the rights of the contract holder to receive index credits over the entire period the index annuities are expected to be in force. For our other embedded derivatives in the product segments, the embedded derivatives are marked to market, but the associated insurance liabilities are not marked to market. A view of our operating performance without the impact of these mismatches enhances the analysis of our results.
Beginning in 2005, we changed the allocation of capital among our segments to be consistent with a change in how we manage capital at the segment level. This change, coupled with a refinement in the allocation of accrued investment income and certain other assets and liabilities among the segments, resulted in an increase (decrease) in investments in our segments as of January 1, 2005 as follows: Exclusive Annuity — $41.9 million; Independent Annuity — $19.8 million; Traditional and Universal Life Insurance — ($69.4) million; Variable — ($12.5) million and Corporate and Other — $20.2 million. Accordingly, operating revenues and pre-tax operating income (loss) by segment for the 2005 periods are impacted by the income on the investments transferred. An estimate of the impact of this asset transfer on operating revenues and pre-tax operating income (loss) for the second quarter is as follows: Exclusive Annuity — $0.6 million; Independent Annuity — $0.3 million; Traditional and Universal Life Insurance — ($1.1) million; Variable — ($0.1) million and Corporate and Other — $0.3 million. An estimate of the impact of this asset transfer on operating revenues and pre-tax operating income (loss) for the six-month period is as follows: Exclusive Annuity - $1.3 million; Independent Annuity — $0.6 million; Traditional and Universal Life Insurance — ($2.2) million; Variable — ($0.3) million and Corporate and Other — $0.6 million.
Also beginning in 2005, we changed the method in which indirect expenses (those expenses for which we do not have a reliable basis such as time studies for allocating the costs) are allocated among the segments from a pro rata method based on allocated capital to a pro rata method based on direct expenses. The change in allocating indirect expenses was made in conjunction with our change in allocating capital to better reflect the effort and resources required to operate the separate segments. The exact impact of this change is not determinable as it was not practicable to calculate required capital under both the new and old capital allocation methodologies during 2005. The most significant impact of this change was to shift approximately $1.0 million in the second quarter and $2.0 million in the six months ended June 30, 2005 of other underwriting expenses from the Corporate and Other segment to the Traditional and Universal
22
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
Life and Variable segments. The impact on the Exclusive Annuity and Independent Annuity segments is not believed to be significant with slight reductions in other underwriting expenses resulting from this change.
A reconciliation of net income to pre-tax operating income (loss) and a summary of pre-tax operating income (loss) by segment follows.
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
| Net income | | $ | 18,295 | | | $ | 13,013 | | | $ | 35,500 | | | $ | 26,195 | |
| | | | | | | | | | | | | | | | | |
| Realized/unrealized losses (gains) on investments | | | (2,876 | ) | | | (629 | ) | | | (3,288 | ) | | | (693 | ) |
| Change in net unrealized gains/losses on derivatives | | | 7,259 | | | | 1,565 | | | | 7,463 | | | | 475 | |
| Change in amortization of: | | | | | | | | | | | | | | | | |
| Deferred policy acquisition costs | | | (2,289 | ) | | | (243 | ) | | | (2,615 | ) | | | 90 | |
| Deferred sales inducements | | | (2,020 | ) | | | (29 | ) | | | (2,026 | ) | | | (7 | ) |
| Value of insurance in force acquired | | | 2 | | | | 78 | | | | (13 | ) | | | 125 | |
| Unearned revenue reserve | | | — | | | | 46 | | | | 1 | | | | 44 | |
| Income tax offset | | | (26 | ) | | | (277 | ) | | | 168 | | | | (13 | ) |
| | | | | | | | | |
| Realized/unrealized losses (gains), net of offsets | | | 50 | | | | 511 | | | | (310 | ) | | | 21 | |
| | | | | | | | | | | | | | | | | |
| Income taxes on operating income | | | 9,957 | | | | 4,589 | | | | 18,998 | | | | 11,182 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Pre-tax operating income | | $ | 28,302 | | | $ | 18,113 | | | $ | 54,188 | | | $ | 37,398 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Pre-tax operating income (loss) by segment: | | | | | | | | | | | | | | | | |
| Traditional Annuity — Exclusive Distribution | | $ | 9,536 | | | $ | 4,974 | | | $ | 18,310 | | | $ | 11,222 | |
| Traditional Annuity — Independent Distribution | | | 5,848 | | | | 2,350 | | | | 10,989 | | | | 6,562 | |
| Traditional and Universal Life | | | 14,838 | | | | 12,005 | | | | 27,651 | | | | 24,408 | |
| Variable | | | (818 | ) | | | 684 | | | | (283 | ) | | | (81 | ) |
| Corporate and Other | | | (1,102 | ) | | | (1,900 | ) | | | (2,479 | ) | | | (4,713 | ) |
| | | | | | | | | |
| | | $ | 28,302 | | | $ | 18,113 | | | $ | 54,188 | | | $ | 37,398 | |
| | | | | | | | | |
23
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
A discussion of our operating results, by segment, follows.
Traditional Annuity — Exclusive Distribution Segment
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
Pre-tax operating income | | | | | | | | | | | | | | | | |
| Operating revenues: | | | | | | | | | | | | | | | | |
| Interest sensitive product charges | | $ | 248 | | | $ | 198 | | | $ | 432 | | | $ | 429 | |
| Net investment income | | | 37,148 | | | | 32,173 | | | | 72,855 | | | | 64,512 | |
| | | | | | | | | |
| | | | 37,396 | | | | 32,371 | | | | 73,287 | | | | 64,941 | |
| Benefits and expenses | | | 27,860 | | | | 27,397 | | | | 54,977 | | | | 53,719 | |
| | | | | | | | | |
| Pre-tax operating income | | $ | 9,536 | | | $ | 4,974 | | | $ | 18,310 | | | $ | 11,222 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other data | | | | | | | | | | | | | | | | |
| Annuity premiums collected, direct | | $ | 51,503 | | | $ | 59,193 | | | $ | 99,826 | | | $ | 116,980 | |
| Policy liabilities and accruals, end of period | | | | | | | | | | | 2,194,582 | | | | 2,023,210 | |
| | | | | | | | | | | | | | | | | |
| Individual deferred annuity spread: | | | | | | | | | | | | | | | | |
| Weighted average yield on cash and invested assets | | | | | | | | | | | 6.51 | % | | | 6.22 | % |
| Weighted average interest crediting rate | | | | | | | | | | | 4.20 | % | | | 4.61 | % |
| | | | | | | | | | | | | |
| Spread | | | | | | | | | | | 2.31 | % | | | 1.61 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Individual traditional annuity withdrawal rate | | | | | | | | | | | 3.5 | % | | | 3.5 | % |
| | | | | | | | | | | | | |
Pre-tax operating income for the Exclusive Annuity segment increased 91.7% in the second quarter of 2005 to $9.5 million and 63.2% in the six months ended June 30, 2005 to $18.3 million. Revenues, benefits and expenses increased in the 2005 periods primarily due to growth in the volume of business in force. Net investment income was positively impacted for the six months ended June 30, 2005 by an increase in investments due to the change in allocation of capital discussed above and a decrease in our cash position and increased investment in corporate bonds. In addition, net investment income includes $1.9 million in the six months ended June 30, 2005 and less than $0.1 million in the respective 2004 period in fee income from bond calls, tender offers and mortgage loan prepayments and the acceleration (reversal) of net discount accretion on mortgage and asset-backed securities as noted in the investment income discussion above. These factors are partially offset by the impact of a decline in overall market interest rates during 2004 and 2005. The increase in benefits and expenses in the 2005 periods is due to growth in the volume of business in force partially offset by the impact of reductions in interest crediting rates. Premiums collected decreased 14.7% in the six-month period of 2005 to $99.8 million due primarily to the impact of the interest rate environment and increased popularity of variable annuities and other competing financial instruments.
The increase in the weighted average yield on cash and invested assets is primarily attributable to the items affecting net investment income noted above. We reduced the crediting rates on most of our annuity products in 2004 in response to declines in the yield on investments backing these products. Interest crediting rates were 4.10% on our primary annuity contracts as of June 30, 2005 and 4.35% as of June 30, 2004. The decrease in the weighted average crediting rate for 2005 is also partially attributable to income from the interest rate swaps backing a portion of our flexible premium deferred annuity contracts.
24
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
Traditional Annuity — Independent Distribution Segment
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
Pre-tax operating income | | | | | | | | | | | | | | | | |
| Operating revenues: | | | | | | | | | | | | | | | | |
| Interest sensitive and index product charges | | $ | 2,628 | | | $ | 1,818 | | | $ | 5,296 | | | $ | 3,292 | |
| Net investment income | | | 39,160 | | | | 29,273 | | | | 75,872 | | | | 57,546 | |
| Derivative income (loss) | | | (2,334 | ) | | | (122 | ) | | | (8,681 | ) | | | 3,467 | |
| | | | | | | | | |
| | | | 39,454 | | | | 30,969 | | | | 72,487 | | | | 64,305 | |
| Benefits and expenses | | | 33,606 | | | | 28,619 | | | | 61,498 | | | | 57,743 | |
| | | | | | | | | |
| Pre-tax operating income | | $ | 5,848 | | | $ | 2,350 | | | $ | 10,989 | | | $ | 6,562 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other data | | | | | | | | | | | | | | | | |
| Annuity premiums collected, independent channel | | $ | 233,126 | | | $ | 124,403 | | | $ | 418,465 | | | $ | 139,636 | |
| Annuity premiums collected, assumed | | | 2,093 | | | | 99,637 | | | | 4,451 | | | | 172,072 | |
| Policy liabilities and accruals, end of period | | | | | | | | | | | 3,105,356 | | | | 2,348,483 | |
| | | | | | | | | | | | | | | | | |
| Individual deferred annuity spread: | | | | | | | | | | | | | | | | |
| Weighted average yield on cash and invested assets | | | | | | | | | | | 6.00 | % | | | 5.98 | % |
| Weighted average interest crediting rate/index cost | | | | | | | | | | | 3.65 | % | | | 3.60 | % |
| | | | | | | | | | | | | |
| Spread | | | | | | | | | | | 2.35 | % | | | 2.38 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Individual traditional annuity withdrawal rate | | | | | | | | | | | 5.2 | % | | | 4.3 | % |
| | | | | | | | | | | | | |
Pre-tax operating income for the Independent Annuity segment increased 148.9% in the second quarter of 2005 period to $5.8 million and 67.5% in the six months ended June 30, 2005 to $11.0 million. The increases in the 2005 periods are due principally to growth in the volume of business in force. The increase in interest sensitive and index product charges is due to an increase in surrender charges. Surrender charges increased due to an increase in surrenders relating to growth in the volume and aging of business in force. The increase in net investment income is attributable to growth in invested assets due principally to net premium inflows. Net investment income is also positively impacted by the change in allocation of capital discussed above. Net investment income includes $0.2 million in the six months ended June 30, 2005 compared to ($0.1) million in the respective 2004 period in fee income from bond calls, tender offers and mortgage loan prepayments and the acceleration (reversal) of net discount accretion on mortgage and asset-backed securities. The decrease in derivative income for the six months ended June 30, 2005 is due to a $9.0 million increase in the cost of money for call options due primarily to the impact of growth in the volume of index annuities in force and a $3.2 million decrease in proceeds from option settlements due to less appreciation in the underlying equity market indices on which our options are based. Benefits and expenses for the six-month period increased due to growth in the volume of business in force, partially offset by a $9.7 million decrease in index credits. Direct premiums collected increased to $418.5 million in the six months ended June 30, 2005 compared to $139.6 million in the 2004 period due to the continued growth of our EquiTrust Life independent distribution. Reinsurance assumed premiums collected decreased during 2005 due to the suspension of our coinsurance agreement with American Equity effective August 1, 2004. Amortization of deferred policy acquisition costs and deferred sales inducements decreased $0.5 million in the second quarter of 2005 due to unlocking. See “Net income applicable to common stock” for a discussion of these changes.
The increase in the weighted average yield on invested assets is the result of the decrease in our cash position and the increase in fee income from bond calls, mortgage loan prepayments, consent fees and discount accretion on mortgage and asset-backed securities for the 2005 period. Our spread earned for the 2005 period was primarily impacted by changes in spreads for index annuities assumed under the coinsurance agreement, which is driven by option costs and fluctuations in the minimum guarantees credited to the contracts.
25
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
Traditional and Universal Life Insurance Segment
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
Pre-tax operating income | | | | | | | | | | | | | | | | |
| Operating revenues: | | | | | | | | | | | | | | | | |
| Interest sensitive product charges | | $ | 11,235 | | | $ | 11,025 | | | $ | 22,200 | | | $ | 22,119 | |
| Traditional life insurance premiums | | | 36,915 | | | | 34,738 | | | | 70,248 | | | | 68,472 | |
| Net investment income | | | 35,701 | | | | 34,060 | | | | 70,873 | | | | 67,682 | |
| | | | | | | | | |
| | | | 83,851 | | | | 79,823 | | | | 163,321 | | | | 158,273 | |
| Benefits and expenses | | | 69,013 | | | | 67,818 | | | | 135,670 | | | | 133,865 | |
| | | | | | | | | |
| Pre-tax operating income | | $ | 14,838 | | | $ | 12,005 | | | $ | 27,651 | | | $ | 24,408 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other data | | | | | | | | | | | | | | | | |
| Life premiums collected, net of reinsurance | | $ | 49,354 | | | $ | 48,159 | | | $ | 96,247 | | | $ | 95,402 | |
| Policy liabilities and accruals, end of period | | | | | | | | | | | 2,079,702 | | | | 2,052,933 | |
| Direct life insurance in force, end of period (in millions) | | | | | | | | | | | 27,508 | | | | 25,395 | |
| | | | | | | | | | | | | | | | | |
| Interest sensitive life insurance spread: | | | | | | | | | | | | | | | | |
| Weighted average yield on cash and invested assets | | | | | | | | | | | 6.79% | | | | 6.62% | |
| Weighted average interest crediting rate | | | | | | | | | | | 4.55% | | | | 4.58% | |
| | | | | | | | | | | | | |
| Spread | | | | | | | | | | | 2.24% | | | | 2.04% | |
| | | | | | | | | | | | | |
Pre-tax operating income for the Traditional and Universal Life Insurance segment increased 23.6% in the second quarter of 2005 to $14.8 million and 13.3% in the six-month period to $27.7 million. These increases are primarily due to increases in the volume of business in force and spreads earned on interest sensitive products. Net investment income was positively impacted by a decrease in our cash position and increased investment in corporate bonds. Net investment income also includes $0.7 million in the six-month period of 2005 compared to $0.1 million in the 2004 period in fee income from bond calls, tender offers and mortgage loan prepayments and the acceleration (reversal) of net discount accretion on mortgage and asset-backed securities. These factors are partially offset by the impact of a decline in market interest rates and a decrease in investments due to the change in allocation of capital discussed above. Traditional life insurance premiums increased due primarily to an increase in sales of term and whole life products by our exclusive agency force. Benefits and expenses for the six-month period of 2005 increased 1.3% to $135.7 million due primarily to an increase in death benefits. For the six-month period of 2005, interest sensitive death benefits increased 12.1% to $11.6 million and traditional death benefits increased 6.2% to $25.5 million. In addition, operating expenses increased $0.7 million for the six-month period of 2005, the cause of which is estimated to be attributable to the change in allocation of indirect expenses discussed above, partially offset by a reduction in information technology expenses. Amortization of deferred policy acquisition costs increased $0.2 million in the second quarter of 2005 due to unlocking.
The increase in the weighted average yield on cash and invested assets is the result of the decrease in our cash position and the increase in fee income noted above. The decrease in the average crediting rate is due to a 20 point basis point decrease in the crediting rate on certain universal life products in September 2004.
26
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| FBL Financial Group, Inc. | | June 30, 2005 |
Variable Segment
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
Pre-tax operating income (loss) | | | | | | | | | | | | | | | | |
| Operating revenues: | | | | | | | | | | | | | | | | |
| Interest sensitive product charges | | $ | 10,182 | | | $ | 9,306 | | | $ | 20,134 | | | $ | 18,524 | |
| Net investment income | | | 3,732 | | | | 3,380 | | | | 7,339 | | | | 6,734 | |
| Other income | | | 228 | | | | 236 | | | | 464 | | | | 516 | |
| | | | | | | | | |
| | | | 14,142 | | | | 12,922 | | | | 27,937 | | | | 25,774 | |
| Benefits and expenses | | | 14,960 | | | | 12,238 | | | | 28,220 | | | | 25,855 | |
| | | | | | | | | |
| Pre-tax operating income (loss) | | $ | (818 | ) | | $ | 684 | | | $ | (283 | ) | | $ | (81 | ) |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other data | | | | | | | | | | | | | | | | |
| Variable premiums collected, net of reinsurance and internal rollovers | | $ | 45,609 | | | $ | 38,350 | | | $ | 85,259 | | | $ | 71,881 | |
| Policy liabilities and accruals, end of period | | | | | | | | | | | 244,057 | | | | 227,188 | |
| Separate account assets, end of period | | | | | | | | | | | 579,302 | | | | 500,976 | |
| Direct life insurance in force, end of period (in millions) | | | | | | | | | | | 7,385 | | | | 7,242 | |
Revenues increased 9.4% in the second quarter of 2005 to $14.1 million and 8.4% in the six months ended June 30, 2005 to $27.9 million. Mortality and expense fee income increased 20.6% to $1.7 million in the second quarter of 2005 and 19.7% to $3.3 million in the six months ended June 30, 2005 due to growth in separate account assets. Net investment income includes $0.1 million in the six-month period of 2005 compared to ($0.1) million in the 2004 period in fee income from bond calls and mortgage loan prepayments and the acceleration (reversal) of net discount accretion on mortgage and asset-backed securities. Benefits and expenses increased 22.2% to $15.0 million in the second quarter of 2005 and 9.1% to $28.2 million due primarily to an increase in amortization of deferred policy acquisition costs related to unlocking totaling $1.0 million in the second quarter of 2005 and an increase in operating expenses. Operating expenses increased $0.4 million in the 2005 quarter and $0.8 million for the six-month period, the cause of which is estimated to be attributable to the change in allocation of indirect expenses during 2005 as discussed above. Death benefits in excess of related account values on variable universal life policies decreased to $5.8 million in the six months ended June 30, 2005 from $6.7 million in the 2004 period. Premiums collected increased 18.6% to $85.3 million in the six months ended June 30, 2005 due to positive market conditions for our variable annuity products.
The Variable segment does not currently contribute significantly to our net income 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 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.
27
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
Corporate and Other Segment
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | (Dollars in thousands) | | | | | |
Pre-tax operating loss: | | | | | | | | | | | | | | | | |
| Operating revenues: | | | | | | | | | | | | | | | | |
| Accident and health insurance premiums | | $ | 186 | | | $ | 184 | | | $ | 206 | | | $ | 258 | |
| Net investment income | | | 2,190 | | | | 1,496 | | | | 5,098 | | | | 2,454 | |
| Other income | | | 5,195 | | | | 5,146 | | | | 9,928 | | | | 9,567 | |
| | | | | | | | | |
| | | | 7,571 | | | | 6,826 | | | | 15,232 | | | | 12,279 | |
| Interest expense | | | 3,375 | | | | 2,965 | | | | 6,670 | | | | 4,998 | |
| Benefits and other expenses | | | 5,581 | | | | 6,140 | | | | 10,828 | | | | 12,702 | |
| | | | | | | | | |
| | | | (1,385 | ) | | | (2,279 | ) | | | (2,266 | ) | | | (5,421 | ) |
| Minority interest | | | (9 | ) | | | 21 | | | | (107 | ) | | | (42 | ) |
| Equity income (loss), before tax | | | 292 | | | | 358 | | | | (106 | ) | | | 750 | |
| | | | | | | | | |
| Pre-tax operating loss | | $ | (1,102 | ) | | $ | (1,900 | ) | | $ | (2,479 | ) | | $ | (4,713 | ) |
| | | | | | | | | |
Pre-tax operating loss decreased 42.0% in the second quarter of 2005 to $1.1 million and 47.4% in the six months ended June 30, 2005 to $2.5 million, primarily due to an increase in net investment income. We recorded $0.9 million in net investment income during the six-month period of 2005, representing past due interest that had not been accrued, relating to the redemption of a fixed maturity security that had been impaired in a prior period. Net investment income was also positively impacted by an increase in investments due to our Senior Note offering in April 2004 and the change in allocation of capital discussed above. Interest expense increased in the 2005 periods due to the issuance of our Senior Notes and an increase in the variable rate on our line of credit. The change in method of allocating indirect expenses among the segments as discussed above caused a reduction in operating expenses totaling approximately $1.0 million in the second quarter of 2005 and $2.0 million in the six months ended June 30, 2005.
Subsequent Event — Consolidation of Life Operations
In July 2005, we announced the closing of our life insurance processing unit in Manhattan, Kansas. As a result of the closure and some unrelated terminations, in the second half of 2005 we expect to record a one time pre-tax charge of approximately $2.3 million, related mainly to severance and early retirement benefits. As a result of efficiencies gained with these activities, we expect to achieve pre-tax annual savings of approximately $4.0 million.
Pending Accounting Changes
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (Statement) No. 123(R), “Share-Based Payment,” which is a revision of Statement No. 123, “Accounting for Stock-Based Compensation.” Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. We currently follow the prospective method under Statement No. 123, which we adopted effective January 1, 2003. Under the prospective method, expense is recognized for those options granted, modified or settled after the date of adoption. The expense is generally recognized ratably over the five-year vesting period without regard to when an employee becomes eligible for retirement and immediate vesting. We expect we will adopt the modified-prospective-transition method upon the adoption of Statement No. 123(R). Under the modified-prospective-transition method, we will recognize compensation expense in financial statements issued subsequent to the adoption for all share-based payments granted, modified or settled after the date of adoption, as well as for any awards that were granted prior to the adoption date for which the requisite service has not been provided as of the adoption date. Under Statement No. 123(R), expense is recognized over the shorter of the five-year vesting schedule or the period ending when the employee becomes eligible for retirement.
We currently use the Black-Scholes-Merton option pricing model to estimate the value of employee stock options and expect to continue to use this acceptable option pricing model upon adoption of Statement No. 123(R).
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| FBL Financial Group, Inc. | | June 30, 2005 |
Statement No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow, as currently required. This requirement will reduce net operating cash flows and increase financing cash flows in periods after adoption. While we cannot estimate what these amounts will be in the future as they are dependent on unknown factors, such as the timing of employee stock option exercises, the amount of operating cash flows previously recognized for such excess tax deductions for the second quarter totaled $0.1 million for 2005 and $0.2 million for 2004 and for the six months ended June 30 totaled $0.4 million for 2005 and $1.5 million for 2004. We intend to adopt Statement No. 123(R) effective January 1, 2006. While we have not calculated the impact of adopting Statement No. 123(R), the adoption is not expected to have a material impact on our consolidated financial statements.
Financial Condition
Investments
Our total investment portfolio increased 6.9% to $8,017.3 million at June 30, 2005 compared to $7,501.7 million at December 31, 2004. This increase is primarily the result of net cash received from interest sensitive and index products and positive cash flow provided by operating activities. In addition, net unrealized appreciation of fixed maturity and equity securities classified as available for sale increased $76.5 million during 2005 to $341.9 million at June 30, 2005 due principally to the impact of a decline in market interest rates and appreciation of common stock investments.
Internal investment professionals manage our investment portfolio. The investment strategy is designed to achieve superior risk-adjusted returns consistent with the investment philosophy of maintaining a largely investment grade portfolio and providing adequate liquidity for obligations to policyholders and other requirements. We continually review the returns on invested assets and change the mix of invested assets as deemed prudent under the current market environment to help maximize current income.
Our investment portfolio is summarized in the table below:
| | | | | | | | | | | | | | | | | |
| | | June 30, 2005 | | | December 31, 2004 | |
| | | Carrying Value | | | Percent | | | Carrying Value | | | Percent | |
| | | | | | | (Dollars in thousands) | | | | | |
| Fixed maturities — available for sale: | | | | | | | | | | | | | | | | |
| Public | | $ | 5,587,801 | | | | 69.7 | % | | $ | 5,304,217 | | | | 70.7 | % |
| 144A private placement | | | 979,696 | | | | 12.2 | | | | 859,022 | | | | 11.5 | |
| Private placement | | | 295,458 | | | | 3.7 | | | | 295,969 | | | | 3.9 | |
| | | | | | | | | |
| Total fixed maturities — available for sale | | | 6,862,955 | | | | 85.6 | | | | 6,459,208 | | | | 86.1 | |
| Fixed maturities — trading | | | 15,002 | | | | 0.2 | | | | — | | | | — | |
| Equity securities | | | 76,464 | | | | 1.0 | | | | 71,163 | | | | 0.9 | |
| Mortgage loans on real estate | | | 793,565 | | | | 9.9 | | | | 740,874 | | | | 9.9 | |
| Derivative instruments | | | 23,549 | | | | 0.3 | | | | 15,536 | | | | 0.2 | |
| Investment real estate: | | | | | | | | | | | | | | | | |
| Acquired for debt | | | 655 | | | | — | | | | 655 | | | | — | |
| Investment | | | 9,038 | | | | 0.1 | | | | 8,786 | | | | 0.1 | |
| Policy loans | | | 176,714 | | | | 2.2 | | | | 176,613 | | | | 2.4 | |
| Other long-term investments | | | 1,300 | | | | — | | | | 1,300 | | | | — | |
| Short-term investments | | | 58,040 | | | | 0.7 | | | | 27,545 | | | | 0.4 | |
| | | | | | | | | |
| Total investments | | $ | 8,017,282 | | | | 100.0 | % | | $ | 7,501,680 | | | | 100.0 | % |
| | | | | | | | | |
As of June 30, 2005, 95.4% (based on carrying value) of the fixed maturity securities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is
29
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of June 30, 2005, the investment in non-investment grade debt was 4.6% of fixed maturity securities. At that time, no single non-investment grade holding exceeded 0.2% of total investments. A summary of the gross unrealized gains and gross unrealized losses on our available-for-sale fixed maturity securities, by internal industry classification, as of June 30, 2005 and December 31, 2004 is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2005 | |
| | | | | | | | | | | | | | | Carrying | | | | |
| | | | | | | Carrying Value | | | | | | | Value of | | | | |
| | | | | | | of Securities | | | | | | | Securities | | | | |
| | | Total | | | with Gross | | | Gross | | | with Gross | | | Gross | |
| | | Carrying | | | Unrealized | | | Unrealized | | | Unrealized | | | Unrealized | |
| | | Value | | | Gains | | | Gains | | | Losses | | | Losses | |
| | | (Dollars in thousands) | |
| Corporate securities: | | | | | | | | | | | | | | | | | | | | |
| Financial services | | $ | 1,192,951 | | | $ | 1,116,141 | | | $ | 76,198 | | | $ | 76,810 | | | $ | (1,015 | ) |
| Manufacturing | | | 671,193 | | | | 592,932 | | | | 39,023 | | | | 78,261 | | | | (3,131 | ) |
| Mining | | | 308,169 | | | | 287,536 | | | | 23,625 | | | | 20,633 | | | | (180 | ) |
| Retail trade | | | 103,819 | | | | 96,756 | | | | 7,257 | | | | 7,063 | | | | (4 | ) |
| Services | | | 100,135 | | | | 88,675 | | | | 5,271 | | | | 11,460 | | | | (19 | ) |
| Transportation | | | 142,480 | | | | 135,568 | | | | 10,887 | | | | 6,912 | | | | (386 | ) |
| Public utilities | | | 250,152 | | | | 212,135 | | | | 14,948 | | | | 38,017 | | | | (137 | ) |
| Private utilities and related sectors | | | 390,276 | | | | 361,497 | | | | 29,087 | | | | 28,779 | | | | (157 | ) |
| Other | | | 147,620 | | | | 147,620 | | | | 11,287 | | | | — | | | | — | |
| | | | | | | | | | | |
| Total corporate securities | | | 3,306,795 | | | | 3,038,860 | | | | 217,583 | | | | 267,935 | | | | (5,029 | ) |
| Mortgage and asset-backed securities | | | 2,456,086 | | | | 2,220,382 | | | | 72,035 | | | | 235,704 | | | | (3,323 | ) |
| United States Government and agencies | | | 607,012 | | | | 505,483 | | | | 12,025 | | | | 101,529 | | | | (1,853 | ) |
| State, municipal and other governments | | | 493,062 | | | | 486,641 | | | | 29,023 | | | | 6,421 | | | | (26 | ) |
| | | | | | | | | | | |
| Total | | $ | 6,862,955 | | | $ | 6,251,366 | | | $ | 330,666 | | | $ | 611,589 | | | $ | (10,231 | ) |
| | | | | | | | | | | |
30
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| FBL Financial Group, Inc. | | June 30, 2005 |
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2004 | |
| | | | | | | | | | | | | | | Carrying | | | | |
| | | | | | | Carrying Value | | | | | | | Value of | | | | |
| | | | | | | of Securities | | | | | | | Securities | | | | |
| | | Total | | | with Gross | | | Gross | | | with Gross | | | Gross | |
| | | Carrying | | | Unrealized | | | Unrealized | | | Unrealized | | | Unrealized | |
| | | Value | | | Gains | | | Gains | | | Losses | | | Losses | |
| | | (Dollars in thousands) | |
| Corporate securities: | | | | | | | | | | | | | | | | | | | | |
| Financial services | | $ | 961,532 | | | $ | 792,754 | | | $ | 62,415 | | | $ | 168,778 | | | $ | (2,606 | ) |
| Manufacturing | | | 579,558 | | | | 510,767 | | | | 36,695 | | | | 68,791 | | | | (823 | ) |
| Mining | | | 272,779 | | | | 249,969 | | | | 17,197 | | | | 22,810 | | | | (500 | ) |
| Retail trade | | | 102,115 | | | | 84,636 | | | | 7,013 | | | | 17,479 | | | | (496 | ) |
| Services | | | 92,296 | | | | 79,265 | | | | 5,037 | | | | 13,031 | | | | (277 | ) |
| Transportation | | | 154,905 | | | | 126,495 | | | | 11,262 | | | | 28,410 | | | | (521 | ) |
| Public utilities | | | 180,654 | | | | 151,237 | | | | 11,583 | | | | 29,417 | | | | (688 | ) |
| Private utilities and related sectors | | | 374,394 | | | | 341,478 | | | | 27,266 | | | | 32,916 | | | | (446 | ) |
| Other | | | 149,327 | | | | 146,366 | | | | 8,825 | | | | 2,961 | | | | (22 | ) |
| | | | | | | | | | | |
| Total corporate securities | | | 2,867,560 | | | | 2,482,967 | | | | 187,293 | | | | 384,593 | | | | (6,379 | ) |
| Mortgage and asset-backed securities | | | 2,622,616 | | | | 2,283,916 | | | | 65,839 | | | | 338,700 | | | | (7,488 | ) |
| United States Government and agencies | | | 636,254 | | | | 363,924 | | | | 6,983 | | | | 272,330 | | | | (7,714 | ) |
| State, municipal and other governments | | | 332,778 | | | | 256,435 | | | | 11,954 | | | | 76,343 | | | | (873 | ) |
| | | | | | | | | | | |
| Total | | $ | 6,459,208 | | | $ | 5,387,242 | | | $ | 272,069 | | | $ | 1,071,966 | | | $ | (22,454 | ) |
| | | | | | | | | | | |
The following table sets forth the credit quality, by NAIC designation and Standard and Poor’s (S&P) rating equivalents, of available-for-sale fixed maturity securities.
| | | | | | | | | | | | | | | | | | | |
| NAIC | | | | June 30, 2005 | | | December 31, 2004 | |
| Designation | | Equivalent S&P Ratings (1) | | Carrying Value | | | Percent | | | Carrying Value | | | Percent | |
| | | | | | | | | (Dollars in thousands) | | | | | |
| 1 | | AAA, AA, A | | $ | 4,602,539 | | | | 67.1 | % | | $ | 4,525,974 | | | | 70.1 | % |
| 2 | | BBB | | | 1,942,844 | | | | 28.3 | | | | 1,646,518 | | | | 25.5 | |
| | | | | | | | | | | |
| | | Total investment grade | | | 6,545,383 | | | | 95.4 | | | | 6,172,492 | | | | 95.6 | |
| 3 | | BB | | | 255,668 | | | | 3.7 | | | | 233,318 | | | | 3.6 | |
| 4 | | B | | | 52,864 | | | | 0.8 | | | | 45,873 | | | | 0.7 | |
| 5 | | CCC, CC, C | | | 8,075 | | | | 0.1 | | | | 7,506 | | | | 0.1 | |
| 6 | | In or near default | | | 965 | | | | — | | | | 19 | | | | — | |
| | | | | | | | | | | |
| | | Total below investment grade | | | 317,572 | | | | 4.6 | | | | 286,716 | | | | 4.4 | |
| | | | | | | | | | | |
| | | Total fixed maturities — available for sale | | $ | 6,862,955 | | | | 100.0 | % | | $ | 6,459,208 | | | | 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. |
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| FBL Financial Group, Inc. | | June 30, 2005 |
The following tables set forth the composition by credit quality of the available-for-sale fixed maturity securities with gross unrealized losses.
| | | | | | | | | | | | | | | | | | | |
| | | | | June 30, 2005 | |
| | | | | Carrying Value | | | | | | | | | | | |
| | | | | of Securities with | | | | | | | Gross | | | | |
| NAIC | | | | Gross Unrealized | | | Percent of | | | Unrealized | | | Percent of | |
| Designation | | Equivalent S&P Ratings | | Losses | | | Total | | | Losses | | | Total | |
| | | | | | | | | (Dollars in thousands) | | | | | |
| 1 | | AAA, AA, A | | $ | 381,487 | | | | 62.4 | % | | $ | (5,615 | ) | | | 54.9 | % |
| 2 | | BBB | | | 189,820 | | | | 31.0 | | | | (3,254 | ) | | | 31.8 | |
| | | | | | | | | | | |
| | | Total investment grade | | | 571,307 | | | | 93.4 | | | | (8,869 | ) | | | 86.7 | |
| 3 | | BB | | | 29,105 | | | | 4.8 | | | | (879 | ) | | | 8.6 | |
| 4 | | B | | | 11,177 | | | | 1.8 | | | | (483 | ) | | | 4.7 | |
| 5 | | CCC, CC, C | | | — | | | | — | | | | — | | | | — | |
| 6 | | In or near default | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | |
| | | Total below investment grade | | | 40,282 | | | | 6.6 | | | | (1,362 | ) | | | 13.3 | |
| | | | | | | | | | | |
| | | Total | | $ | 611,589 | | | | 100.0 | % | | $ | (10,231 | ) | | | 100.0 | % |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2004 | |
| | | | | Carrying Value | | | | | | | | | | | |
| | | | | of Securities with | | | | | | | Gross | | | | |
| NAIC | | | | Gross Unrealized | | | Percent of | | | Unrealized | | | Percent of | |
| Designation | | Equivalent S&P Ratings | | Losses | | | Total | | | Losses | | | Total | |
| | | | | | | | | (Dollars in thousands) | | | | | |
| 1 | | AAA, AA, A | | $ | 786,630 | | | | 73.4 | % | | $ | (17,714 | ) | | | 78.9 | % |
| 2 | | BBB | | | 232,750 | | | | 21.7 | | | | (3,596 | ) | | | 16.0 | |
| | | | | | | | | | | |
| | | Total investment grade | | | 1,019,380 | | | | 95.1 | | | | (21,310 | ) | | | 94.9 | |
| 3 | | BB | | | 37,000 | | | | 3.5 | | | | (601 | ) | | | 2.7 | |
| 4 | | B | | | 15,586 | | | | 1.4 | | | | (503 | ) | | | 2.2 | |
| 5 | | CCC, CC, C | | | — | | | | — | | | | — | | | | — | |
| 6 | | In or near default | | | — | | | | — | | | | (40 | ) | | | 0.2 | |
| | | | | | | | | | | |
| | | Total below investment grade | | | 52,586 | | | | 4.9 | | | | (1,144 | ) | | | 5.1 | |
| | | | | | | | | | | |
| | | Total | | $ | 1,071,966 | | | | 100.0 | % | | $ | (22,454 | ) | | | 100.0 | % |
| | | | | | | | | | | |
The following tables set forth the number of issuers, amortized cost, unrealized losses and market value of available-for-sale fixed maturity securities in an unrealized loss position listed by the length of time the securities have been in an unrealized loss position.
| | | | | | | | | | | | | | | | | |
| | | June 30, 2005 | |
| | | | | | | | | | | Gross | | | | |
| | | Number of | | | Amortized | | | Unrealized | | | Estimated | |
| | | Issuers | | | Cost | | | Losses | | | Market Value | |
| | | (Dollars in thousands) | |
| Three months or less | | | 21 | | | $ | 83,043 | | | $ | (761 | ) | | $ | 82,282 | |
| Greater than three months to six months | | | 23 | | | | 110,154 | | | | (2,117 | ) | | | 108,037 | |
| Greater than six months to nine months | | | 34 | | | | 208,257 | | | | (3,283 | ) | | | 204,974 | |
| Greater than nine months to twelve months | | | 7 | | | | 32,355 | | | | (483 | ) | | | 31,872 | |
| Greater than twelve months | | | 26 | | | | 188,011 | | | | (3,587 | ) | | | 184,424 | |
| | | | | | | | | | | |
| Total | | | | | | $ | 621,820 | | | $ | (10,231 | ) | | $ | 611,589 | |
| | | | | | | | | | | |
32
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
| | | | | | | | | | | | | | | | | |
| | | December 31, 2004 | |
| | | | | | | | | | | Gross | | | | |
| | | Number of | | | Amortized | | | Unrealized | | | Estimated | |
| | | Issuers | | | Cost | | | Losses | | | Market Value | |
| | | | | | | (Dollars in thousands) | | | | | |
| Three months or less | | | 104 | | | $ | 612,150 | | | $ | (8,449 | ) | | $ | 603,701 | |
| Greater than three months to six months | | | 18 | | | | 83,877 | | | | (851 | ) | | | 83,026 | |
| Greater than six months to nine months | | | 16 | | | | 73,817 | | | | (843 | ) | | | 72,974 | |
| Greater than nine months to twelve months | | | 12 | | | | 59,419 | | | | (846 | ) | | | 58,573 | |
| Greater than twelve months | | | 20 | | | | 265,157 | | | | (11,465 | ) | | | 253,692 | |
| | | | | | | | | | | |
| Total | | | | | | $ | 1,094,420 | | | $ | (22,454 | ) | | $ | 1,071,966 | |
| | | | | | | | | | | |
The scheduled maturity dates for available-for-sale fixed maturity securities in an unrealized loss position are as follows:
| | | | | | | | | | | | | | | | | |
| | | June 30, 2005 | | | December 31, 2004 | |
| | | Carrying Value | | | | | | | Carrying Value | | | | |
| | | of Securities with | | | Gross | | | of Securities with | | | Gross | |
| | | Gross Unrealized | | | Unrealized | | | Gross Unrealized | | | Unrealized | |
| | | Losses | | | Losses | | | Losses | | | Losses | |
| | | | | | | (Dollars in thousands) | | | | | |
| Due in one year or less | | $ | 13,255 | | | $ | (103 | ) | | $ | 10,184 | | | $ | (53 | ) |
| Due after one year through five years | | | 79,093 | | | | (935 | ) | | | 111,883 | | | | (815 | ) |
| Due after five years through ten years | | | 130,837 | | | | (3,727 | ) | | | 167,370 | | | | (2,091 | ) |
| Due after ten years | | | 152,700 | | | | (2,143 | ) | | | 443,829 | | | | (12,007 | ) |
| | | | | | | | | |
| | | | 375,885 | | | | (6,908 | ) | | | 733,266 | | | | (14,966 | ) |
| Mortgage and asset-backed securities | | | 235,704 | | | | (3,323 | ) | | | 338,700 | | | | (7,488 | ) |
| | | | | | | | | |
| Total | | $ | 611,589 | | | | (10,231 | ) | | $ | 1,071,966 | | | $ | (22,454 | ) |
| | | | | | | | | |
Included in the above table are 122 securities from 84 issuers at June 30, 2005 and 169 securities from 130 issuers at December 31, 2004. These decreases are primarily due to decreases in market interest rates between December 31, 2004 and June 30, 2005. Approximately 86.7% at June 30, 2005 and 94.9% at December 31, 2004 of the unrealized losses on fixed maturity securities are on securities that are rated investment grade. Unrealized losses on investment grade securities principally relate to changes in market interest rates or changes in credit spreads since the securities were acquired. Approximately 13.3% at June 30, 2005 and 5.1% at December 31, 2004 of the unrealized losses on fixed maturity securities are on securities that are rated below investment grade. We monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certain investment grade securities on which we have concerns regarding credit quality. In determining whether or not an unrealized loss on an available-for-sale security is other than temporary, we review factors such as:
| | • | | historical operating trends; |
| |
| | • | | business prospects; |
| |
| | • | | status of the industry in which the company operates; |
| |
| | • | | analyst ratings on the issuer and sector; |
| |
| | • | | quality of management; |
| |
| | • | | size of the unrealized loss; |
| |
| | • | | length of time the security has been in an unrealized loss position; and |
| |
| | • | | our intent and ability to hold the security. |
We believe the issuers of the securities in an unrealized loss position will continue to make payments as scheduled, and we have the ability and intent to hold these securities until they recover in value or mature.
Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $0.7 million at June 30, 2005. With respect to mortgage and asset-backed securities not backed by the
33
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
United States government, no securities from the same issuer had an aggregate unrealized loss in excess of $0.9 million at June 30, 2005. The $0.9 million unrealized loss from one issuer relates to two different securities that are backed by different pools of residential mortgage loans. Both securities are rated investment grade and the largest unrealized loss on any one security totaled $0.8 million at June 30, 2005.
Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $0.5 million at December 31, 2004. With respect to mortgage and asset-backed securities not backed by the United States government, no securities from the same issuer had an aggregate unrealized loss in excess of $2.2 million at December 31, 2004. The $2.2 million unrealized loss from one issuer relates to four different securities that are backed by different pools of residential mortgage loans. All four securities are rated investment grade and the largest unrealized loss on any one security totaled $1.5 million at December 31, 2004.
The carrying value and estimated market value of our portfolio of available-for-sale fixed maturity securities, 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.
| | | | | | | | | | | | | | | | | |
| | | June 30, 2005 | | | December 31, 2004 | |
| | | | | | | Estimated | | | | | | | Estimated | |
| | | Amortized Cost | | | Market Value | | | Amortized Cost | | | Market Value | |
| | | | | | | (Dollars in thousands) | | | | | |
| Due in one year or less | | $ | 76,996 | | | $ | 77,544 | | | $ | 76,875 | | | $ | 78,273 | |
| Due after one year through five years | | | 453,525 | | | | 473,217 | | | | 460,638 | | | | 484,626 | |
| Due after five years through ten years | | | 1,151,456 | | | | 1,199,639 | | | | 909,744 | | | | 956,174 | |
| Due after ten years | | | 2,390,748 | | | | 2,564,819 | | | | 2,127,608 | | | | 2,238,332 | |
| | | | | | | | | |
| | | | 4,072,725 | | | | 4,315,219 | | | | 3,574,865 | | | | 3,757,405 | |
| Mortgage and asset-backed securities | | | 2,387,374 | | | | 2,456,086 | | | | 2,564,265 | | | | 2,622,616 | |
| Redeemable preferred stocks | | | 82,421 | | | | 91,650 | | | | 70,463 | | | | 79,187 | |
| | | | | | | | | |
| Total | | $ | 6,542,520 | | | $ | 6,862,955 | | | $ | 6,209,593 | | | $ | 6,459,208 | |
| | | | | | | | | |
Mortgage and other asset-backed securities comprised 35.8% at June 30, 2005 and 40.6% at December 31, 2004 of our total available-for-sale fixed maturity securities. These securities are purchased 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. During 2005, we reduced our allocation of assets to mortgage and other asset-backed securities to reduce our exposure to unwanted changes in the duration of our investment portfolio with changes in market interest rates.
The repayment pattern on mortgage and other asset-backed securities is more variable than that of more traditional fixed maturity securities because the repayment terms are tied to underlying debt obligations that are subject to prepayments. The prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that cannot be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy.
At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed, to result in a constant effective yield over the life of the security. This effective yield is computed using historical principal payments and expected future principal payment patterns. Any adjustments to book value to derive the constant effective yield, which may include the reversal of premium or discount amounts previously amortized or accrued, are recorded in the current period as a component of net investment income. Accordingly, deviations in actual prepayment speeds from that originally expected or changes in expected prepayment speeds can cause a change in the yield earned on mortgage and asset-backed securities purchased at a premium or discount and may result in adjustments that have a material positive or negative impact on quarterly reported results. 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.
34
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
The mortgage-backed portfolio includes pass-through and collateralized mortgage obligation (CMO) securities. With a pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or “tranches” which provide sequential retirement of the bonds. We invest in sequential tranches which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to greater than average risk. These include, but are not limited to, principal only, floater, inverse floater, PAC II and support tranches.
The following tables set forth the amortized cost, par value and carrying value of our mortgage and asset-backed securities summarized by type of security.
| | | | | | | | | | | | | | | | | |
| | | June 30, 2005 | |
| | | | | | | | | | | | | | | Percent of | |
| | | | | | | | | | | | | | | Fixed | |
| | | Amortized Cost | | | Par Value | | | Carrying Value | | | Maturities | |
| | | | | | | (Dollars in thousands) | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | | | | | | |
| Sequential | | $ | 1,389,299 | | | $ | 1,415,888 | | | $ | 1,427,858 | | | | 20.8 | % |
| Pass through | | | 154,545 | | | | 153,863 | | | | 157,200 | | | | 2.3 | |
| Planned and targeted amortization class | | | 309,212 | | | | 313,018 | | | | 319,595 | | | | 4.7 | |
| Other | | | 116,362 | | | | 117,568 | | | | 118,717 | | | | 1.7 | |
| | | | | | | | | |
| Total residential mortgage-backed securities | | | 1,969,418 | | | | 2,000,337 | | | | 2,023,370 | | | | 29.5 | |
| Commercial mortgage-backed securities | | | 263,087 | | | | 259,116 | | | | 275,647 | | | | 4.0 | |
| Other asset-backed securities | | | 154,869 | | | | 154,747 | | | | 157,069 | | | | 2.3 | |
| | | | | | | | | |
| Total mortgage and asset-backed securities | | $ | 2,387,374 | | | $ | 2,414,200 | | | $ | 2,456,086 | | | | 35.8 | % |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | December 31, 2004 | |
| | | | | | | | | | | | | | | Percent of | |
| | | | | | | | | | | | | | | Fixed | |
| | | Amortized Cost | | | Par Value | | | Carrying Value | | | Maturities | |
| | | | | | | (Dollars in thousands) | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | | | | | | |
| Sequential | | $ | 1,571,151 | | | $ | 1,598,937 | | | $ | 1,606,055 | | | | 24.9 | % |
| Pass through | | | 311,556 | | | | 315,371 | | | | 315,516 | | | | 4.9 | |
| Planned and targeted amortization class | | | 180,900 | | | | 180,095 | | | | 184,206 | | | | 2.8 | |
| Other | | | 145,362 | | | | 146,732 | | | | 145,617 | | | | 2.3 | |
| | | | | | | | | |
| Total residential mortgage-backed securities | | | 2,208,969 | | | | 2,241,135 | | | | 2,251,394 | | | | 34.9 | |
| Commercial mortgage-backed securities | | | 261,153 | | | | 256,877 | | | | 274,180 | | | | 4.2 | |
| Other asset-backed securities | | | 94,143 | | | | 93,917 | | | | 97,042 | | | | 1.5 | |
| | | | | | | | | |
| Total mortgage and asset-backed securities | | $ | 2,564,265 | | | $ | 2,591,929 | | | $ | 2,622,616 | | | | 40.6 | % |
| | | | | | | | | |
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.
Fixed maturity securities held for trading consist of $15.0 million of U.S. Treasury securities. These securities had an unrealized loss of less than $0.1 million at June 30, 2005.
Equity securities totaled $76.5 million at June 30, 2005 and $71.2 million at December 31, 2004. Gross unrealized gains totaled $21.7 million and gross unrealized losses totaled $0.2 million at June 30, 2005. At December 31,
35
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
2004, gross unrealized gains totaled $15.9 million and gross unrealized losses totaled $0.1 million on these securities. Included in equity securities is our investment in American Equity Investment Life Holding Company which totaled $65.6 million at June 30, 2005 and $59.5 million at December 31, 2004.
Mortgage loans totaled $793.6 million at June 30, 2005 and $740.9 million at December 31, 2004. These mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. Mortgages more than 60 days delinquent accounted for less than 0.1% of the carrying value of the mortgage portfolio at June 30, 2005. There were no mortgages more than 60 days delinquent at December 31, 2004. 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. Information regarding the collateral type and related geographic location within the United States follows:
| | | | | | | | | | | | | | | | | |
| | | June 30, 2005 | | | December 31, 2004 | |
| | | Mortgage Loan | | | Percent of | | | Mortgage Loan | | | Percent of | |
| Collateral Type | | Carrying Value | | | Total | | | Carrying Value | | | Total | |
| | | | | | | (Dollars in thousands) | | | | | |
| Office | | $ | 318,814 | | | | 40.2 | % | | $ | 314,985 | | | | 42.5 | % |
| Retail | | | 275,706 | | | | 34.7 | | | | 233,785 | | | | 31.6 | |
| Industrial | | | 189,399 | | | | 23.9 | | | | 181,395 | | | | 24.5 | |
| Other | | | 9,646 | | | | 1.2 | | | | 10,709 | | | | 1.4 | |
| | | | | | | | | |
| Total | | $ | 793,565 | | | | 100.0 | % | | $ | 740,874 | | | | 100.0 | % |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | June 30, 2005 | | | December 31, 2004 | |
| | | Mortgage Loan | | | Percent of | | | Mortgage Loan | | | Percent of | |
| Region of the United States | | Carrying Value | | | Total | | | Carrying Value | | | Total | |
| | | | | | | (Dollars in thousands) | | | | | |
| Pacific | | $ | 162,459 | | | | 20.5 | % | | $ | 154,704 | | | | 20.9 | % |
| East North Central | | | 161,591 | | | | 20.3 | | | | 156,417 | | | | 21.1 | |
| South Atlantic | | | 135,495 | | | | 17.1 | | | | 125,304 | | | | 16.9 | |
| West North Central | | | 119,561 | | | | 15.1 | | | | 94,305 | | | | 12.7 | |
| Mountain | | | 77,316 | | | | 9.7 | | | | 85,247 | | | | 11.5 | |
| West South Central | | | 72,014 | | | | 9.1 | | | | 65,635 | | | | 8.9 | |
| Other | | | 65,129 | | | | 8.2 | | | | 59,262 | | | | 8.0 | |
| | | | | | | | | |
| Total | | $ | 793,565 | | | | 100.0 | % | | $ | 740,874 | | | | 100.0 | % |
| | | | | | | | | |
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. The weighted average life of the fixed maturity and mortgage loan portfolio, based on market values and excluding convertible bonds, was approximately 7.8 years at June 30, 2005 and December 31, 2004. Based on calculations utilizing our fixed income analytical system, including our mortgage backed prepayment assumptions, the effective duration of our fixed maturity and mortgage loan portfolios was 5.4 at June 30, 2005 and 5.8 at December 31, 2004.
Other Assets
Deferred policy acquisition costs increased 4.4% to $613.1 million and deferred sales inducements increased 31.2% to $102.9 million at June 30, 2005 due to capitalization of costs incurred with new sales. Assets held in separate accounts increased 4.9% to $579.3 million at June 30, 2005 due primarily to the transfer of net premiums to the separate accounts. At June 30, 2005, we had total assets of $9,706.7 million, a 6.7% increase from total assets at December 31, 2004.
Liabilities
Policy liabilities and accruals and other policyholders’ funds increased 6.8% to $7,692.4 million at June 30, 2005 primarily due to increases in the volume of business in force. Short-term debt increased due to the reclassification from long-term debt of the final redemption of our Series C preferred stock due January 3, 2006 ($46.3 million). At
36
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
June 30, 2005, we had total liabilities of $8,804.2 million, a 6.5% increase from total liabilities at December 31, 2004.
Stockholders’ Equity
Stockholders’ equity increased 8.4%, to $902.4 million at June 30, 2005, compared to $832.6 million at December 31, 2004. This increase is principally attributable to net income and the change in unrealized appreciation/depreciation on fixed maturity and equity securities, partially offset by dividends paid.
At June 30, 2005, common stockholders’ equity was $899.4 million, or $31.09 per share, compared to $829.6 million, or $28.87 per share at December 31, 2004. Included in stockholders’ equity per common share is $6.12 at June 30, 2005 and $4.91 at December 31, 2004 attributable to net unrealized investment gains resulting from marking to market value our fixed maturity and equity securities classified as available for sale and interest rate swaps. The change in net unrealized appreciation of these securities and derivatives increased stockholders’ equity $36.0 million during the six months ended June 30, 2005, after related adjustments to deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired, unearned revenue reserve and deferred income taxes.
Liquidity and Capital Resources
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, (iv) proceeds from the exercise of employee stock options, (v) proceeds from borrowings and (vi) 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 our parent company debt.
We paid cash dividends on our common and preferred stock during the six-month period totaling $6.1 million in 2005 and $5.8 million in 2004. Interest payments on our debt totaled $5.8 million for the six months ended June 30, 2005 and $3.0 million for the 2004 period. It is anticipated quarterly cash dividend requirements for the remainder of 2005 will be $0.105 per common and $0.0075 per Series B redeemable preferred share or approximately $6.2 million. In addition, interest payments on our debt, assuming no changes to the variable rate charged on our line of credit borrowings, are estimated to be $5.7 million for the remainder of 2005.
We have agreed that we will not declare or pay dividends on any class or series of stock except for regular cash dividends as long as any Series C redeemable preferred stock is outstanding. Regular cash dividends are defined as regular, fixed, quarterly or other periodic cash dividends as declared by our Board of Directors as part of the stated cash dividend policy and do not include any other dividends or distributions, such as extraordinary, special or otherwise non-recurring dividends. We have also agreed that we will not pay dividends if we are in default of the revolving line of credit, Subordinated Deferrable Interest Note or Senior Notes agreements.
The ability of the Life Companies 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, the Life Companies 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 2005, the maximum amount legally available for distribution to FBL Financial Group, Inc., without further regulatory approval, from Farm Bureau Life is $39.3 million and from EquiTrust Life is $23.8 million.
37
| | |
| FBL Financial Group, Inc. | | June 30, 2005 |
FBL Financial Group, Inc. expects to rely on available cash resources and dividends from the Life Companies to make any dividend payments to its stockholders and interest payments on its debt for the remainder of 2005. In addition, it is anticipated that a combination of available cash and investments, additional borrowing and dividends from the Life Companies will be used to fund the repayment of borrowings on the line of credit which are due October 31, 2005 ($46.0 million) and the scheduled final redemption of the Series C preferred stock ($46.3 million) due on January 3, 2006.
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, 2005, we had no material commitments for capital expenditures. The parent company had available cash and investments totaling $42.6 million at June 30, 2005.
Insurance Operations
The Life Companies’ cash inflows consist primarily of premium income, deposits to policyholder account balances, income from investments, sales, maturities and calls of investments and repayments of investment principal. The Life Companies’ cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, dividends and current operating expenses. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. The Life Companies’ liquidity positions continued to be favorable in the three- and six-month periods ended June 30, 2005, 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 and index products provided funds totaling $443.9 million in the six months ended June 30, 2005 and $393.7 million in the six months ended June 30, 2004. 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.
We anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. We believe that the current level of cash and available-for-sale and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage and asset-backed securities, mortgage loans and our insurance products, are adequate to meet our anticipated cash obligations for the foreseeable future. Our investment portfolio at June 30, 2005, included $58.0 million of short-term investments, $36.0 million of cash (consisting primarily of securities purchased with a maturity of three months or less) and $1,118.5 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.
Contractual Obligations
In the normal course of business, we enter into insurance contracts, 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, 2004, we had contractual obligations totaling $10,444.2 million with payments due as follows: less than one year — $682.2 million, one-to-three years — $1,255.6 million, four-to-five years — $1,228.4 million and after five years — $7,278.0 million. There have been no material changes to our total contractual obligations since December 31, 2004.
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| FBL Financial Group, Inc. | | June 30, 2005 |
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. |
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| | • | | Little or no gains in the entire series of call options purchased over the life of index annuities could cause us to incur expenses for credited interest over and above our option costs. This would cause our spreads to tighten and reduce our profits, or potentially result in losses on these products. |
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| | • | | The degree to which customers and agents (including the agents of our alliance partners) accept our products will influence our future growth rate. |
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| | • | | Extraordinary acts of nature or man may result in higher than expected claim activity. |
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| | • | | 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 ABOUT MARKET RISK
There have been no material changes in the market risks of our financial instruments since December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Our internal controls over financial reporting change from time-to-time as we modify and enhance our systems and processes to meet our dynamic needs. Changes are also made as we strive to be more efficient in how we conduct our business. Any significant changes in controls are evaluated prior to implementation to help ensure the continued effectiveness of our internal controls and internal control environment. While changes have taken place in our internal controls during the quarter and six months ended June 30, 2005, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| FBL Financial Group, Inc. | | June 30, 2005 |
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| (c) | | The following table sets forth issuer purchases of equity securities for the quarter ended June 30, 2005. |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | (d) Maximum | |
| | | | | | | | | | | (c) Total | | | Number (or | |
| | | | | | | | | | | Number of | | | Approximate | |
| | | | | | | | | | | Shares (or | | | Dollar Value) | |
| | | | | | | | | | | Units) | | | of Shares (or | |
| | | | | | | | | | | Purchased as | | | Units) that | |
| | | | | | | | | | | Part of | | | May Yet Be | |
| | | (a) Total | | | (b) Average | | | Publicly | | | Purchased | |
| | | Number of | | | Price Paid | | | Announced | | | Under the | |
| | | Shares (or Units) | | | per Share | | | Plans or | | | Plans or | |
| Period | | Purchased (1) | | | (or Unit) (1) | | | Programs | | | Programs | |
| April 1, 2005 through April 30, 2005 | | | — | | | $ | — | | | Not applicable | | Not applicable |
| May 1, 2005 through May 31, 2005 | | | — | | | | — | | | Not applicable | | Not applicable |
| June 1, 2005 through June 30, 2005 | | | 1,600 | | | | 27.79 | | | Not applicable | | Not applicable |
| | | | | | | | | | | | | |
| Total | | | 1,600 | | | $ | 27.79 | | | Not applicable | | Not applicable |
| | | | | | | | | | | | | |
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| (1) | | Our 1996 Class A Common Stock Compensation Plan (the Plan) provides for the grant of incentive stock options, nonqualified stock options, bonus stock, restricted stock and stock appreciation rights to directors, officers and employees. Under the Plan, the purchase price for any shares purchased pursuant to the exercise of an option shall be paid in full upon such exercise in cash, by check or by transferring shares of Class A common stock to the Company. Activity in this table represents Class A common shares returned to the Company in connection with the exercise of employee stock options. |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company’s annual shareholders meeting was held on May 20, 2005.
(b) and (c) (i) Election of the following Class A directors to the Company’s Board of Directors:
| | | | | | | | | |
| | | For | | | Withheld | |
| Jerry L. Chicoine | | | 36,375,160 | | | | 1,726,370 | |
| John W. Creer | | | 36,369,761 | | | | 1,731,769 | |
| Tim H. Gill | | | 36,371,533 | | | | 1,729,997 | |
| Robert H. Hanson | | | 36,369,618 | | | | 1,731,912 | |
| Paul E. Larson | | | 36,371,533 | | | | 1,729,997 | |
| Edward W. Mehrer | | | 36,370,146 | | | | 1,731,384 | |
| William J. Oddy | | | 36,115,202 | | | | 1,986,328 | |
| John E. Walker | | | 36,371,217 | | | | 1,730,313 | |
| | (ii) | | Election of the following Class B directors to the Company’s Board of Directors: |
| | | | | | | | | |
| | | For | | | Withheld | |
| Steve L. Baccus | | | 1,192,890 | | | | 100 | |
| O. Al Christopherson | | | 1,192,890 | | | | 100 | |
| Jerry C. Downin | | | 1,192,890 | | | | 100 | |
| Craig A. Lang | | | 1,192,890 | | | | 100 | |
| Frank S. Priestley | | | 1,192,890 | | | | 100 | |
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| FBL Financial Group, Inc. | | June 30, 2005 |
| | (iii) | | Approval of performance terms of incentive compensation plans, including approval of material terms of the Management Performance Plan. Shareholders cast 37,958,092 votes for and 349,438 votes against the approval of these terms. There were 556,858 abstentions and no broker non-votes. |
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| | (iv) | | Approval of the Executive Salary and Bonus Deferred Compensation Plan. Shareholders cast 35,854,036 votes for and 2,454,106 votes against the approval of this Plan. There were 556,244 abstentions and no broker non-votes. |
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| | (v) | | Approval of an amendment to the 1996 Common Stock Compensation Plan. Shareholders cast 33,573,936 votes for and 5,160,077 votes against the amendment to the 1996 Common Stock Compensation Plan. There were 560,502 abstentions and no broker non-votes. |
| |
| | (vi) | | Approval of the appointment of Ernst & Young LLP as independent auditors for the Company for the year 2005. Shareholders cast 38,625,722 votes for and 652,302 votes against the appointment of Ernst & Young LLP. There were 16,444 abstentions and no broker non-votes. |
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| FBL Financial Group, Inc. | | June 30, 2005 |
ITEM 6. EXHIBITS
(a) Exhibits:
| 3(i)(a) | | Restated Articles of Incorporation, filed with Iowa Secretary of State March 19, 1996 (H) |
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| 3(i)(b) | | Articles of Amendment, Designation of Series A Preferred Stock, filed with Iowa Secretary of State April 30, 1996 (H) |
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| 3(i)(c) | | Articles of Amendment, Designation of Series B Preferred Stock, filed with Iowa Secretary of State May 30, 1997 (H) |
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| 3(i)(d) | | Articles of Correction, filed with Iowa Secretary of State October 27, 2000 (H) |
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| 3(i)(e) | | Articles of Amendment, Designation of Series C Preferred Stock, filed with Iowa Secretary of State December 29, 2000 (H) |
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| 3(i)(f) | | Articles of Amendment, filed with Iowa Secretary of State May 15, 2003 (H) |
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| 3(i)(g) | | Articles of Amendment, filed with Iowa Secretary of State May 14, 2004 (H) |
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| 3(i)(h) | | Letter Agreement dated as of January 31, 2005 between FBL Financial Group, Inc. and Kansas Farm Bureau waiving certain terms of Series C Preferred Stock (J) |
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| 3(ii) | | Second Restated Bylaws, adopted May 14, 2004 (H) |
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| 4.1 | | Form of Class A Common Stock Certificate of the Registrant (A) |
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| 4.2 | | Restated Stockholders’ Agreement Regarding Management and Transfer of Shares of Class B Common Stock of FBL Financial Group, Inc. dated as of March 31, 2004 (H) |
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| 4.3 | | Certificate of Trust; Declaration of Trust of FBL Financial Group Capital Trust dated May 30, 1997, including in Annex I thereto the form of Trust Preferred Security and the form of Trust Common Security; Subordinated Deferrable Interest Note Agreement dated May 30, 1997 between FBL Financial Group, Inc. and FBL Financial Group Capital Trust, including therein the form of Subordinated Deferrable Interest Note; Preferred Securities Guarantee Agreement of FBL Financial Group, Inc., dated May 30, 1997 (B) |
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| 4.4(a) | | Master Transaction Agreement between Federal Home Loan Bank of Des Moines and Farm Bureau Life Insurance Company dated July 9, 2003 (E) |
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| 4.4(b) | | Advance Agreement between Federal Home Loan Bank of Des Moines and Farm Bureau Life Insurance Company dated September 17, 2003 (E) |
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| 4.5 | | Credit Agreement and related Schedules and Exhibits dated as of December 18, 2003 between FBL Financial Group, Inc. and LaSalle Bank National Association (F) |
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| 4.5(a) | | Amendment No. 1 to Credit Agreement dated as of April 1, 2004 between FBL Financial Group, Inc. and LaSalle Bank National Association and Bankers Trust Company, N.A. (G) |
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| 4.6 | | Indenture, dated as of April 12, 2004, between FBL Financial Group, Inc. and Deutsche Bank Trust Company Americas as Trustee (G) |
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| 4.7 | | Form of 5.85% Senior Note Due 2014 (G) |
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| 4.8 | | Revolving Demand Note, dated as of September 20, 2004, between Farm Bureau Life Insurance Company and Farm Bureau Mutual Insurance Company (I) |
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| 4.9 | | Revolving Demand Note, dated as of September 20, 2004, between EquiTrust Life Insurance Company and Farm Bureau Mutual Insurance Company (I) |
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| 10.1 | | Form of Amended and Restated 1996 Class A Common Stock Compensation Plan containing all amendments adopted through May 20, 2005 * |
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| 10.1(a) | | Form of Stock Option Agreement, pursuant to the Amended and Restated FBL Financial Group, Inc. 1996 Class A Common Stock Compensation Plan (I) * |
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| 10.2 | | Trademark License from the American Farm Bureau Federation to Farm Bureau Life Insurance Company dated May 20, 1987 (A) |
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| 10.3 | | Membership Agreement between American Farm Bureau Federation and the Iowa Farm Bureau Federation dated February 13, 1987 (A) |
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| 10.4 | | Form of Royalty Agreement with Farm Bureau organizations (K) |
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| 10.5 | | Executive Salary and Bonus Deferred Compensation Plan, effective June 1, 2005 * |
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| 10.7 | | Form of Services Agreement between FBL Financial Group, Inc. and Farm Bureau Management Corporation, dated as of January 1, 1996 (A) |
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| 10.8 | | Management Services Agreement between FBL Financial Group, Inc. and Farm Bureau Mutual effective as of January 1, 2003 (F) |
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| FBL Financial Group, Inc. | | June 30, 2005 |
| 10.10 | | Management Performance Plan (2005) sponsored by FBL Financial Group, Inc. (K) * |
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| 10.14 | | Lease Agreement dated as of March 31, 1998 between IFBF Property Management, Inc., FBL Financial Group, Inc. and Farm Bureau Mutual Insurance Company (C) |
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| 10.15 | | Building Management Services Agreement dated as of March 31, 1998 between IFBF Property Management, Inc. and FBL Financial Group, Inc. (C) |
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| 10.16 | | Coinsurance Agreement between EquiTrust Life Insurance Company and American Equity Investment Life Insurance Company, dated December 29, 2003 (F) |
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| 10.17 | | First Amendment to the Coinsurance Agreement by and between EquiTrust Life Insurance Company and American Equity Investment Life Insurance Company, effective August 1, 2004 (I) |
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| 10.18 | | 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 and JoAnn Rumelhart, and dated as of November 24, 2004 between the Company and Bruce A. Trost (D) * |
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| 10.19 | | Form of Change In Control Agreement Form B, dated as of April 22, 2002 between the Company and each of James P. Brannen, Douglas W. Gumm, Barbara J. Moore and Lou Ann Sandburg and dated as of November 24, 2004 between the Company and David T. Sebastian (D) * |
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| 10.20 | | Form of Restricted Stock Agreement, dated as of January 15, 2004 between the Company and each of William J. Oddy, James W. Noyce, Stephen M. Morain, John M. Paule and JoAnn Rumelhart, John E. Tatum, James P. Brannen, Douglas W. Gumm, Barbara J. Moore and Lou Ann Sandburg (I) * |
| |
| 10.21 | | Form of Restricted Stock Agreement, dated as of January 17, 2005 between the Company and each of William J. Oddy, James W. Noyce, Stephen M. Morain, John M. Paule and JoAnn Rumelhart, Bruce A. Trost, James P. Brannen, Douglas W. Gumm, Barbara J. Moore, Lou Ann Sandburg and David T. Sebastian (K) * |
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| 31.1 | | Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 31.2 | | Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 32 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* exhibit relates to a compensatory plan for management or directors
Incorporated by reference to:
(A) Form S-1 filed on July 11, 1996, File No. 333-04332
(B) Form 8-K filed on June 6, 1997, File No. 001-11917
(C) Form 10-Q for the period ended March 31, 1998, File No. 001-11917
(D) Form 10-Q for the period ended June 30, 2002, File No. 001-11917
(E) Form 10-Q for the period ended September 30, 2003, File No. 001-11917
(F) Form 10-K for the period ended December 31, 2003, File No. 001-11917
(G) Form S-4 filed on May 5, 2004, File No. 333-115197
(H) Form 10-Q for the period ended June 30, 2004, File No. 001-11917
(I) Form 10-Q for the period ended September 30, 2004, File No. 001-11917
(J) Form 10-K for the period ended December 31, 2004, File No. 001-11917
(K) Form 10-Q for the period ended March 31, 2005, File No. 001-11917
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| FBL Financial Group, Inc. | | June 30, 2005 |
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 8, 2005
| | | | | |
| | FBL FINANCIAL GROUP, INC.
| |
| | By | /s/ William J. Oddy | |
| | | William J. Oddy | |
| | | Chief Executive Officer (Principal Executive Officer) | |
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| | | | | |
| | | |
| | By | /s/ James W. Noyce | |
| | | James W. Noyce | |
| | | Chief Financial Officer (Principal Financial and Accounting Officer) | |
| |
44
