UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from________________ to________________
Commission File Number: 1-11917
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FBL Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Iowa 42-1411715
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
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(Address of principal executive offices) (Zip Code)
(515) 225-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. |X| Yes |_| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. |_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 29,822,288 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of August 1, 2000.
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 2000 - $309,437; 1999 -
$337,794) ................................................................ $ 310,352 $ 339,362
Available for sale, at market (amortized cost: 2000 - $2,092,511; 1999 -
$2,077,341) .............................................................. 2,004,025 2,002,030
Equity securities, at market (cost: 2000 - $37,806; 1999 - $38,147) .......... 32,818 35,345
Mortgage loans on real estate ................................................ 314,632 314,523
Investment real estate, less allowances for depreciation of $2,661 in 2000
and $2,300 in 1999 ......................................................... 22,278 20,119
Policy loans ................................................................. 125,587 123,717
Other long-term investments .................................................. 8,063 8,575
Short-term investments ....................................................... 102,162 106,529
------------ ------------
Total investments ............................................................... 2,919,917 2,950,200
Cash and cash equivalents ....................................................... 8,752 6,482
Securities and indebtedness of related parties .................................. 57,045 61,309
Accrued investment income ....................................................... 35,159 35,707
Accounts and notes receivable ................................................... 1,940 1,733
Amounts receivable from affiliates .............................................. 2,313 4,484
Reinsurance recoverable ......................................................... 5,019 4,812
Deferred policy acquisition costs ............................................... 252,833 236,263
Value of insurance in force acquired ............................................ 15,383 15,894
Property and equipment, less allowances for depreciation of $42,101 in 2000
and $40,115 in 1999 ........................................................... 58,951 60,506
Current income taxes recoverable ................................................ 1,523 --
Deferred income taxes ........................................................... 4,746 4,616
Goodwill, less accumulated amortization of $4,529 in 2000 and $4,181 in
1999 .......................................................................... 8,903 9,251
Other assets .................................................................... 18,155 15,046
Assets held in separate accounts ................................................ 306,404 256,028
------------ ------------
Total assets ............................................................ $ 3,697,043 $ 3,662,331
============ ============
1
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products ......................................... $ 1,601,495 $ 1,626,042
Traditional life insurance and accident and health products ......... 764,825 752,733
Unearned revenue reserve ............................................ 28,728 27,650
Other policy claims and benefits ....................................... 12,331 10,019
------------ ------------
2,407,379 2,416,444
Other policyholders' funds:
Supplementary contracts without life contingencies ..................... 167,004 160,848
Advance premiums and other deposits .................................... 82,699 83,258
Accrued dividends ...................................................... 12,013 13,554
------------ ------------
261,716 257,660
Short-term debt payable to affiliate ..................................... 11,694 11,694
Amounts payable to affiliates ............................................ 363 166
Long-term debt ........................................................... 40,000 40,000
Current income taxes payable ............................................. -- 1,002
Other liabilities ........................................................ 65,608 77,184
Liabilities related to separate accounts ................................. 306,404 256,028
------------ ------------
Total liabilities ................................................... 3,093,164 3,060,178
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust .................................................... 97,000 97,000
Other .................................................................... 237 145
Stockholders' equity:
Preferred stock, without par value, at liquidation value - authorized
10,000,000 shares, issued and outstanding 5,000,000 Series B shares .... 3,000 3,000
Class A common stock, without par value - authorized 88,500,000 shares,
issued and outstanding 29,816,121 shares in 2000 and 30,307,232 shares
in 1999 ................................................................ 42,547 42,308
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares ................................ 7,543 7,558
Accumulated other comprehensive loss ..................................... (61,036) (49,917)
Retained earnings ........................................................ 514,588 502,059
------------ ------------
Total stockholders' equity ............................................. 506,642 505,008
------------ ------------
Total liabilities and stockholders' equity .......................... $ 3,697,043 $ 3,662,331
============ ============
See accompanying notes.
2
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues:
Interest sensitive product charges .................... $ 15,025 $ 13,941 $ 29,747 $ 27,373
Traditional life insurance and accident and health
premiums ........................................... 27,601 27,556 51,604 50,967
Net investment income ................................. 55,373 58,843 110,056 114,830
Realized gains (losses) on investments ................ (4,148) 1,512 (4,209) (728)
Other income .......................................... 4,959 4,910 9,457 9,839
------------ ------------ ------------ ------------
Total revenues ..................................... 98,810 106,762 196,655 202,281
Benefits and expenses:
Interest sensitive product benefits ................... 33,007 30,903 63,975 60,220
Traditional life insurance and accident and health
benefits ........................................... 16,783 14,042 32,528 29,795
Increase in traditional life and accident and health
future policy benefits ............................. 7,436 6,032 12,090 10,229
Distributions to participating policyholders .......... 6,394 6,773 12,651 13,212
Underwriting, acquisition and insurance expenses ...... 18,766 20,233 37,061 36,842
Interest expense ...................................... 910 514 1,771 1,061
Other expenses ........................................ 3,272 3,707 7,091 7,709
------------ ------------ ------------ ------------
Total benefits and expenses ........................ 86,568 82,204 167,167 159,068
------------ ------------ ------------ ------------
12,242 24,558 29,488 43,213
Income taxes .............................................. (3,744) (8,030) (9,281) (14,065)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily
redeemable preferred stock of subsidiary trust ..... (1,212) (1,212) (2,425) (2,425)
Other ................................................. -- (74) (42) (60)
Equity income, net of related income taxes ................ 2,379 1,686 10,059 1,890
------------ ------------ ------------ ------------
Net income ................................................ $ 9,665 $ 16,928 $ 27,799 $ 28,553
============ ============ ============ ============
Earnings per common share ................................. $ 0.31 $ 0.52 $ 0.89 $ 0.87
============ ============ ============ ============
Earnings per common share - assuming dilution ............. $ 0.31 $ 0.51 $ 0.88 $ 0.86
============ ============ ============ ============
Cash dividends per common share ........................... $ 0.090 $ 0.083 $ 0.180 $ 0.165
============ ============ ============ ============
See accompanying notes.
3
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME (LOSS) EARNINGS EQUITY
------------ ------------ ------------ ------------- ------------ ------------
Balance at January 1, 1999 ........... $ 3,000 $ 42,034 $ 7,558 $ 50,050 $ 480,946 $ 583,588
Comprehensive income (loss):
Net income for six months ended
June 30, 1999 .................. -- -- -- -- 28,553 28,553
Change in net unrealized
investment gains/losses ........ -- -- -- (56,316) -- (56,316)
------------
Total comprehensive loss ........... (27,763)
Purchase of 461,945 shares of
common stock ..................... -- (624) -- -- (8,230) (8,854)
Issuance of 55,551 shares of
common stock under employee
benefit and stock option plans,
including related income tax
benefit .......................... -- 1,027 -- -- -- 1,027
Dividends on preferred stock ....... -- -- -- -- (75) (75)
Dividends on common stock .......... -- -- -- -- (5,373) (5,373)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 ............. $ 3,000 $ 42,437 $ 7,558 $ (6,266) $ 495,821 $ 542,550
============ ============ ============ ============ ============ ============
Balance at January 1, 2000 ........... $ 3,000 $ 42,308 $ 7,558 $ (49,917) $ 502,059 $ 505,008
Comprehensive income (loss):
Net income for six months ended
June 30, 2000 .................. -- -- -- -- 27,799 27,799
Change in net unrealized
investment gains/losses ........ -- -- -- (11,119) -- (11,119)
------------
Total comprehensive income ......... 16,680
Purchase of 608,379 shares of
common stock ..................... -- (852) -- -- (9,612) (10,464)
Issuance of 117,268 shares of
common stock under employee
benefit and stock option plans,
including related income tax
benefit .......................... -- 1,178 -- -- -- 1,178
Adjustment resulting from capital
transactions of equity investee .. -- (87) (15) -- -- (102)
Dividends on preferred stock ....... -- -- -- -- (75) (75)
Dividends on common stock .......... -- -- -- -- (5,583) (5,583)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 ............. $ 3,000 $ 42,547 $ 7,543 $ (61,036) $ 514,588 $ 506,642
============ ============ ============ ============ ============ ============
Comprehensive income (loss) totaled ($3.1) million in the second quarter of 2000
and ($13.8) million in the second quarter 1999.
See accompanying notes.
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2000 1999
------------ ------------
OPERATING ACTIVITIES
Net income ........................................................................ $ 27,799 $ 28,553
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances ....................................... 52,269 51,805
Charges for mortality and administration .................................... (29,369) (26,908)
Deferral of unearned revenues ............................................... 1,431 1,217
Amortization of unearned revenue reserve .................................... (467) (614)
Provision for depreciation and amortization .................................... 8,416 7,549
Equity income .................................................................. (10,059) (1,890)
Realized losses on investments ................................................. 4,209 728
Increase in traditional life and accident and health benefit accruals .......... 12,090 11,256
Policy acquisition costs deferred .............................................. (21,456) (17,340)
Amortization of deferred policy acquisition costs .............................. 5,837 6,038
Provision for deferred income taxes ............................................ 5,826 1,093
Other .......................................................................... (4,376) (9,446)
------------ ------------
Net cash provided by operating activities ......................................... 52,150 52,041
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ......................................... 29,380 102,009
Fixed maturities - available for sale .......................................... 119,222 124,424
Equity securities .............................................................. 11,343 4,621
Mortgage loans on real estate .................................................. 22,810 33,361
Investment real estate ......................................................... 644 5,535
Policy loans ................................................................... 15,429 14,656
Other long-term investments .................................................... 502 667
Short-term investments - net ................................................... 4,367 4,021
------------ ------------
203,697 289,294
Acquisition of investments:
Fixed maturities - available for sale .......................................... (152,602) (248,374)
Equity securities .............................................................. (2,368) (5,112)
Mortgage loans on real estate .................................................. (22,994) (40,596)
Investment real estate ......................................................... -- (161)
Policy loans ................................................................... (17,299) (15,085)
Other long-term investments .................................................... -- (519)
------------ ------------
(195,263) (309,847)
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2000 1999
------------ ------------
INVESTING ACTIVITIES (CONTINUED):
Proceeds from disposal, repayments of advances and other distributions from
equity investees .............................................................. $ 3,003 $ 5,888
Investments in and advances to equity investees ................................... (305) (2,653)
Net proceeds from sale of discontinued operations ................................. 2,000 1,229
Net purchases of property and equipment and other ................................. (4,364) (9,817)
------------ ------------
Net cash provided by (used in) investing activities ............................... 8,768 (25,906)
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited to policyholder
account balances .............................................................. 123,693 111,708
Return of policyholder account balances on interest sensitive and variable
products ...................................................................... (164,984) (112,787)
Proceeds from short-term debt with affiliate ...................................... -- 2,175
Repayments of long-term debt ...................................................... -- (71)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust .............................................................. (2,425) (2,425)
Other contributions (distributions) related to minority interests - net ........... 50 (4,646)
Purchase of common stock .......................................................... (10,464) (8,854)
Issuance of common stock .......................................................... 1,140 966
Dividends paid .................................................................... (5,658) (5,448)
------------ ------------
Net cash used in financing activities ............................................. (58,648) (19,382)
------------ ------------
Increase in cash and cash equivalents ............................................. 2,270 6,753
Cash and cash equivalents at beginning of period .................................. 6,482 4,516
------------ ------------
Cash and cash equivalents at end of period ........................................ $ 8,752 $ 11,269
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ...................................................................... $ 1,778 $ 1,015
Income taxes .................................................................. 11,407 4,108
See accompanying notes.
6
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of FBL Financial
Group, Inc. (we or the Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. Our financial
statements include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of our financial position and results of
operations. Operating results for the three- and six-month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. For further information, refer to our
consolidated financial statements and notes for the year ended December 31, 1999
included in our annual report on Form 10-K.
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation.
2. ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (Statement) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
Statement 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." Statement No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value.
Accounting for gains or losses resulting from changes in the values of those
derivatives is dependent on the use of the derivative and whether it qualifies
for hedge accounting. Statement No. 133 also allows companies to transfer
securities classified as held for investment to either the available-for-sale or
trading categories in connection with the adoption of the new standard.
Statement 138 amends Statement 133 to clarify the appropriate accounting for
certain hedging transactions. The Statements are effective for the year
beginning January 1, 2001, with earlier adoption encouraged. Because of our
minimal use of derivatives, we do not anticipate that the adoption of the new
Statements will have a significant effect on our earnings or financial position.
3. INVESTMENT OPERATIONS
Fixed maturity securities, comprised of bonds and redeemable preferred stocks
that we have the positive intent and ability to hold to maturity, are designated
as "held for investment." Held for investment securities are reported at cost
adjusted for amortization of premiums and discounts. Changes in the market value
of these securities, except for declines that are other than temporary, are not
reflected in our financial statements. Fixed maturity securities which may be
sold are designated as "available for sale." Available for sale securities are
reported at market value and unrealized gains and losses on these securities are
included directly in stockholders' equity as a component of accumulated other
comprehensive income or loss. The unrealized gains and losses included in
accumulated other comprehensive income or loss are reduced by a provision for
deferred income taxes and adjustments to deferred policy acquisition costs,
value of insurance in force acquired and unearned revenue reserve that would
have been required as a charge or credit to income had such amounts been
realized. Equity securities, comprised of common and non-redeemable preferred
stocks, are reported at market value. The change in unrealized appreciation and
depreciation of equity securities is included directly in stockholders' equity,
net of any related deferred income taxes, as a component of accumulated other
comprehensive income or loss.
7
FBL Financial Group, Inc. June 30, 2000
Net unrealized investment losses as reported were comprised of the following:
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
Unrealized depreciation on fixed maturity and equity securities available for
sale ...................................................................... $ (93,474) $ (78,113)
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ......................................... 6,528 5,577
Value of insurance in force acquired ...................................... 1,181 1,040
Unearned revenue reserve .................................................. (668) (554)
Provision for deferred income taxes ........................................... 30,252 25,217
------------ ------------
(56,181) (46,833)
Proportionate share of net unrealized investment losses of equity investees ... (4,855) (3,084)
------------ ------------
Net unrealized investment losses .............................................. $ (61,036) $ (49,917)
============ ============
During the six months ended June 30, 2000, equity investees distributed to us
equity securities with a fair value totaling $14.5 million. Also during the six
months ended June 30, 2000, we received an interest in three real estate
properties with a fair value of $3.0 million in satisfaction of a fixed maturity
security that had been in default. These transactions were treated as noncash
items for purposes of the statement of cash flow.
4. CREDIT ARRANGEMENTS
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0
million at June 30, 2000 and at December 31, 1999. The note is due September 17,
2003, and interest on the note is charged at a variable rate equal to the London
Interbank Offered Rate less 0.0475% (6.58% at June 30, 2000 and 5.77% at
December 31, 1999). Fixed maturity securities with a carrying value of $42.1
million are on deposit with the FHLB as collateral for the note. As an investor
in the FHLB, we have the ability to borrow an additional $159.1 million on the
line of credit from the FHLB at June 30, 2000. Any additional borrowing will
require that additional collateral be deposited with the FHLB.
We have a $12.0 million line of credit with Farm Bureau Mutual Insurance Company
(Farm Bureau Mutual), an affiliate, in the form of a revolving demand note.
Borrowings on the note, which totaled $11.7 million at June 30, 2000 and
December 31, 1999, were used to acquire assets that are leased to certain
affiliates, including Farm Bureau Mutual. Interest is payable at a rate equal to
the prime rate of a national bank (9.50% at June 30, 2000 and 8.50% at December
31, 1999). Rental income from the related leases includes a provision for
interest on the carrying value of the assets.
5. CONTINGENCIES
In the normal course of business, we may be involved in litigation where amounts
are alleged that are substantially in excess of contractual policy benefits or
certain other agreements. At June 30, 2000, management is not aware of any
claims for which a material loss is reasonably possible.
We seek to limit our exposure to loss on any single insured or event and to
recover a portion of benefits paid by ceding insurance to other insurance
enterprises. Reinsurance contracts do not relieve us of our obligations to
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, our insurance subsidiaries would be
liable for these obligations, and payment of these obligations could result in
losses. To limit the possibility of such losses, we evaluate the financial
condition of our reinsurers and monitor concentrations of credit risk. No
allowance for uncollectible amounts has been established against our asset for
reinsurance recoverable since all of our receivables are deemed to be
collectible.
In connection with an investment in a real estate limited partnership, we have
agreed to pay any cash flow deficiencies of a medium-sized shopping center owned
by the partnership through January 1, 2001. At June 30, 2000, we assessed the
probability and amount of future cash flows from the property and determined
that no accrual
8
FBL Financial Group, Inc. June 30, 2000
was necessary. At December 31, 1999, we recorded a reserve for expected future
cash flow deficiencies totaling $0.4 million. At June 30, 2000, the limited
partnership had a $5.2 million mortgage loan, secured by the shopping center,
with Farm Bureau Mutual.
On March 31, 1998, we sold our wholly-owned subsidiary, Utah Farm Bureau
Insurance Company (Utah Insurance), to Farm Bureau Mutual. We may earn
additional consideration during each of the three years in the period ended
December 31, 2002 in accordance with an earn-out provision. Under the earn-out
arrangement, the Company and Farm Bureau Mutual share equally in the dollar
amount by which the incurred losses on Utah Insurance's direct business, net of
reinsurance ceded, is less than the incurred losses assumed in the valuation
model used to derive the initial acquisition price. The earn-out calculation is
performed and any settlement (subject to a maximum of $2.0 million per year) is
made on a calendar year basis. We have not accrued any contingent consideration
for the three year period ending December 31, 2002 as such amounts, if any,
cannot be reasonably estimated as of June 30, 2000. Receipts as a result of the
earn-out provision are recorded as an adjustment to the gain on the disposal of
the discontinued segment.
6. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income .................................... $ 9,665 $ 16,928 $ 27,799 $ 28,553
Dividends on Series B preferred stock ......... (38) (38) (75) (75)
------------ ------------ ------------ ------------
Numerator for earnings per common
share-income available to common
stockholders ............................ $ 9,627 $ 16,890 $ 27,724 $ 28,478
============ ============ ============ ============
Denominator:
Denominator for earnings per common share
- weighted-average shares .................. 31,023,248 32,431,403 31,110,481 32,563,316
Effect of dilutive securities - employee stock
options .................................... 394,851 637,608 414,852 649,158
------------ ------------ ------------ ------------
Denominator for diluted earnings per
common share - adjusted weighted-
average shares .......................... 31,418,099 33,069,011 31,525,333 33,212,474
============ ============ ============ ============
Earnings per common share ......................... $ 0.31 $ 0.52 $ 0.89 $ 0.87
============ ============ ============ ============
Earnings per common share - assuming dilution ..... $ 0.31 $ 0.51 $ 0.88 $ 0.86
============ ============ ============ ============
9
FBL Financial Group, Inc. June 30, 2000
7. SEGMENT INFORMATION
In general, we are organized by the types of products and services we offer for
sale. Our principal and only reportable operating segment is our life insurance
segment. The life insurance segment includes activities related to the sale of
life insurance, annuities and accident and health insurance products. Operations
have been aggregated into the same segment due to the similarity of the
products, including the underlying economic characteristics, the method of
distribution and the regulatory environment. We also have several other
operating segments that do not meet the quantitative threshold for separate
segment reporting and, therefore, are aggregated herein. A summary of these
segments, along with the related source of revenues, is as follows:
SEGMENT SOURCE OF REVENUES
Investment advisory.............. Fee income from the management of
investments
Marketing and distribution....... Commissions and distribution fee
income from the sale of mutual funds
and insurance products not issued
by us
Leasing.......................... Income from operating leases
Corporate........................ Fees from management and administrative
services
Financial information concerning our operating segments is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Revenues from external customers:
Life insurance ........................ $ 93,320 $ 101,822 $ 185,965 $ 192,734
All other ............................. 13,325 10,116 24,937 19,298
------------ ------------ ------------ ------------
106,645 111,938 210,902 212,032
Eliminations .......................... (7,835) (5,176) (14,247) (9,751)
------------ ------------ ------------ ------------
Consolidated .......................... $ 98,810 $ 106,762 $ 196,655 $ 202,281
============ ============ ============ ============
Intersegment revenues:
Life insurance ........................ $ 523 $ 233 $ 1,027 $ 453
All other ............................. 7,312 4,943 13,220 9,298
------------ ------------ ------------ ------------
7,835 5,176 14,247 9,751
Eliminations .......................... (7,835) (5,176) (14,247) (9,751)
------------ ------------ ------------ ------------
Consolidated .......................... $ -- $ -- $ -- $ --
============ ============ ============ ============
Net income (loss):
Life insurance ........................ $ 8,775 $ 16,935 $ 26,550 $ 29,008
All other ............................. 890 (7) 1,249 (455)
------------ ------------ ------------ ------------
Consolidated .......................... $ 9,665 $ 16,928 $ 27,799 $ 28,553
============ ============ ============ ============
Transactions between segments are recorded at negotiated rates generally
intended to be at levels commensurate with charges that would be assessed to
unaffiliated parties. Our investment in equity method investees and the related
equity income are attributable to the life insurance segment.
10
FBL Financial Group, Inc. June 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING SECTIONS INCLUDE A SUMMARY OF FBL FINANCIAL GROUP, INC.'S
CONSOLIDATED RESULTS OF OPERATIONS, FINANCIAL CONDITION AND WHERE APPROPRIATE,
FACTORS THAT MANAGEMENT BELIEVES MAY AFFECT FUTURE PERFORMANCE. PLEASE READ THIS
DISCUSSION IN CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES. UNLESS NOTED OTHERWISE, ALL REFERENCES TO FBL
FINANCIAL GROUP, INC. (WE OR THE COMPANY) INCLUDE ALL OF ITS DIRECT AND INDIRECT
SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE SUBSIDIARIES, FARM BUREAU
LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND EQUITRUST LIFE INSURANCE COMPANY
(EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES).
Revenues and net income are primarily derived from our life insurance segment.
Revenues and expenses of our other segments, which consist of investment
advisory, marketing and distribution, leasing and management operations, are
principally recorded in the other income and other expense line items on the
Consolidated Statements of Income. See Note 7 of the Notes to Consolidated
Financial Statements (page 10) for additional information regarding segment
information.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1999
NET INCOME decreased 42.9% in the second quarter of 2000 to $9.7 million and
2.6% in the six months ended June 30, 2000 to $27.8 million. Adjusted operating
income, which does not include the impact of realized gains and losses on
investments, decreased 23.9% in the second quarter of 2000 to $12.2 million and
increased 4.9% in the six months ended June 30, 2000 to $30.4 million. Adjusted
operating income decreased in the second quarter of 2000 due principally to a
decrease in fee income from mortgage loan prepayments and bond calls and an
increase in interest sensitive life insurance and accident and health benefits.
The impact of these items on adjusted operating income was partially offset by a
decrease in insurance expenses and an increase in equity income from investments
in various partnerships and joint ventures. For the six-month period, the
increase in equity income more than offset the decrease in net investment income
and increased life insurance and accident and health benefits. The following is
a reconciliation of net income to adjusted operating income.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income .................................... $ 9,665 $ 16,928 $ 27,799 $ 28,553
Adjustment - net realized losses (gains) on
investments ............................... 2,516 (913) 2,574 390
------------ ------------ ------------ ------------
Adjusted operating income ..................... $ 12,181 $ 16,015 $ 30,373 $ 28,943
------------ ------------ ------------ ------------
Earnings per common share - assuming
dilution .................................. $ 0.31 $ 0.51 $ 0.88 $ 0.86
============ ============ ============ ============
Adjusted operating income per common share -
assuming dilution ......................... $ 0.39 $ 0.48 $ 0.96 $ 0.87
============ ============ ============ ============
The adjustment for realized gains and losses on investments noted in the table
above is net of adjustments for that portion of amortization of deferred policy
acquisition costs, unearned revenue reserve, value of insurance in force
acquired and income taxes attributable to such gains and losses.
The change in earnings per common share from period to period is positively
impacted by a decrease in the weighted average common shares outstanding during
the eighteen-month period ended June 30, 2000. Weighted average common shares
outstanding, assuming dilution, decreased 5.0% in the second quarter of 2000 to
31.4 million and 5.1% in the six months ended June 30, 2000 to 31.5 million.
These decreases are primarily the result of acquisitions of common stock by the
Company.
11
FBL Financial Group, Inc. June 30, 2000
A summary of our premiums and product charges is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ........ $ 15,025 $ 13,941 $ 29,747 $ 27,373
Traditional life insurance and accident and
health premiums ........................ 27,601 27,556 51,604 50,967
------------ ------------ ------------ ------------
Total .................................. $ 42,626 $ 41,497 $ 81,351 $ 78,340
============ ============ ============ ============
INTEREST SENSITIVE PRODUCT CHARGES increased 7.8% in the second quarter of 2000
to $15.0 million and 8.7% in the six months ended June 30, 2000 to $29.7
million. This increase is due primarily to increased cost of insurance charges
resulting from an increase in the volume and age of business in force. In
addition, mortality and expense charges have increased as a result of growth in
variable product account balances.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH PREMIUMS increased 0.2% in
the second quarter of 2000 to $27.6 million and 1.2% in the six months ended
June 30, 2000 to $51.6 million. During the six-month period traditional life
premiums increased 0.6% to $44.5 million and accident and health premiums
increased 5.6% to $7.1 million. Management believes the modest increase in the
sale of traditional life insurance products is the result of a marketing
emphasis placed on the sale of variable universal life insurance contracts.
Premiums collected on variable universal life insurance products increased 21.4%
to $25.4 million in the six months ended June 30, 2000.
During the third quarter of 2000, it is anticipated that we will discontinue
underwriting long-term disability income insurance and begin to offer, to our
agents, a long-term disability income product underwritten by one of our
variable alliance partners. We will not share in the risks, costs or profits of
the new product, but will earn a commission on new sales. It is anticipated that
this change, over time, will result in a decrease in accident and health
premiums and benefits as our existing block of business matures.
NET INVESTMENT INCOME, which excludes investment income on separate account
assets relating to variable products, decreased 5.9% in the second quarter of
2000 to $55.4 million and 4.2% in the six months ended June 30, 2000 to $110.1
million. The annualized yield earned on average invested assets decreased to
7.42% in the six months ended June 30, 2000 period compared to 7.91% in the
respective 1999 period due principally to a decrease in fee income from mortgage
loan prepayments and bond calls. Fee income from mortgage loan prepayments and
bond calls was less than $0.1 million in the quarter and six months ended June
30, 2000. Revenue from these sources totaled $3.0 million in the second quarter
of 1999 and $4.6 million in the six-months ended June 30, 1999. In addition, the
Company recorded $1.7 million in interest income during the second quarter of
1999 relating to settlement of a fixed maturity security that had been in
default. We had discontinued the accrual of interest on this security during
1996. The impact of the decline in annualized yield was partially offset by a
2.0% increase in average invested assets to $3,019.8 million (based on assets
excluding the impact of recording certain fixed maturity securities at market
value) for the six months ended June 30, 2000.
REALIZED GAINS (LOSSES) ON INVESTMENTS decreased 374.3% in the second quarter of
2000 to ($4.1) million and 478.2% in the six months ended June 30, 2000 to
($4.2) million. Realized gains (losses) include writedowns of investments that
became other-than-temporarily impaired totaling $3.2 million in the second
quarter of 2000 and $0.5 million in the respective 1999 period. For the
six-month periods, impairment losses totaled $5.5 million in 2000 and $2.7
million in 1999. These writedowns are the result of sustained operating losses
and various other operational or economic factors that became evident in the
respective periods. The level of realized gains (losses) is subject to
fluctuation from period to period depending on the prevailing interest rate and
economic environment and the timing of the sale of investments.
OTHER INCOME increased 1.0% in the second quarter of 2000 to $5.0 million and
decreased 3.9% in the six months ended June 30, 2000 to $9.5 million. For the
six-month period, the decrease is primarily due to a decrease in the level of
leasing and investment advisory services provided to affiliates and third
parties.
12
FBL Financial Group, Inc. June 30, 2000
A summary of our policy benefits is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive product benefits ............ $ 33,007 $ 30,903 $ 63,975 $ 60,220
Traditional life insurance and accident and
health benefits ............................. 16,783 14,042 32,528 29,795
Increase in traditional and accident and health
future policy benefits ...................... 7,436 6,032 12,090 10,229
Distributions to participating policyholders ... 6,394 6,773 12,651 13,212
------------ ------------ ------------ ------------
Total ....................................... $ 63,620 $ 57,750 $ 121,244 $ 113,456
============ ============ ============ ============
INTEREST SENSITIVE PRODUCT BENEFITS increased 6.8% in the second quarter of 2000
to $33.0 million and 6.2% in the six months ended June 30, 2000 to $64.0
million. The components of interest sensitive product benefits, along with
selected average interest crediting rates, are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Interest credited to account balances .............. $ 26,090 $ 25,901 $ 52,269 $ 51,804
Death benefits in excess of related account balances 6,917 5,002 11,706 8,416
Weighted average contractual crediting rates:
Universal life liabilities ...................... 6.01% 6.01% 6.01% 6.01%
Annuity liabilities ............................. 5.70% 5.71% 5.70% 5.71%
While we decreased the crediting rate on our deposit administration contracts
effective January 1, 2000 and increased crediting rates on our single premium
annuity contracts effective February 1, 2000 and June 1, 2000, the average
crediting rate on our product portfolio has been relatively consistent over the
18-month period ended June 30, 2000. Interest sensitive death benefits can tend
to fluctuate from period to period as a result of mortality experience. The
death benefits incurred in the second quarter of 2000 were greater than
anticipated and we do not expect interest sensitive death benefits to
consistently recur at this level.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE
RELATED CHANGES IN RESERVES, increased 20.6% in the second quarter of 2000 to
$24.2 million and 11.5% in the six months ended June 30, 2000 to $44.6 million.
Accident and health benefits, including related change in reserves, increased
278.3% in six-month period of 2000 to $6.9 million. Traditional life insurance
benefits, including related change in reserves, decreased 1.3% in six-month
period of 2000 to $37.7 million. Traditional life insurance and accident and
health benefits can tend to fluctuate from period to period as a result of
changes in mortality and morbidity experience.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 5.6% in the second
quarter of 2000 to $6.4 million and 4.2% in the six months ended June 30, 2000
to $12.7 million. This decrease is primarily attributable to a decrease in the
average interest rate used in the dividend formula for these policies to 5.72%
at June 30, 2000 from 5.84% at June 30, 1999.
13
FBL Financial Group, Inc. June 30, 2000
A summary of the our underwriting, acquisition and insurance expenses is as
follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ............ $ 2,707 $ 2,661 $ 5,380 $ 5,070
Amortization of deferred policy acquisition costs 2,860 3,517 5,837 6,038
Other underwriting, acquisition and insurance
expenses, net of deferrals ................... 13,199 14,055 25,844 25,734
------------ ------------ ------------ ------------
Total ........................................ $ 18,766 $ 20,233 $ 37,061 $ 36,842
============ ============ ============ ============
COMMISSION EXPENSE increased 1.7% in the second quarter of 2000 to $2.7 million
and 6.1% in the six months ended June 30, 2000 to $5.4 million. Commission
expense increased due principally to an increase in direct life insurance
premiums collected.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS decreased 18.7% in the second
quarter of 2000 to $2.9 million and 3.3% in the six months ended June 30, 2000
to $5.8 million. Amortization decreased during the second quarter and six-months
ended June 30, 2000 due principally to lower profitability on interest sensitive
life insurance products and the impact of realized gains and losses on
investments backing the related policyholder liabilities. These decreases were
partially offset by an increase in amortization resulting from an increase in
traditional annuity surrender benefits during 2000.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES decreased 6.1% in the
second quarter of 2000 to $13.2 million and increased 0.4% in the six months
ended June 30, 2000 to $25.8 million. The decrease in expenses for the quarter
is due to a $1.6 million restructuring charge incurred in the second quarter of
1999 relating to the closing of an administrative service center. Salaries,
benefits and other operating expenses increased in the six-month period of 2000
primarily due to increased operating expenses associated with administering our
variable product business and developing variable product alliances. In
addition, the level of agent training and related costs increased in the
six-month period of 2000 compared to the respective 1999 period. These increases
were partially offset by a $0.5 million decrease associated with preparing our
computer systems for the Year 2000 date conversion.
INTEREST EXPENSE increased 77.0% in the second quarter of 2000 to $0.9 million
and 66.9% in the six months ended June 30, 2000 to $1.8 million due primarily to
an increase in the average debt outstanding.
OTHER EXPENSES decreased 11.7% in the second quarter of 2000 to $3.3 million and
8.0% in the six months ended June 30, 2000 to $7.1 million due principally to a
decrease in the level of leasing and investment advisory services provided to
affiliates and third parties.
INCOME TAXES decreased 53.4% in the second quarter of 2000 to $3.7 million and
34.0% in the six months ended June 30, 2000 to $9.3 million. The effective tax
rate for the six months ended June 30, 2000 was 31.5% compared to 32.5% for the
respective period in 1999. The effective tax rate was lower than the federal
statutory rate of 35% due primarily to the tax benefit associated with the
payment of dividends on mandatorily redeemable preferred stock of subsidiary
trust, tax-exempt interest and tax-exempt dividend income.
EQUITY INCOME, NET OF RELATED INCOME TAXES, increased 41.1% in the second
quarter of 2000 to $2.4 million and 432.2% in the six months ended June 30, 2000
to $10.1 million. Equity income includes our proportionate share of gains and
losses attributable to our ownership interest in partnerships, joint ventures
and certain companies where we exhibit some control but have a minority
ownership interest. Given the timing of availability of financial information
from these entities, we will consistently use information that is as much as
three months in arrears for certain of these entities. Several of these entities
are venture capital investment companies, whose operating results are derived
primarily from unrealized and realized gains and losses generated by their
investment portfolios. The income in 2000 is primarily driven by unrealized
appreciation on two internet-related equity securities owned by two of these
venture capital investment companies. A substantial portion of the positions
held by the equity investees in these two entities was distributed to us and
subsequently sold during the second quarter of 2000. As is
14
FBL Financial Group, Inc. June 30, 2000
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.
FINANCIAL CONDITION
INVESTMENTS
Our total investment portfolio decreased 1.0% to $2,919.9 million at June 30,
2000 compared to $2,950.2 million at December 31, 1999. This decrease is
primarily the result of an increase in unrealized depreciation on fixed maturity
securities classified as available for sale, net cash outflows on interest
sensitive and variable products and the acquisition of our common stock,
partially offset by positive cash flow from operations.
Over the last several years, the mix of our life insurance business has been
shifting from traditional and interest sensitive products to variable products.
In addition, in an attempt to enhance our persistency rate, we have promoted an
exchange program for the rollover of universal life policies to variable
universal life policies. We expect the shift to variable products to continue
due to this program and the continued popularity of the variable products. A
majority of premiums received on variable products are typically invested in our
separate accounts as opposed to the general account investments. This trend is
expected to impact the future growth rate of our investment portfolio and
separate account assets.
Internal investment professionals manage our investment portfolio. The
investment strategy is designed to achieve superior risk-adjusted returns
consistent with the investment philosophy of maintaining a largely investment
grade portfolio and providing adequate liquidity for obligations to
policyholders and other requirements. We continually review the returns on
invested assets and change the mix of invested assets as deemed prudent under
the current market environment to help maximize current income.
Our investment portfolio is summarized in the table below:
JUNE 30, 2000 DECEMBER 31, 1999
------------------------------- -------------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public ............................ $ 1,730,985 59.3% $ 1,733,678 58.8%
144A private placement ............ 414,242 14.2 429,269 14.6
Private placement ................. 169,150 5.8 178,445 6.0
-------------- -------------- -------------- --------------
Total fixed maturities ............ 2,314,377 79.3 2,341,392 79.4
Equity securities ................... 32,818 1.1 35,345 1.2
Mortgage loans on real estate ....... 314,632 10.8 314,523 10.7
Investment real estate:
Acquired for debt ................. 3,343 0.1 783 --
Investment ........................ 18,935 0.6 19,336 0.6
Policy loans ........................ 125,587 4.3 123,717 4.2
Other long-term investments ......... 8,063 0.3 8,575 0.3
Short-term investments .............. 102,162 3.5 106,529 3.6
-------------- -------------- -------------- --------------
Total investments .............. $ 2,919,917 100.0% $ 2,950,200 100.0%
============== ============== ============== ==============
As of June 30, 2000, 94.0% (based on carrying value) of the fixed maturity
securities were investment grade debt securities, defined as being in the
highest two National Association of Insurance Commissioners (NAIC) designations.
Non-investment grade debt securities generally provide higher yields and involve
greater risks than investment grade debt securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities is usually more limited than for investment grade debt
securities. We regularly review the percentage of our portfolio
15
FBL Financial Group, Inc. June 30, 2000
which is invested in non-investment grade debt securities (NAIC designations 3
through 6). As of June 30, 2000, the investment in non-investment grade debt was
6.0% of fixed maturity securities. At that time no single non-investment grade
holding exceeded 0.3% of total investments.
The following table sets forth the credit quality, by NAIC designation and
Standard & Poors (S & P) rating equivalents, of fixed maturity securities:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
JUNE 30, 2000
------------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS (1) CARRYING VALUE PERCENT
- ----------------------- ----------------------------------------------- -------------- -------------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A).................................. $ 1,417,470 61.3%
2 (BBB)......................................... 757,029 32.7
-------------- -------------
Total investment grade........................ 2,174,499 94.0
3 (BB).......................................... 102,574 4.4
4 (B)........................................... 32,313 1.4
5 (CCC, CC, C).................................. 4,509 0.2
6 In or near default............................ 482 --
-------------- -------------
Total below investment grade.................. 139,878 6.0
-------------- -------------
Total fixed maturities........................ $ 2,314,377 100.0%
============== =============
- -------------
(1) Private placement securities are generally rated by the Securities
Valuation Office of the NAIC. Comparisons between NAIC designations and S
& P ratings are published by the NAIC. S & P has not rated some of the
fixed maturity securities in our portfolio.
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at June 30, 2000:
HELD FOR INVESTMENT
------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities - mortgage-backed securities $ 310,352 $ 3,266 $ (4,181) $ 309,437
============== ============== ============== ==============
AVAILABLE FOR SALE
------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies ... $ 70,080 $ 185 $ (1,356) $ 68,909
State, municipal and other governments .. 45,881 272 (877) 45,276
Public utilities ........................ 130,786 1,683 (3,696) 128,773
Corporate securities .................... 1,041,460 10,981 (66,603) 985,838
Mortgage and asset-backed securities .... 764,626 1,910 (26,634) 739,902
Redeemable preferred stocks ................. 39,678 496 (4,847) 35,327
-------------- -------------- -------------- --------------
Total fixed maturities ...................... $ 2,092,511 $ 15,527 $ (104,013) $ 2,004,025
============== ============== ============== ==============
Equity securities ........................... $ 37,806 $ 398 $ (5,386) $ 32,818
============== ============== ============== ==============
16
FBL Financial Group, Inc. June 30, 2000
The carrying value and estimated market value of our portfolio of fixed maturity
securities at June 30, 2000, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
HELD FOR INVESTMENT AVAILABLE FOR SALE
------------------------------- -------------------------------
ESTIMATED ESTIMATED
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Due in one year or less ................. $ -- $ -- $ 43,585 $ 43,483
Due after one year through five years ... -- -- 236,371 229,863
Due after five years through ten years .. -- -- 414,232 394,717
Due after ten years ..................... -- -- 594,019 560,733
-------------- -------------- -------------- --------------
-- -- 1,288,207 1,228,796
Mortgage and asset-backed securities .... 310,352 309,437 764,626 739,902
Redeemable preferred stocks ............. -- -- 39,678 35,327
-------------- -------------- -------------- --------------
$ 310,352 $ 309,437 $ 2,092,511 $ 2,004,025
============== ============== ============== ==============
Mortgage and other asset-backed securities constitute a significant portion of
our portfolio of securities. These securities were purchased at a time when, we
believed, these types of investments provided superior risk-adjusted returns
compared to returns of more conventional investments such as corporate bonds and
mortgage loans. These securities are diversified as to collateral types, cash
flow characteristics and maturity.
The return of principal on mortgage and other asset-backed securities occurs
more frequently and is more variable than that of more traditional fixed
maturity securities. The principal prepayment speeds (e.g., the rate of
individuals refinancing their home mortgages) can vary based on a number of
economic factors that can not be predicted with certainty. These factors include
the prevailing interest rate environment and general status of the economy.
Deviations in actual prepayment speeds from that originally expected can cause a
change in the yield earned on mortgage and asset-backed securities purchased at
a premium or discount. Increases in prepayment speeds, which typically occur in
a decreasing interest rate environment, generally increase the rate at which
discount is accrued and premium is amortized into income. Decreases in
prepayment speeds, which typically occur in an increasing interest rate
environment, generally slow down the rate these amounts are recorded into
income.
The mortgage-backed portfolio includes pass-through and collateralized mortgage
obligation (CMO) securities. With a pass-through security, we receive a pro rata
share of principal payments as payments are made on the underlying mortgage
loans. CMOs consist of pools of mortgages divided into sections or "tranches"
which provide sequential retirement of the bonds. We invest in sequential
tranches, which provide cash flow stability in that principal payments do not
occur until the previous tranches are paid off. In addition, to provide call
protection and more stable average lives, we invest in CMOs such as planned
amortization class (PAC) and targeted amortization class (TAC) securities. CMOs
of these types provide more predictable cash flows within a range of prepayment
speeds by shifting the prepayment risks to support tranches. We do not purchase
certain types of collateralized mortgage obligations that we believe would
subject the investment portfolio to greater than average risk. These include,
but are not limited to, interest only, principal only, floater, inverse floater,
PAC II, Z and support tranches.
17
FBL Financial Group, Inc. June 30, 2000
The following table sets forth the amortized cost, par value and carrying value
of our mortgage and asset-backed securities at June 30, 2000, summarized by type
of security.
PERCENT
AMORTIZED CARRYING OF FIXED
COST PAR VALUE VALUE MATURITIES
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential .................................... $ 405,123 $ 409,765 $ 403,413 17.4%
Pass through .................................. 71,550 71,100 68,395 3.0
Planned and targeted amortization class ....... 39,962 40,073 39,881 1.7
Other ......................................... 11,315 11,573 11,309 0.5
------------ ------------ ------------ ------------
Total residential mortgage-backed securities ..... 527,950 532,511 522,998 22.6
Commercial mortgage-backed securities ............ 215,525 214,227 205,254 8.9
Other asset-backed securities .................... 331,503 333,148 322,002 13.9
------------ ------------ ------------ ------------
Total mortgage and asset-backed securities ....... $ 1,074,978 $ 1,079,886 $ 1,050,254 45.4%
============ ============ ============ ============
The commercial and other asset-backed securities are primarily sequential
securities. Commercial mortgage-backed securities typically have cash flows that
are less sensitive to interest rate changes than residential securities of
similar types due principally to prepayment restrictions on many of the
underlying commercial mortgage loans. Other asset-backed securities are
principally mortgage related (manufactured housing and home equity loans) which
historically have also demonstrated relatively less cash flow volatility than
residential securities of similar types.
At June 30, 2000, we held $314.6 million or 10.8% of invested assets in mortgage
loans. These mortgage loans are diversified as to property type, location and
loan size, and are collateralized by the related properties. At June 30, 2000,
mortgages more than 60 days delinquent accounted for 0.1% of the carrying value
of the mortgage portfolio. Our mortgage lending policies establish limits on the
amount that can be loaned to one borrower and require diversification by
geographic location and collateral type. Regions with the largest concentration
of our mortgage loan portfolio at June 30, 2000 include: Pacific (27%) which
includes California; and West South Central (25%) which includes Oklahoma and
Texas. Mortgage loans on real estate are also diversified by collateral types
with office buildings (48%) and retail facilities (33%) representing the largest
holdings at June 30, 2000.
Our asset-liability management program includes (i) designing and developing
products which encourage persistency and, as a result, create a stable liability
structure; and (ii) structuring the investment portfolio with duration and cash
flow characteristics consistent with the duration and cash flow characteristics
of our insurance liabilities. At June 30, 2000, the weighted average life of the
fixed maturity portfolio, based on market values and excluding convertible
bonds, was approximately 8.6 years. Based on our utilization of the fixed income
analytical system, including our mortgage backed prepayment assumptions, the
effective duration of the fixed income portfolio was 4.6 as of June 30, 2000.
OTHER ASSETS
Deferred policy acquisition costs increased 7.0% in the 2000 period to $252.8
million due principally to the capitalization of costs incurred with new sales.
Assets held in separate accounts increased 19.7%, to $306.4 million at June 30,
2000 due primarily to net transfers to the separate accounts resulting from
sales of our variable products. At June 30, 2000, we had total assets of
$3,697.0 million, a 0.9% increase from total assets at December 31, 1999.
LIABILITIES
Policy liabilities and accruals decreased 0.4% to $2,407.4 million at June 30,
2000. The slight decrease in policy liabilities is partially attributable to our
marketing emphasis on the sale of variable products. As noted under the
"Investments" section above, the shift in sales to variable products will have
an impact on the future growth rate of our policy liabilities and accruals as
well as the separate account liabilities. In addition, future policy benefit
reserves on interest sensitive products decreased due to an increase in
surrender benefits during the six months ended June 30, 2000. At June 30, 2000,
we had total liabilities of $3,093.2 million, a 1.1% increase from total
liabilities at December 31, 1999.
18
FBL Financial Group, Inc. June 30, 2000
STOCKHOLDERS' EQUITY
Stockholders' equity increased 0.3% to $506.6 million at June 30, 2000, compared
to $505.0 million at December 31, 1999. This increase is principally
attributable to net income offset in part by unrealized depreciation on
securities classified as available for sale, stock repurchases and dividends
paid.
At June 30, 2000, common stockholders' equity was $503.6 million, or $16.24 per
share, compared to $502.0 million, or $15.94 per share at December 31, 1999.
Included in stockholders' equity per common share is ($1.87) at June 30, 2000
and ($1.52) at December 31, 1999 attributable to net unrealized investment
losses resulting from marking our fixed maturity securities classified as
available for sale to market value. The change in unrealized appreciation of
fixed maturity and equity securities classified as available for sale decreased
stockholders' equity $11.1 million during the six months ended June 30, 2000,
after related adjustments to deferred policy acquisition costs, value of
insurance in force acquired, unearned revenue reserve and deferred income taxes.
LIQUIDITY
FBL FINANCIAL GROUP, INC.
Parent company cash inflows from operations consist primarily of (i) dividends
from subsidiaries, if declared and paid, (ii) fees that it charges the various
subsidiaries and affiliates for management of their operations, (iii) expense
reimbursements from subsidiaries and (iv) tax settlements between the parent
company and its subsidiaries. Cash outflows are principally for salaries and
other expenses related to providing these management services, dividends on
outstanding stock and interest on the parent company debt issued to a
subsidiary. In addition, the parent company will on occasion enter into capital
transactions such as the acquisition of our common stock.
We may receive consideration during each of the three years in the period ending
December 31, 2003 in accordance with an earn-out provision related to our sale
in 1998 of Utah Farm Bureau Insurance Company (Utah Insurance) to Farm Bureau
Mutual Insurance Company (Farm Bureau Mutual). Under the earn-out arrangement,
we and Farm Bureau Mutual share equally in the dollar amount by which the
incurred losses on Utah Insurance's direct business, net of reinsurance ceded,
is less than the incurred losses assumed in the valuation model used to derive
the initial acquisition price. The earn-out calculation is performed and any
settlement (subject to a maximum of $2.0 million per year) is made on a calendar
year basis. Earn-out settlements received, on a pre-tax basis, totaled $2.0
million in the six months ended June 30, 2000 and $1.2 million in the respective
period of 1999.
During the six months ended June 30, 2000, we repurchased 608,379 shares of
Class A common stock for $10.5 million. The repurchases were made in accordance
with a $25.0 million stock repurchase plan approved by our Board of Directors on
December 20, 1999.
During the six months ended June 30, 2000, we paid common and preferred stock
dividends totaling $5.7 million. We also paid common and preferred stock
dividends totaling $5.4 million during the corresponding 1999 period. It is
anticipated dividend requirements for the remainder of 2000 will be $0.09 per
quarter per common share and $0.0075 per quarter per preferred share, or
approximately $5.6 million. In addition, interest payments on the parent company
debt issued to a subsidiary are estimated to be $2.5 million for the remainder
of 2000.
FBL Financial Group, Inc. expects to rely on available cash resources and on
dividends from Farm Bureau Life to make any dividend payments to its
stockholders and interest payments on its Notes. The ability of Farm Bureau Life
to pay dividends to FBL Financial Group, Inc. is limited by law to earned
profits (statutory unassigned surplus) as of the date the dividend is paid, as
determined in accordance with accounting practices prescribed by insurance
regulatory authorities of the State of Iowa. In addition, under the Iowa
Insurance Holding Company Act, Farm Bureau Life may not pay an "extraordinary"
dividend without prior notice to and approval by the Iowa insurance
commissioner. An "extraordinary" dividend is defined under the Iowa Insurance
Holding Company Act as any dividend or distribution of cash or other property
whose fair market value, together with that of other dividends or distributions
made within the preceding 12 months, exceeds the greater of (i) 10% of
policyholders' surplus (total statutory capital stock and statutory surplus) as
of December 31 of the preceding year, or (ii) the statutory net gain from
operations of the insurer for the 12-month period ending December 31 of the
preceding year. During the
19
FBL Financial Group, Inc. June 30, 2000
remainder of 2000, the maximum amount legally available for distribution to FBL
Financial Group, Inc. without further regulatory approval is approximately $40.6
million.
On September 22, 1999, Farm Bureau Life paid an extraordinary dividend totaling
$75.0 million, consisting of cash and fixed maturity securities, to FBL
Financial Group, Inc. Because of this dividend, Farm Bureau Life would need
further regulatory approval to pay any additional dividends to FBL Financial
Group, Inc. during the 12-month period ending September 22, 2000. However,
management believes that, due to the financial strength of Farm Bureau Life,
such regulatory approval would be granted to fund FBL Financial Group's regular
quarterly interest and dividend (subject to Board approval) requirements.
Primarily as a result of the $75.0 million dividend, FBL Financial Group, Inc.
has cash and investments totaling $61.6 million at June 30, 2000. Except for the
potential acquisition of approximately $14.0 million worth of the Company's
common stock to complete the current stock repurchase plan, management does not
have any immediate plans to deploy this capital and is currently evaluating
capital management and investment options. We may from time to time review
potential acquisition opportunities. It is anticipated that funding for any such
acquisition would be provided from available cash resources, debt or equity
financing. As of June 30, 2000, we had no material commitments for capital
expenditures.
INSURANCE OPERATIONS
The Life Companies' cash inflows consist primarily of premium income, deposits
to policyholder account balances, product charges on variable products, income
from investments, sales, maturities and calls of investments and repayments of
investment principal. The Life Companies' cash outflows are primarily related to
withdrawals of policyholder account balances, investment purchases, payment of
policy acquisition costs, policyholder benefits, income taxes, dividends and
current operating expenses. Life insurance companies generally produce a
positive cash flow which may be measured by the degree to which cash inflows are
adequate to meet benefit obligations to policyholders and normal operating
expenses as they are incurred. The remaining cash flow is generally used to
increase the asset base to provide funds for future policy benefit payments and
for writing new business. The Life Companies' liquidity positions continued to
be favorable in the six-month period ended June 30, 2000, with cash inflows at
levels sufficient to provide the funds necessary to meet their obligations.
For the life insurance operations, cash outflow requirements for operations are
typically met from normal premium and deposit cash inflows. This has been the
case for all reported periods as the Life Companies' continuing operations and
financing activities relating to interest sensitive products provided funds
amounting to $0.7 million in the six months ended June 30, 2000 and $36.1
million in the six months ended June 30, 1999. These funds were primarily
invested in fixed maturity securities. In developing their investment strategy,
the Life Companies establish a level of cash and securities which, combined with
expected net cash inflows from operations, maturities of fixed maturity
investments and principal payments on mortgage and asset-backed securities and
mortgage loans, are believed adequate to meet anticipated short-term and
long-term benefit and expense payment obligations.
Through its membership in the Federal Home Loan Bank of Des Moines (FHLB), Farm
Bureau Life is eligible to establish and borrow on a collateralized line of
credit to provide it additional liquidity. The line of credit available is based
on the amount of capital stock of the FHLB owned by Farm Bureau Life, which
supported a collateralized borrowing capacity of $199.1 million as of June 30,
2000. At June 30, 2000, Farm Bureau Life had outstanding borrowings of $40.0
million under this arrangement, leaving a collateralized borrowing capacity of
$159.1 million. The outstanding debt is due September 17, 2003, and interest on
the debt is charged at a variable rate equal to the London Interbank Offered
Rate less 0.0475% (6.58% at June 30, 2000). Fixed maturity securities with a
carrying value of $42.1 million are on deposit with the FHLB as collateral for
the note.
We also have a $12.0 million line of credit with Farm Bureau Mutual in the form
of a revolving demand note. Borrowings on the note, which totaled $11.7 million
at June 30, 2000, were used to acquire assets that are leased to certain
affiliates, including Farm Bureau Mutual. Interest is payable at a rate equal to
the prime rate of a national bank (9.50% at June 30, 2000).
20
FBL Financial Group, Inc. June 30, 2000
We anticipate that funds to meet our short-term and long-term capital
expenditures, cash dividends to stockholders and operating cash needs will come
from existing capital and internally generated funds. We believe that the
current level of cash and available-for-sale and short-term securities, combined
with expected net cash inflows from operations, maturities of fixed maturity
investments, principal payments on mortgage and asset-backed securities,
mortgage loans and its insurance products, are adequate to meet our anticipated
cash obligations for the foreseeable future. Our investment portfolio at June
30, 2000, included $102.2 million of short-term investments and $280.4 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.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
From time to time, we may publish statements relating to anticipated financial
performance, business prospects, new products, and similar matters. These
statements and others which include words such as "expect", "anticipate",
"believe", "intend", and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
these types of statements. In order to comply with the terms of the safe harbor,
please note that a variety of factors could cause our actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of our business include but are not limited to the following:
* Changes to interest rate levels and stock market performance may impact
our lapse rates, market value of our investment portfolio and our ability
to sell life insurance products, notwithstanding product features to
mitigate the financial impact of such changes.
* The degree to which our products are accepted by customers and agents
(including the agents of our alliance partners) will impact our future
growth rate.
* Extraordinary acts of nature or man may result in higher than expected
claim activity.
* Changes in federal and state income tax laws and regulations may affect
the relative tax advantage of our products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in the market risks of our financial
instruments since December 31, 1999.
21
FBL Financial Group, Inc. June 30, 2000
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual shareholders meeting was held on May 16,
2000.
(b) and (c) (i) Election of the following Class A directors to the Company's
Board of Directors:
AGAINST OR
FOR WITHHELD
------------ ------------
Jerry L. Chicoine........... 38,632,259 47,644
John W. Creer............... 38,618,413 61,490
John E. Walker.............. 38,631,245 48,658
(ii) Election of the following Class B directors to the Company's
Board of Directors:
AGAINST OR
FOR WITHHELD
------------ ------------
Eric K. Aasmundstad....... 1,192,990 --
Stanley R. Ahlerich....... 1,192,990 --
Kenneth R. Ashby.......... 1,192,990 --
O. Al Christopherson...... 1,192,990 --
Jerry C. Downin........... 1,192,990 --
Kenny J. Evans............ 1,192,990 --
Karen J. Henry............ 1,192,990 --
Richard G. Kjerstad....... 1,192,990 --
G. Steven Kouplen......... 1,192,990 --
David L. McClure.......... 1,192,990 --
Roger Bill Mitchell....... 1,192,990 --
Stephen M. Morain......... 1,192,990 --
Bryce P. Neidig........... 1,192,990 --
William J. Oddy........... 1,192,990 --
Howard D. Poulson......... 1,192,990 --
Frank S. Priestley........ 1,192,990 --
John J. Van Sweden........ 1,192,990 --
Edward M. Wiederstein..... 1,192,990 --
(iii) Approval of the amendment to the 1996 stock option plan.
Shareholders cast 36,979,059 votes for and 1,369,551 against
the amendment to the 1996 stock option plan. There were
331,293 abstentions and no broker non-votes.
(iv) Approval of the appointment of Ernst & Young LLP as
independent auditors for the Company for the year 2000.
Shareholders cast 38,576,941 votes for and 14,396 votes
against the appointment of Ernst & Young LLP. There were
88,566 abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000:
None
22
FBL Financial Group, Inc. June 30, 2000
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 4, 2000
FBL FINANCIAL GROUP, INC.
By /s/ William J. Oddy
-----------------------------------------
William J. Oddy
Chief Executive Officer (Principal Executive
Officer)
By /s/ James W. Noyce
-----------------------------------------
James W. Noyce
Chief Financial Officer (Principal Financial
and Accounting Officer)
23