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, 2001
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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 (I.R.S. Employer Identification No.)
of incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
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(Address of principal executive offices) (Zip Code)
(515) 225-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 26,188,915 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of August 2, 2001.
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 2000 - $288,661) ........... $ -- $ 284,253
Available for sale, at market (amortized cost: 2001 - $3,174,218; 2000 -
$2,038,161) ............................................................. 3,208,432 2,015,179
Equity securities, at market (cost: 2001 - $42,670; 2000 - $32,629) .......... 42,309 30,781
Mortgage loans on real estate ................................................ 359,355 321,862
Investment real estate, less allowances for depreciation of $3,462 in 2001
and $3,061 in 2000 ......................................................... 21,838 23,820
Policy loans ................................................................. 181,757 125,987
Other long-term investments .................................................. 5,431 4,118
Short-term investments ....................................................... 24,738 64,659
------------ ------------
Total investments ............................................................... 3,843,860 2,870,659
Cash and cash equivalents ....................................................... 121,309 3,099
Securities and indebtedness of related parties .................................. 57,350 52,458
Accrued investment income ....................................................... 48,204 34,656
Accounts and notes receivable ................................................... 199 107
Amounts receivable from affiliates .............................................. 7,281 6,522
Reinsurance recoverable ......................................................... 62,004 51,312
Deferred policy acquisition costs ............................................... 295,881 250,971
Value of insurance in force acquired ............................................ 61,304 14,264
Property and equipment, less allowances for depreciation of $45,700 in 2001
and $44,742 in 2000 .......................................................... 45,094 59,152
Current income taxes recoverable ................................................ 7,125 8,496
Goodwill, less accumulated amortization of $5,259 in 2001 and $4,878 in
2000 ......................................................................... 9,477 8,554
Other assets .................................................................... 27,975 16,389
Assets held in separate accounts ................................................ 347,721 327,407
------------ ------------
Total assets ............................................................ $ 4,934,784 $ 3,704,046
============ ============
1
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products .......................................... $ 2,201,654 $ 1,598,958
Traditional life insurance and accident and health products .......... 1,046,573 773,372
Unearned revenue reserve ............................................. 30,838 29,382
Other policy claims and benefits ........................................ 16,911 10,378
------------ ------------
3,295,976 2,412,090
Other policyholders' funds:
Supplementary contracts without life contingencies ...................... 242,101 170,404
Advance premiums and other deposits ..................................... 113,014 81,739
Accrued dividends ....................................................... 14,090 13,385
------------ ------------
369,205 265,528
Short-term debt payable to affiliate ...................................... -- 9,943
Amounts payable to affiliates ............................................. 3,862 136
Long-term debt ............................................................ 40,000 40,000
Deferred income taxes ..................................................... 54,104 19,749
Other liabilities ......................................................... 113,723 55,248
Liabilities related to separate accounts .................................. 347,721 327,407
------------ ------------
Total liabilities .................................................... 4,224,591 3,130,101
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust .................................................... 97,000 97,000
Other ..................................................................... 174 142
Series C redeemable preferred stock, $26.8404 par and redemption value per
share - authorized 3,752,100 shares, issued and outstanding 3,411,000
shares .................................................................... 81,331 --
Stockholders' equity:
Preferred stock, without par value, at liquidation value - authorized
10,000,000 shares, issued and outstanding 5,000,000 Series B shares ..... 3,000 3,000
Class A common stock, without par value - authorized 88,500,000 shares,
issued and outstanding 26,178,762 shares in 2001 and 26,115,120 shares
in 2000 ................................................................. 38,465 37,769
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares ................................. 7,564 7,563
Accumulated other comprehensive income (loss) ............................. 17,139 (22,445)
Retained earnings ......................................................... 465,520 450,916
------------ ------------
Total stockholders' equity .............................................. 531,688 476,803
------------ ------------
Total liabilities and stockholders' equity ........................... $ 4,934,784 $ 3,704,046
============ ============
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,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Interest sensitive product charges ..................... $ 17,550 $ 15,025 $ 33,517 $ 29,747
Traditional life insurance premiums .................... 31,024 23,964 58,862 44,465
Accident and health premiums ........................... 1,072 3,637 2,222 7,139
Net investment income .................................. 71,058 55,373 136,950 110,056
Realized gains (losses) on investments ................. 253 (4,148) (1,269) (4,209)
Other income ........................................... 4,115 4,959 8,375 9,457
------------ ------------ ------------ ------------
Total revenues ...................................... 125,072 98,810 238,657 196,655
Benefits and expenses:
Interest sensitive product benefits .................... 40,830 33,007 78,684 63,975
Traditional life insurance and accident and health
benefits ............................................ 20,838 16,783 41,357 32,528
Increase in traditional life and accident and health
future policy benefits .............................. 8,065 7,436 12,832 12,090
Distributions to participating policyholders ........... 7,595 6,394 14,500 12,651
Underwriting, acquisition and insurance expenses ....... 24,527 18,766 48,723 37,061
Interest expense ....................................... 457 910 1,094 1,771
Other expenses ......................................... 2,672 3,272 6,588 7,091
------------ ------------ ------------ ------------
Total benefits and expenses ......................... 104,984 86,568 203,778 167,167
------------ ------------ ------------ ------------
20,088 12,242 34,879 29,488
Income taxes ............................................... (5,928) (3,744) (10,554) (9,281)
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 .................................................. (54) -- (56) (42)
Equity income (loss), net of related income taxes .......... (630) 2,379 (26) 10,059
------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle ................................ 12,264 9,665 21,818 27,799
Cumulative effect of change in accounting for
derivative instruments .............................. -- -- 344 --
------------ ------------ ------------ ------------
Net income ................................................. 12,264 9,665 22,162 27,799
Dividend on Series B and C preferred stock ................. (1,046) (38) (2,085) (75)
------------ ------------ ------------ ------------
Net income applicable to common stock ...................... $ 11,218 $ 9,627 $ 20,077 $ 27,724
============ ============ ============ ============
Earnings per common share:
Income before accounting change ........................ $ 0.41 $ 0.31 $ 0.72 $ 0.89
Cumulative effect of change in accounting for
derivative instruments .............................. -- -- 0.01 --
------------ ------------ ------------ ------------
Earnings per common share .............................. $ 0.41 $ 0.31 $ 0.73 $ 0.89
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income before accounting change ........................ $ 0.40 $ 0.31 $ 0.71 $ 0.88
Cumulative effect of change in accounting for
derivative instruments .............................. -- -- 0.01 --
------------ ------------ ------------ ------------
Earnings per common share - assuming dilution .......... $ 0.40 $ 0.31 $ 0.72 $ 0.88
============ ============ ============ ============
Cash dividends per common share ........................... $ 0.10 $ 0.09 $ 0.20 $ 0.18
============ ============ ============ ============
See accompanying notes
3
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
SERIES B CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME (LOSS) EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 2000 ....... $ 3,000 $ 42,308 $ 7,558 $ (49,917) $ 502,059 $ 505,008
Comprehensive income:
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
============ ============ ============ ============ ============ ============
Balance at January 1, 2001 ....... $ 3,000 $ 37,769 $ 7,563 $ (22,445) $ 450,916 $ 476,803
Comprehensive income:
Net income for six months
ended June 30, 2001 ....... -- -- -- -- 22,162 22,162
Cumulative effect of
change in accounting
for derivative
instruments ............... -- -- -- 2,406 -- 2,406
Change in net unrealized
investment gains/losses ... -- -- -- 37,178 -- 37,178
------------
Total comprehensive income .... 61,746
Issuance of 63,642 shares of
common stock under
employee benefit and
stock option plans,
including related income
tax benefit ................. -- 691 -- -- -- 691
Adjustment resulting from
capital transactions of
equity investee ............. -- 5 1 -- -- 6
Dividends on preferred stock ... -- -- -- -- (2,085) (2,085)
Dividends on common stock ...... -- -- -- -- (5,473) (5,473)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2001 ......... $ 3,000 $ 38,465 $ 7,564 $ 17,139 $ 465,520 $ 531,688
============ ============ ============ ============ ============ ============
Comprehensive income (loss) totaled $7.8 million in the second quarter of 2001
and ($3.1) million in the second quarter of 2000.
See accompanying notes
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net income ....................................................................... $ 22,162 $ 27,799
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances ..................................... 66,533 52,269
Charges for mortality and administration .................................. (32,688) (29,369)
Deferral of unearned revenues ............................................. 1,227 1,431
Amortization of unearned revenue reserve .................................. (772) (467)
Provision for depreciation and amortization .................................. 7,899 8,416
Equity income ................................................................ 26 (10,059)
Realized losses on investments ............................................... 1,269 4,209
Increase in traditional life and accident and health benefit accruals ........ 12,832 12,090
Policy acquisition costs deferred ............................................ (21,666) (21,456)
Amortization of deferred policy acquisition costs ............................ 8,352 5,837
Provision for deferred income taxes .......................................... 3,277 5,826
Other ........................................................................ 14,980 (4,376)
------------ ------------
Net cash provided by operating activities ........................................ 83,431 52,150
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ....................................... -- 29,380
Fixed maturities - available for sale ........................................ 277,420 119,222
Equity securities ............................................................ 6,349 11,343
Mortgage loans on real estate ................................................ 16,152 22,810
Investment real estate ....................................................... 1,528 644
Policy loans ................................................................. 20,947 15,429
Other long-term investments .................................................. 86 502
Short-term investments - net ................................................. 78,639 4,367
------------ ------------
401,121 203,697
Acquisition of investments:
Fixed maturities - available for sale ........................................ (315,217) (152,602)
Equity securities ............................................................ (6,392) (2,368)
Mortgage loans on real estate ................................................ (22,903) (22,994)
Policy loans ................................................................. (22,220) (17,299)
Other long-term investments .................................................. (1,252) --
------------ ------------
(367,984) (195,263)
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------ ------------
INVESTING ACTIVITIES (CONTINUED)
Proceeds from disposal, repayments of advances and other distributions from
equity investees ............................................................. $ 6,130 $ 3,003
Investments in and advances to equity investees .................................. (1,102) (305)
Net proceeds from sale of discontinued operations ................................ 2,000 2,000
Net cash received in acquisition and coinsurance transaction ..................... 3,202 --
Net sales (purchases) of property and equipment and other ........................ (2,621) (4,364)
------------ ------------
Net cash provided by investing activities ........................................ 40,746 8,768
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited to policyholder
account balances ............................................................. 151,029 123,693
Return of policyholder account balances on interest sensitive and variable
products ..................................................................... (148,923) (164,984)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ............................................................. (2,425) (2,425)
Other contributions (distributions) related to minority interests - net .......... (24) 50
Purchase of common stock ......................................................... -- (10,464)
Issuance of common stock ......................................................... 608 1,140
Dividends paid ................................................................... (6,232) (5,658)
------------ ------------
Net cash used in financing activities ............................................ (5,967) (58,648)
------------ ------------
Increase in cash and cash equivalents ............................................ 118,210 2,270
Cash and cash equivalents at beginning of period ................................. 3,099 6,482
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 121,309 $ 8,752
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ..................................................................... $ 1,034 $ 1,778
Income taxes ................................................................. 4,962 11,407
See accompanying notes.
6
FBL Financial Group, Inc. June 30, 2001
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of FBL Financial
Group, Inc. (we or the Company) have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP) for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. Our financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of our financial position and results of operations. Operating
results for the three- and six-month periods ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to our consolidated financial
statements and notes for the year ended December 31, 2000 included in our annual
report on Form 10-K.
2. ACCOUNTING CHANGES
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (Statements) No. 141, "Business Combinations,"
and No. 142, "Goodwill and Other Intangible Assets." Under the new Statements,
goodwill will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. We will apply the new Statements on
accounting for goodwill beginning in the first quarter of 2002. For 2002,
application of the nonamortization provisions is expected to result in an
increase in net income of $1.1 million ($0.04 per share). While no impairments
are anticipated, we will perform the first of the required impairment tests of
goodwill as of January 1, 2002.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued Statement No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." Statement No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Accounting for
gains or losses resulting from changes in the values of those derivatives is
dependent on the use of the derivative and whether it qualifies for hedge
accounting. Statement No. 133 allows companies to transfer securities classified
as held for investment to either the available-for-sale or trading categories in
connection with the adoption of the new standard. Statement 138 amends Statement
133 to clarify the appropriate accounting for certain hedging transactions. We
adopted the Statements on January 1, 2001, their effective dates.
The cumulative effect of adopting these Statements on net income was $0.3
million. This amount represents the difference in accumulated net unrealized
capital gains (losses) on the date of adoption, net of tax, resulting from the
change in accounting for the conversion features embedded in our convertible
fixed maturity securities. Income before cumulative effect of change in
accounting for derivative instruments for the six-month period ended June 30,
2001 was approximately $0.3 million less than what would have been recorded
without the accounting change due primarily to a decrease in the fair value of
these conversion features during the period. The fair value of the conversion
features embedded in convertible fixed maturity securities is estimated using an
option-pricing model. Except for the convertible fixed maturity securities, we
do not own any other derivatives or embedded derivatives that are subject to the
Statements.
Upon the adoption of Statement No. 133, we transferred our fixed maturity
securities classified as held for investment to the available-for-sale category.
In connection with this transfer, the securities were marked to market and the
corresponding increase in carrying value totaling $2.8 million, net of
offsetting adjustments to deferred acquisition costs, value of insurance in
force acquired, unearned revenue reserve and income taxes, was credited to
stockholders' equity during the period.
7
FBL Financial Group, Inc. June 30, 2001
3. COINSURANCE AGREEMENT AND ACQUISITION
On May 1, 2001, we entered into a coinsurance agreement with National Travelers
Life Company (NTL) whereby we assumed 90% of NTL's traditional life, universal
life and annuity business in force. In addition, we agreed to assume 50% of
NTL's traditional life, universal life and annuity business issued subsequent to
May 1, 2001. We received investments and other assets in consideration for the
policy liabilities assumed. Assets and liabilities recorded in connection with
this agreement as of May 1, 2001 were as follows (dollars in thousands):
ASSETS LIABILITIES
Investments............................ $ 299,252 Policy liabilities and accruals .... $ 326,506
Cash................................... 340 Other policyholder funds............ 10,450
Deferred policy acquisition costs ..... 35,499 Other liabilities................... 3,183
Other assets........................... 5,048
--------- ---------
Total........................... $ 340,139 Total........................ $ 340,139
========= =========
On January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau
Life Insurance Company for $80.7 million. The acquisition was accounted for
using purchase accounting. A condensed statement of the assets and liabilities
acquired as of January 1, 2001, is as follows (dollars in thousands):
ASSETS LIABILITIES AND STOCKHOLDER'S EQUITY
Investments............................ $ 620,856 Policy liabilities and accruals..... $ 522,953
Cash................................... 2,863 Other policyholder funds............ 76,738
Value of insurance in force acquired .. 51,865 Other liabilities................... 12,824
Goodwill............................... 1,304 ---------
Other assets........................... 16,315 Total liabilities................ 612,515
--------- Stockholder's equity................ 80,688
Total........................... $ 693,203 ---------
========= Total........................ $ 693,203
=========
During the second quarter of 2001, certain purchase price allocation adjustments
were made to record an additional $3.5 million of policy liabilities acquired as
a result of refinements made to preliminary amounts recorded in the initial
opening balance sheet. This adjustment resulted in a $1.5 million increase to
value of insurance in force acquired, a $0.7 million decrease in deferred income
tax liability and the establishment of $1.3 million in goodwill. Acquisition
costs totaling $0.7 million have been deferred and included as a component of
goodwill. Goodwill is being amortized during 2001 using the straight-line method
and a 20-year amortization schedule.
As consideration for the purchase, we issued 3,411,000 shares of Series C
cumulative voting mandatorily redeemable preferred stock with an estimated fair
value of $80.0 million. Each share of Series C preferred stock has a par value
of $26.8404 and voting rights identical to that of Class A common stock.
Dividends on the Series C preferred stock are payable quarterly at a rate equal
to the common stock dividend per share then payable. The mandatory redemption is
structured so that 49.5% of the Series C preferred stock will be redeemed at par
value, or $45.3 million, on January 2, 2004 with the remaining 50.5% redeemed at
par value, or $46.3 million, on January 3, 2006. In the event of a change in the
control of the Company, at the option of the holder, each share of Series C
preferred stock is convertible into one share of Class A common stock or
redeemable for cash at par. The Series C preferred stock was issued at an $11.6
million discount to par. This discount will accrete to preferred stock dividends
during the life of the securities using the effective interest method.
4. INVESTMENT OPERATIONS
All of our fixed maturity securities, comprised of bonds and redeemable
preferred stocks, are designated as "available for sale" and are reported at
market value. Unrealized gains and losses on these securities 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. Prior to the adoption of Statement No. 133, we had certain securities
classified as "held for investment."
8
FBL Financial Group, Inc. June 30, 2001
Held for investment securities were reported at cost adjusted for amortization
of premiums and discounts. Equity securities, comprised of common and
non-redeemable preferred stocks, are reported at market value. The change in
unrealized appreciation and depreciation of equity securities is included
directly in stockholders' equity, net of any related deferred income taxes, as a
component of accumulated other comprehensive income or loss.
Net unrealized investment gains (losses) as reported were comprised of the
following:
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(DOLLARS IN THOUSANDS)
Unrealized appreciation (depreciation) on fixed maturity and equity securities
available for sale ........................................................... $ 33,853 $ (24,830)
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ............................................ (1,701) 2,202
Value of insurance in force acquired ......................................... (2,244) 271
Unearned revenue reserve ..................................................... 217 (180)
Provision for deferred income taxes ............................................ (10,544) 7,888
------------ ------------
19,581 (14,649)
Proportionate share of net unrealized investment losses of equity investees .... (2,442) (7,796)
------------ ------------
Net unrealized investment gains (losses) ....................................... $ 17,139 $ (22,445)
============ ============
5. CREDIT ARRANGEMENTS
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0
million at June 30, 2001 and at December 31, 2000. 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% (3.92% at June 30, 2001 and 6.50% at
December 31, 2000). Fixed maturity securities with a carrying value of $42.4
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 $38.9 million on the
line of credit from the FHLB at June 30, 2001 with appropriate increased
collateral deposits.
At December 31, 2000, we had a $9.9 million note payable to Farm Bureau Mutual
Insurance Company (Farm Bureau Mutual), an affiliate. The note had been used to
acquire certain assets that were leased to Farm Bureau Mutual and other
affiliates. During the 2001 period, this note was paid off, principally by
transferring the underlying assets to Farm Bureau Mutual. No gain or loss was
recorded on this transaction, as fair value of the assets was equal to book
value on the transfer date.
6. 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, 2001, 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.
Effective January 1, 2001, we switched our insurance coverage for employee
health and welfare claims from indemnity insurance primarily to self-insurance.
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
9
FBL Financial Group, Inc. June 30, 2001
statements for unpaid claims and claims incurred but not reported. Adjustments,
if any, resulting in changes in the estimate of claims incurred will be
reflected in operations in the periods in which such adjustments are known.
On March 31, 1998, we sold our wholly-owned subsidiary, Utah Farm Bureau
Insurance Company (Utah Insurance), to Farm Bureau Mutual. We may earn
additional consideration during each of the two years in the period ended
December 31, 2002 in accordance with an earn-out provision included in the
related sales agreement. Under the earn-out arrangement, the Company and Farm
Bureau Mutual share equally in the dollar amount by which the incurred losses on
Utah Insurance's direct business, net of reinsurance ceded, is less than the
incurred losses assumed in the valuation model used to derive the initial
acquisition price. The earn-out calculation is performed and any settlement
(subject to a maximum of $2.0 million per year) is made on a calendar year
basis. We have not accrued any contingent consideration for the two year period
ending December 31, 2002 as such amounts, if any, cannot be reasonably estimated
as of June 30, 2001. Receipts as a result of the earn-out provision are recorded
as an adjustment to the gain on the disposal of the discontinued segment.
7. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income before accounting change ............... $ 12,264 $ 9,665 $ 21,818 $ 27,799
Cumulative effect of change in accounting
for derivative instruments ............. -- -- 344 --
------------ ------------ ------------ ------------
Net income .................................... 12,264 9,665 22,162 27,799
Dividends on Series B and C preferred stock ... (1,046) (38) (2,085) (75)
------------ ------------ ------------ ------------
Numerator for earnings per common
share-income available to common
stockholders ........................... $ 11,218 $ 9,627 $ 20,077 $ 27,724
============ ============ ============ ============
Denominator:
Denominator for earnings per common share
- weighted-average shares .................. 27,367,776 31,023,248 27,347,561 31,110,481
Effect of dilutive securities - employee stock
options .................................... 460,771 394,851 435,534 414,852
------------ ------------ ------------ ------------
Denominator for diluted earnings per
common share - adjusted weighted-
average shares ......................... 27,828,547 31,418,099 27,783,095 31,525,333
============ ============ ============ ============
Earnings per common share:
Income before accounting change ............... $ 0.41 $ 0.31 $ 0.72 $ 0.89
Cumulative effect of change in accounting
for derivative instruments ............. -- -- 0.01 --
------------ ------------ ------------ ------------
Earnings per common share ..................... 0.41 0.31 0.73 0.89
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income before accounting change ............... $ 0.40 $ 0.31 $ 0.71 $ 0.88
Cumulative effect of change in accounting
for derivative instruments ............. -- -- 0.01 --
------------ ------------ ------------ ------------
Earnings per common share ..................... $ 0.40 $ 0.31 $ 0.72 $ 0.88
============ ============ ============ ============
10
FBL Financial Group, Inc. June 30, 2001
8. SEGMENT INFORMATION
Prior to January 1, 2001, our life insurance segment was our only reportable
operating segment. The life insurance segment included activities related to the
sale of life insurance, annuities and accident and health insurance products.
Operations were 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. During the first quarter of 2001, a
financial reporting project to refine our line of business detail was completed.
With the availability of more detailed line of business information, management
now utilizes financial information regarding products that are aggregated into
three product segments. These segments are (1) traditional annuity, (2)
traditional and universal life insurance and (3) variable. We also have various
support operations and corporate capital that is aggregated into a corporate and
other segment.
The traditional annuity segment consists of traditional annuities and
supplementary contracts (some of which involve life contingencies). Traditional
annuities provide for tax-deferred savings and supplementary contracts provide
for the systematic repayment of funds that accumulate interest. Traditional
annuities consist primarily of flexible premium deferred annuities, but also
include single premium deferred and immediate contracts. With these contracts,
we bear the underlying investment risk and credit interest to the contracts at
rates we determine.
The traditional and universal life insurance segment consists of whole life,
term life and universal life policies. These policies provide benefits upon the
death of the insured and may also allow the customer to build cash value on a
tax-deferred basis.
The variable segment consists of variable universal life insurance and variable
annuity contracts. These products are similar to universal life insurance and
traditional annuity contracts, except the contract holder has the option to
direct the cash value of the contract to a wide range of investment
sub-accounts, thereby passing the investment risk to the contract holder.
The corporate and other segment consists of the following corporate items and
products/services that do not meet the quantitative threshold for separate
segment reporting:
* Investments and related investment income not specifically allocated to
our product segments
* Interest expense and minority interest pertaining to distributions on
trust preferred securities
* Accident and health insurance products, primarily long-term disability
income insurance
* Advisory services for the management of investments and other companies
* Marketing and distribution services for the sale of mutual funds and
insurance products not issued by us
* Leasing services, primarily with affiliates
Financial information concerning our operating segments is as follows.
Information for the three and six months ended June 30, 2000 has been restated
to conform to the new segment presentation.
11
FBL Financial Group, Inc. June 30, 2001
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Operating revenues:
Traditional annuity ............................ $ 31,317 $ 23,101 $ 61,071 $ 45,982
Traditional and universal life ................. 75,982 58,578 143,938 113,442
Variable ....................................... 10,475 9,154 20,528 17,901
Corporate and other ............................ 7,103 12,168 14,450 23,582
------------ ------------ ------------ ------------
124,877 103,001 239,987 200,907
Realized losses on investments (A) ................ 195 (4,191) (1,330) (4,252)
------------ ------------ ------------ ------------
Consolidated revenues .......................... $ 125,072 $ 98,810 $ 238,657 $ 196,655
============ ============ ============ ============
Pre-tax operating income from continuing
operations:
Traditional annuity ............................ $ 5,544 $ 4,253 $ 9,592 $ 8,299
Traditional and universal life ................. 12,102 9,677 23,294 21,075
Variable ....................................... 935 38 1,945 352
Corporate and other ............................ (923) 4,595 (715) 16,733
------------ ------------ ------------ ------------
17,658 18,563 34,116 46,459
Income taxes on operating income ............... (5,523) (6,382) (11,158) (16,086)
Realized losses on investments, net (A) ........ 129 (2,516) (1,140) (2,574)
------------ ------------ ------------ ------------
Consolidated income from continuing
operations ............................... $ 12,264 $ 9,665 $ 21,818 $ 27,799
============ ============ ============ ============
(A) Amounts are net of adjustments, as applicable, to amortization of unearned
reserves, deferred policy acquisition costs, value of insurance in-force
acquired and income taxes attributable to gains and losses on investments.
We analyze our segment results based on pre-tax operating income. Accordingly,
income taxes are not allocated to the segments. In addition, operating results
are analyzed net of any transactions between the segments.
Our investment in equity method investees and the related equity income are
attributable to the corporate and other segment.
12
FBL Financial Group, Inc. June 30, 2001
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. 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).
RESULTS OF OPERATIONS
We use both net income and operating income to measure our performance.
Operating income represents net income excluding the impact of realized gains
and losses on investments and cumulative effect of change in accounting
principle. The impact of realized gains and losses on investments includes
adjustments for income taxes and that portion of amortization of deferred policy
acquisition costs, unearned revenue reserve and value of insurance in force
acquired attributable to such gains. While operating income is commonly used in
the insurance industry as a measure of on-going earnings performance, it is not
a substitute for net income determined in accordance with accounting principles
generally accepted in the United States.
Effective May 1, 2001, we entered into a coinsurance agreement with National
Travelers Life Company (NTL) whereby we assumed 90% of NTL's traditional life,
universal life and annuity business in force. In addition, we agreed to assume
50% of NTL's traditional life, universal life and annuity business issued
subsequent to May 1, 2001. Effective January 1, 2001, we acquired the assets and
liabilities of Kansas Farm Bureau Life Insurance Company, a single-state life
insurance company selling traditional life and annuity products in Kansas. In
connection with this acquisition, we assumed all of Kansas Farm Bureau Life's
insurance business through an assumption reinsurance agreement. Revenues and
expenses for the three and six months ended June 30, 2001 increased compared to
respective periods in 2000 as a result of the NTL and Kansas transactions.
Operating income increased approximately $1.0 million, or $0.04 per common
share, during the six months ended June 30, 2001 as a result of this new
business.
THREE AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2000
NET INCOME applicable to common stock increased 16.5% in the second quarter of
2001 to $11.2 million and decreased 27.6% in the six months ended June 30, 2001
to $20.1 million. Operating income applicable to common stock decreased 8.7% in
the second quarter of 2001 to $11.1 million and 31.1% in the six months ended
June 30, 2001 to $20.9 million. Net income increased in the second quarter due
primarily to an increase in realized gains on investments and the impact of the
Kansas and NTL transactions. Net income for the six months and operating income
in both periods decreased principally due to decreases in equity income from
investments in various partnerships and joint ventures. For the six-month
period, the decrease in equity income was partially offset by a decrease in
realized losses on investments. The following is a reconciliation of net income
to operating income.
13
FBL Financial Group, Inc. June 30, 2001
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income applicable to common stock ........ $ 11,218 $ 9,627 $ 20,077 $ 27,724
Adjustments:
Net realized losses (gains) on
investments ........................... (129) 2,516 1,140 2,574
Cumulative effect of change in
accounting for derivative
instruments ........................... -- -- (344) --
------------ ------------ ------------ ------------
Operating income applicable to common
stock .................................... $ 11,089 $ 12,143 $ 20,873 $ 30,298
============ ============ ============ ============
Earnings per common share - assuming
dilution ................................. $ 0.40 $ 0.31 $ 0.72 $ 0.88
============ ============ ============ ============
Operating income per common share -
assuming dilution ........................ $ 0.40 $ 0.39 $ 0.75 $ 0.96
============ ============ ============ ============
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, 2001. Weighted average common shares
outstanding, assuming dilution, decreased 11.4% in the second quarter of 2001 to
27,828,547 and 11.9% in the six months ended June 30, 2001 to 27,783,095. These
decreases are primarily the result of acquisitions of common stock by the
Company.
A summary of our premiums and product charges is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ........ $ 17,550 $ 15,025 $ 33,517 $ 29,747
Traditional life insurance premiums ....... 31,024 23,964 58,862 44,465
Accident and health premiums .............. 1,072 3,637 2,222 7,139
------------ ------------ ------------ ------------
Total premiums and product charges ..... $ 49,646 $ 42,626 $ 94,601 $ 81,351
============ ============ ============ ============
PREMIUMS AND PRODUCT CHARGES increased 16.5% in the second quarter of 2001 to
$49.6 million and 16.3% in the six months ended June 30, 2001 to $94.6 million.
These increases are due primarily to the addition of the Kansas Farm Bureau Life
and NTL business. Revenues from this business in the six-month period included
interest sensitive product charges of $2.5 million, traditional life insurance
premiums of $13.2 million and accident and health premiums of $2.1 million. In
addition, cost of insurance charges, which are included in interest sensitive
product charges, increased as a result of an increase in the volume and age of
business in force. Accident and health premiums decreased as a result of a 100%
coinsurance agreement to reinsure our individual long-term disability income
business effective September 1, 2000.
NET INVESTMENT INCOME, which excludes investment income on separate account
assets relating to variable products, increased 28.3% in the second quarter of
2001 to $71.1 million and 24.4% in the six months ended June 30, 2001 to $137.0
million. The annualized yield earned on average invested assets increased to
7.61% in the six months ended June 30, 2001 from 7.42% in the respective 2000
period due principally to an increase in fee income from bond calls and mortgage
loan prepayments. Fee income from bond calls and mortgage loan prepayments was
$3.1 million in the 2001 period compared to less than $0.1 million in the 2000
period. Average invested assets in the 2001 period increased 21.4% to $3,665.4
million (based on securities at amortized cost) due primarily to the acquisition
of approximately $620.9 million in investments in connection with the Kansas
Farm Bureau Life transaction and $299.3 million in investments in connection
with the NTL transaction.
14
FBL Financial Group, Inc. June 30, 2001
REALIZED GAINS (LOSSES) ON INVESTMENTS totaled $0.3 million in the second
quarter of 2001 compared to ($4.1) million in the second quarter of 2000. For
the six months ended June 30, 2001 realized losses decreased 69.9% to ($1.3)
million. Realized losses during the six month periods include writedowns of
investments that became other-than-temporarily impaired totaling $4.5 million in
2001 and $5.5 million in 2000. These writedowns are the result of the
declaration of bankruptcy, 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 AND OTHER EXPENSES include revenues and expenses, respectively,
relating primarily to our non-insurance operations. These operations include
management, advisory, marketing and distribution services and leasing
activities. Fluctuations in these financial statement line items are generally
attributable to fluctuations in the level of these services provided during the
periods.
A summary of our policy benefits is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive product benefits ................ $ 40,830 $ 33,007 $ 78,684 $ 63,975
Traditional life insurance and accident and health
benefits ........................................ 20,838 16,783 41,357 32,528
Increase in traditional and accident and health
future policy benefits .......................... 8,065 7,436 12,832 12,090
Distributions to participating policyholders ....... 7,595 6,394 14,500 12,651
------------ ------------ ------------ ------------
Total ........................................... $ 77,328 $ 63,620 $ 147,373 $ 121,244
============ ============ ============ ============
POLICY BENEFITS increased 21.5% in the second quarter of 2001 to $77.3 million
and 21.6% in the six months ended June 30, 2001 to $147.4 million. These
increase are due primarily to the addition of the Kansas Farm Bureau Life and
NTL business. Benefits incurred from this business for the six-month period
included interest sensitive product benefits of $15.8 million, traditional life
insurance and accident and health benefits, including change in reserves, of
$14.9 million and distributions to participating policyholders of $1.6 million.
Partially offsetting these increases was a decrease in accident and health
benefits as a result of the 100% coinsurance of our long-term disability income
business during 2000. Policy benefits can tend to fluctuate from period to
period as a result of changes in mortality and morbidity experience.
A summary of the our underwriting, acquisition and insurance expenses is as
follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ............... $ 2,910 $ 2,707 $ 5,921 $ 5,380
Amortization of deferred policy acquisition costs .. 4,461 2,860 8,352 5,837
Amortization of value of insurance in force
acquired ........................................ 1,014 345 2,311 652
Other underwriting, acquisition and insurance
expenses, net of deferrals ...................... 16,142 12,854 32,139 25,192
------------ ------------ ------------ ------------
Total ........................................... $ 24,527 $ 18,766 $ 48,723 $ 37,061
============ ============ ============ ============
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 30.7% in the second
quarter of 2001 to $24.5 million and 31.5% in the six months ended June 30, 2001
to $48.7 million due principally to the addition of the Kansas Farm Bureau Life
and NTL business. The increase in amortization of deferred policy acquisition
costs is due partly to a shift in product profitability to blocks of business
that have a larger acquisition cost remaining to be amortized
15
FBL Financial Group, Inc. June 30, 2001
or that have higher amortization factors. In addition, amortization increased
due to an increase in the unamortized acquisition cost asset due to the NTL
transaction and growth in the volume of business in force. In addition to an
increase relating to adding the Kansas business, amortization of value of
insurance in force acquired increased $0.7 million during the six month period
as a result of the impact of realized gains on the investments backing the
related policyholder liabilities.
INTEREST EXPENSE decreased 49.8% in the second quarter of 2001 to $0.5 million
and 38.2% in the six months ended June 30, 2001 to $1.1 million due to a
decrease in the average debt outstanding and a decrease in the interest rate on
our $40.0 million of variable-rate debt.
INCOME TAXES increased 58.3% in the second quarter of 2001 to $5.9 million and
13.7% in the six months ended June 30, 2001 to $10.6 million. The effective tax
rate for the six months ended June 30, 2001 was 30.3% compared to 31.5% for the
respective period in 2000. The effective tax rate was lower than the federal
statutory rate of 35% due primarily to the tax benefit associated with the
payment of dividends on mandatorily redeemable preferred stock of subsidiary
trust, tax-exempt interest and tax-exempt dividend income.
EQUITY INCOME (LOSS), NET OF RELATED INCOME TAXES, decreased 126.5% in the
second quarter of 2001 to ($0.6) million and 100.3% in the six months ended June
30, 2001 to ($26,000). 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 the 2000 period is primarily driven by
unrealized appreciation on two internet-related equity securities owned by two
of these venture capital investment companies. A substantial portion of the
positions held by the equity investees in these two entities was distributed to
us and subsequently sold during 2000. The losses recorded in the 2001 periods
are also generally attributable to these venture capital investment companies.
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.
16
FBL Financial Group, Inc. June 30, 2001
SEGMENT INFORMATION
Prior to January 1, 2001, our life insurance segment was our only reportable
operating segment. The life insurance segment included activities related to the
sale of life insurance, annuities and accident and health insurance products.
Operations were 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. During the first quarter of 2001, a
financial reporting project to refine our line of business detail was completed.
With the availability of more detailed line of business information, management
now utilizes financial information regarding products that are aggregated into
three product segments. These segments are (1) traditional annuity, (2)
traditional and universal life insurance and (3) variable. We also have various
support operations and corporate capital that is aggregated into a corporate and
other segment. See Note 8 of the Notes to Consolidated Financial Statements for
additional information regarding segment information. A discussion of our
operating results, by segment, follows.
TRADITIONAL ANNUITY SEGMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges .............. $ 179 $ 363 $ 539 $ 671
Net investment income ........................... 31,138 22,738 60,532 45,311
------------ ------------ ------------ ------------
31,317 23,101 61,071 45,982
Benefits and expenses .............................. 25,773 18,848 51,479 37,683
------------ ------------ ------------ ------------
Pre-tax operating income ..................... $ 5,544 $ 4,253 $ 9,592 $ 8,299
============ ============ ============ ============
OTHER DATA
Annuity premiums collected, net of reinsurance ..... $ 25,863 $ 14,557 $ 50,837 $ 27,193
Policy liabilities and accruals, end of period ..... 1,597,305 1,140,788
Pre-tax operating income for the traditional annuity segment increased 30.4% in
the second quarter of 2001 to $5.5 million and 15.6% in the six months ended
June 30, 2001 to $9.6 million. Revenues, benefits, expenses and the volume of
business in force increased primarily due to the addition of the Kansas Farm
Bureau Life and NTL business. For the six-month period, the positive impact of
the Kansas Farm Bureau Life and NTL business on pre-tax operating income was
partially offset by an increase in the average crediting rate on our flexible
premium deferred annuity contracts during the first quarter of 2001 compared to
the first quarter of 2000. Effective April 1, 2001, the crediting rate on a
majority of our flexible premium deferred annuity contracts decreased 25 basis
points to 5.75%.
TRADITIONAL AND UNIVERSAL LIFE INSURANCE SEGMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges .............. $ 9,669 $ 7,930 $ 17,806 $ 15,926
Traditional life insurance premiums and other
income ....................................... 31,024 23,985 58,862 44,516
Net investment income ........................... 35,289 26,663 67,270 53,000
------------ ------------ ------------ ------------
75,982 58,578 143,938 113,442
Benefits and expenses .............................. 63,880 48,901 120,644 92,367
------------ ------------ ------------ ------------
Pre-tax operating income ..................... $ 12,102 $ 9,677 $ 23,294 $ 21,075
============ ============ ============ ============
OTHER DATA
Life premiums collected, net of reinsurance ........ $ 43,194 $ 34,728 $ 82,042 $ 66,571
Policy liabilities and accruals, end of period ..... 1,869,821 1,366,351
17
FBL Financial Group, Inc. June 30, 2001
Pre-tax operating income for the traditional and universal life insurance
segment increased 25.1% in the second quarter of 2001 to $12.1 million and 10.5%
in the six months ended June 30, 2001 to $23.3 million. Revenues, benefits,
expenses and pre-tax operating income increased due to the addition of the
Kansas Farm Bureau Life and NTL business. In addition, excluding the impact of
Kansas Farm Bureau Life and NTL, death benefits decreased to $11.7 million in
the second quarter of 2001 from $14.0 million in the second quarter of 2000. For
the six month periods, death benefits, excluding the impact of Kansas Farm
Bureau Life and NTL, totaled $25.9 million in 2001 and 2000.
VARIABLE SEGMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges ............... $ 7,760 $ 6,775 $ 15,233 $ 13,193
Net investment income ............................ 2,505 2,185 4,890 4,325
Other income ..................................... 210 194 405 383
------------- ------------- ------------- -------------
10,475 9,154 20,528 17,901
Benefits and expenses ............................... 9,540 9,116 18,583 17,549
------------- ------------- ------------- -------------
Pre-tax operating income ..................... $ 935 $ 38 $ 1,945 $ 352
============= ============= ============= =============
OTHER DATA
Variable premiums collected, net of reinsurance and
internal rollovers ............................... $ 28,483 $ 32,845 $ 53,075 $ 59,938
Policy liabilities and accruals, end of period ...... 134,214 115,736
Separate account assets, end of period .............. 347,721 306,404
Pre-tax operating income for the variable segment increased to $0.9 million in
the second quarter of 2001 from $38,000 in the first quarter of 2000. Pre-tax
operating income increased to $1.9 million in the six-months ended June 30, 2001
from $0.4 million in the respective 2000 period. This increase is generally
attributable to more favorable mortality experience and an increase in interest
sensitive product charges resulting from growth in the volume of business in
force. Death benefits in excess of related account values on variable universal
life policies decreased 22.7% in the second quarter of 2001 to $1.4 million and
12.8% in the six months ended June 30, 2001 to $2.6 million. The variable
segment does not currently contribute significantly to our bottom line due to
the fee income structure of these products and the significant administrative
costs associated with the sale and processing of this business. Profitability of
this line of business is expected to increase as the volume of business grows.
CORPORATE AND OTHER SEGMENT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Accident and health insurance premiums ........... $ 1,072 $ 3,637 $ 2,222 $ 7,139
Net investment income ............................ 2,126 3,787 4,258 7,420
Other income ..................................... 3,905 4,744 7,970 9,023
------------ ------------ ------------ ------------
7,103 12,168 14,450 23,582
Benefits and expenses ............................... 5,791 10,022 12,644 19,859
------------ ------------ ------------ ------------
1,312 2,146 1,806 3,723
Minority interest ................................... (1,266) (1,212) (2,481) (2,467)
Equity income (loss), before tax .................... (969) 3,661 (40) 15,477
------------ ------------ ------------ ------------
Pre-tax operating income (loss) ............... $ (923) $ 4,595 $ (715) $ 16,733
============ ============ ============ ============
Pre-tax operating income for the corporate and other segment decreased 120.1% in
the second quarter of 2001 to ($0.9) million and 104.3% in the six months ended
June 30, 2001 to ($0.7) million. This decrease is primarily due
18
FBL Financial Group, Inc. June 30, 2001
to the decrease in equity income as described above. The decrease in net
investment income is due to a decrease in average invested assets resulting from
a smaller volume of accident and health business in force and a $75.0 million
stock repurchase and tender offer during the fourth quarter of 2000.
FINANCIAL CONDITION
INVESTMENTS
Our total investment portfolio increased 33.9% to $3,843.9 million at June 30,
2001 compared to $2,870.7 million at December 31, 2000. This increase is
primarily the result of the acquisition of approximately $620.9 million in
investments in connection with the Kansas Farm Bureau Life transaction and
$299.3 million in investments in connection with the NTL transaction, unrealized
appreciation on fixed maturity securities and positive cash flow from
operations. In addition, the carrying value of our investment portfolio
increased as a result of the reclassification of our fixed maturity securities
classified as held for investment to the available-for-sale category in
connection with an accounting change for derivatives. See Note 2 to the Notes to
Consolidated Financial Statements for additional information regarding this
reclassification.
Over the last several years, the mix of our life insurance and annuity business
has been shifting from traditional and interest sensitive products to variable
products. In addition, we have an exchange program for the rollover of universal
life policies to variable universal life policies. We expect the shift to
variable products to continue due to this program and the continued popularity
of 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, 2001 DECEMBER 31, 2000
----------------------------- -----------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public .............................. $ 2,469,056 64.2% $ 1,727,513 60.2%
144A private placement .............. 494,158 12.9 402,877 14.0
Private placement ................... 245,218 6.4 169,042 5.9
------------ ------------ ------------ ------------
Total fixed maturities .............. 3,208,432 83.5 2,299,432 80.1
Equity securities ..................... 42,309 1.1 30,781 1.1
Mortgage loans on real estate ......... 359,355 9.3 321,862 11.2
Investment real estate:
Acquired for debt ................... 3,703 0.1 5,285 0.2
Investment .......................... 18,135 0.5 18,535 0.6
Policy loans .......................... 181,757 4.7 125,987 4.4
Other long-term investments ........... 5,431 0.1 4,118 0.1
Short-term investments ................ 24,738 0.7 64,659 2.3
------------ ------------ ------------ ------------
Total investments ................ $ 3,843,860 100.0% $ 2,870,659 100.0%
============ ============ ============ ============
As of June 30, 2001, 94.6% (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
19
FBL Financial Group, Inc. June 30, 2001
usually more limited than for investment grade debt securities. We regularly
review the percentage of our portfolio, which is invested in non-investment
grade debt securities (NAIC designations 3 through 6). As of June 30, 2001, the
investment in non-investment grade debt was 5.4% of fixed maturity securities.
At that time no single non-investment grade holding exceeded 0.2% of total
investments.
The following table sets forth the credit quality, by NAIC designation and
Standard & Poors (S & P) rating equivalents, of fixed maturity securities:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
JUNE 30, 2001
----------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS(1) CARRYING VALUE PERCENT
- -------------------- ---------------------------------------------- -------------- -----------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A).................................. $ 2,033,117 63.4%
2 (BBB)......................................... 1,000,684 31.2
-------------- -----------
Total investment grade........................ 3,033,801 94.6
3 (BB).......................................... 120,992 3.8
4 (B)........................................... 41,150 1.3
5 (CCC, CC, C).................................. 7,276 0.2
6 In or near default............................ 5,213 0.1
-------------- -----------
Total below investment grade.................. 174,631 5.4
-------------- -----------
Total fixed maturities........................ $ 3,208,432 100.0%
============== ===========
- ---------------
(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.
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at June 30, 2001:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies .. $ 60,311 $ 1,789 $ (364) $ 61,736
State, municipal and other governments . 66,269 2,061 (378) 67,952
Public utilities ....................... 158,411 3,642 (2,810) 159,243
Corporate securities ................... 1,591,288 46,771 (29,524) 1,608,535
Mortgage and asset-backed securities ... 1,246,787 22,841 (7,018) 1,262,610
Redeemable preferred stocks ................ 51,152 609 (3,405) 48,356
-------------- -------------- -------------- --------------
Total fixed maturities ..................... $ 3,174,218 $ 77,713 $ (43,499) $ 3,208,432
============== ============== ============== ==============
Equity securities .......................... $ 42,670 $ 1,164 $ (1,525) $ 42,309
============== ============== ============== ==============
20
FBL Financial Group, Inc. June 30, 2001
The carrying value and estimated market value of our portfolio of fixed maturity
securities at June 30, 2001, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
ESTIMATED
AMORTIZED COST MARKET VALUE
-------------- --------------
(DOLLARS IN THOUSANDS)
Due in one year or less .................. $ 34,064 $ 34,786
Due after one year through five years .... 376,223 378,577
Due after five years through ten years ... 578,357 588,891
Due after ten years ...................... 887,635 895,212
-------------- --------------
1,876,279 1,897,466
Mortgage and asset-backed securities ..... 1,246,787 1,262,610
Redeemable preferred stocks .............. 51,152 48,356
-------------- --------------
$ 3,174,218 $ 3,208,432
============== ==============
Mortgage and other asset-backed securities constitute a significant portion of
our portfolio of securities. These securities are purchased at times when, we
believe, these types of investments provide superior risk-adjusted returns
compared to returns of more conventional investments such as corporate bonds and
mortgage loans. These securities are diversified as to collateral types, cash
flow characteristics and maturity.
The return of principal on mortgage and other asset-backed securities occurs
more frequently and is more variable than that of more traditional fixed
maturity securities. The principal prepayment speeds (e.g., the rate of
individuals refinancing their home mortgages) can vary based on a number of
economic factors that can not be predicted with certainty. These factors include
the prevailing interest rate environment and general status of the economy.
Deviations in actual prepayment speeds from that originally expected can cause a
change in the yield earned on mortgage and asset-backed securities purchased at
a premium or discount. Increases in prepayment speeds, which typically occur in
a decreasing interest rate environment, generally increase the rate at which
discount is accrued and premium is amortized into income. Decreases in
prepayment speeds, which typically occur in an increasing interest rate
environment, generally slow down the rate these amounts are recorded into
income.
The mortgage-backed portfolio includes pass-through and collateralized mortgage
obligation (CMO) securities. With a pass-through security, we receive a pro rata
share of principal payments as payments are made on the underlying mortgage
loans. CMOs consist of pools of mortgages divided into sections or "tranches"
which provide sequential retirement of the bonds. We invest in sequential
tranches, which provide cash flow stability in that principal payments do not
occur until the previous tranches are paid off. In addition, to provide call
protection and more stable average lives, we invest in CMOs such as planned
amortization class (PAC) and targeted amortization class (TAC) securities. CMOs
of these types provide more predictable cash flows within a range of prepayment
speeds by shifting the prepayment risks to support tranches. We generally do not
purchase certain types of collateralized mortgage obligations that we believe
would subject the investment portfolio to greater than average risk. These
include, but are not limited to, interest only, principal only, floater, inverse
floater, PAC II, Z and support tranches. However, in connection with the Kansas
acquisition, we did acquire Z securities with a carrying value of $30.4 million
at June 30, 2001. These securities generally tend to have more duration risk
(risk the security's price will change significantly with a given change in
market interest rates) than the other types of mortgage-backed securities in our
portfolio.
21
FBL Financial Group, Inc. June 30, 2001
The following table sets forth the amortized cost, par value and carrying value
of our mortgage and asset-backed securities at June 30, 2001, summarized by type
of security.
PERCENT OF
AMORTIZED CARRYING FIXED
COST PAR VALUE VALUE MATURITIES
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential ....................................... $ 389,321 $ 393,261 $ 398,311 12.4%
Pass through ..................................... 127,592 127,033 127,451 3.9
Planned and targeted amortization class .......... 87,988 87,717 88,975 2.8
Other ............................................ 58,962 60,230 59,872 1.9
------------ ------------ ------------ ------------
Total residential mortgage-backed securities ........ 663,863 668,241 674,609 21.0
Commercial mortgage-backed securities ............... 275,860 274,239 274,802 8.6
Other asset-backed securities ....................... 307,064 308,589 313,199 9.8
------------ ------------ ------------ ------------
Total mortgage and asset-backed securities .......... $ 1,246,787 $ 1,251,069 $ 1,262,610 39.4%
============ ============ ============ ============
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, 2001, we held $359.4 million or 9.3% of invested assets in mortgage
loans. These mortgage loans are diversified as to property type, location and
loan size, and are collateralized by the related properties. At June 30, 2001,
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, 2001 include: Pacific (26%) which
includes California; and West South Central (23%) which includes Oklahoma and
Texas. Mortgage loans on real estate are also diversified by collateral type
with office buildings (39%), retail facilities (35%) and industrial (20%)
representing the largest holdings at June 30, 2001.
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, 2001, the weighted average life of the
fixed maturity portfolio, based on market values and excluding convertible
bonds, was approximately 8.7 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 4.7 as of June 30, 2001.
OTHER ASSETS
Assets other than investments generally increased due to the addition of the
Kansas Farm Bureau Life and NTL business. Cash and cash equivalents increased to
$121.3 million at June 30, 2001 from $3.1 million at December 31, 2000 due to an
increase in short-term investments with a maturity of three months or less when
acquired. Assets held in separate accounts increased 6.2%, to $347.7 million at
June 30, 2001 due primarily to net transfers to the separate accounts resulting
from sales of our variable products. At June 30, 2001, we had total assets of
$4,934.8 million, a 33.2% increase from total assets at December 31, 2000.
LIABILITIES AND REDEEMABLE PREFERRED STOCK
Policy liabilities and accruals and other policyholders' funds increased 36.9%
to $3,665.2 million at June 30, 2001 primarily due to the addition of the Kansas
Farm Bureau Life and NTL business. Policy related liabilities recorded at the
inception of these transactions totaled $936.6 million. 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. Deferred income taxes increased 174.0%
to $54.1 million at June 30,
22
FBL Financial Group, Inc. June 30, 2001
2001 due primarily to an increase in deferred taxes on the change in unrealized
appreciation/depreciation on fixed maturity securities during the quarter and
deferred taxes recorded in connection with the Kansas and NTL transactions. At
June 30, 2001, we had total liabilities of $4,224.6 million, a 35.0% increase
from total liabilities at December 31, 2000.
We issued Series C redeemable preferred stock with a carrying value of $81.3
million at June 30, 2001 in connection with the Kansas Farm Bureau Life
transaction. See Note 3 of the Notes to Consolidated Financial Statements for
additional details regarding the terms of this preferred stock.
STOCKHOLDERS' EQUITY
At June 30, 2001, common stockholders' equity was $528.7 million, or $19.32 per
share, compared to $473.8 million, or $17.35 per share at December 31, 2000.
Included in stockholders' equity per common share is $0.63 at June 30, 2001 and
($0.78) at December 31, 2000 attributable to net unrealized investment gains
(losses) resulting from marking our fixed maturity securities to market value.
The change in unrealized appreciation of fixed maturity and equity securities
increased stockholders' equity $37.2 million during the six months ended June
30, 2001, after related adjustments to deferred policy acquisition costs, value
of insurance in force acquired, unearned revenue reserve and deferred income
taxes. Stockholders' equity also increased due to net income during the period
and from the effect of reclassifying our fixed maturity securities from the
held-for-investment to the available-for-sale category. Dividends paid partially
offset the impact of these increases.
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 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 two 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, 2001 and 2000.
During the six months ended June 30, 2001 and 2000, we paid cash dividends on
our common and preferred stock totaling $6.2 million and $5.7 million,
respectively. It is anticipated quarterly cash dividend requirements for the
remainder of 2001 will be $0.10 per common and Series C redeemable preferred
share and $0.0075 per Series B preferred share, or approximately $6.3 million.
In addition, interest payments on the parent company debt issued to a subsidiary
are estimated to be $2.5 million for the remainder of 2001.
FBL Financial Group, Inc. expects to rely on available cash resources, dividends
from Farm Bureau Life and short-term borrowings, if needed, to make any dividend
payments to its stockholders and interest payments on its Notes. In addition, we
expect to use these sources to fund the redemption of the Series C redeemable
preferred stock in 2004 and 2006.
The ability of Farm Bureau Life to pay dividends to FBL Financial Group, Inc. is
limited by law to earned profits (statutory unassigned surplus) as of the date
the dividend is paid, as determined in accordance with accounting practices
prescribed by insurance regulatory authorities of the State of Iowa. In
addition, under the Iowa Insurance
23
FBL Financial Group, Inc. June 30, 2001
Holding Company Act, Farm Bureau Life may not pay an "extraordinary" dividend
without prior notice to and approval by the Iowa insurance commissioner. An
"extraordinary" dividend is defined under the Iowa Insurance Holding Company Act
as any dividend or distribution of cash or other property whose fair market
value, together with that of other dividends or distributions made within the
preceding 12 months, exceeds the greater of (i) 10% of policyholders' surplus
(total statutory capital stock and statutory surplus) as of December 31 of the
preceding year, or (ii) the statutory net gain from operations of the insurer
for the 12-month period ending December 31 of the preceding year. During the
remainder of 2001, the maximum amount legally available for distribution to FBL
Financial Group, Inc. without further regulatory approval is approximately $44.9
million.
We may from time to time review potential acquisition opportunities. It is
anticipated that funding for any such acquisition would be provided from
available cash resources, debt or equity financing. As of June 30, 2001, 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. The Life Companies' liquidity positions continued to
be favorable in the six-month period ended June 30, 2001, 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 $87.8 million in the six months ended June 30, 2001 and $0.7
million in the six months ended June 30, 2000. Positive cash flow from
operations is generally used to increase the insurance companies' fixed maturity
securities and other investment portfolios. In developing their investment
strategy, the Life Companies establish a level of cash and securities which,
combined with expected net cash inflows from operations, maturities of fixed
maturity investments and principal payments on mortgage and asset-backed
securities and mortgage loans, are believed adequate to meet anticipated
short-term and long-term benefit and expense payment obligations.
Through its membership in the Federal Home Loan Bank of Des Moines (FHLB), Farm
Bureau Life is eligible to establish and borrow on a collateralized line of
credit to provide it additional liquidity. The line of credit available is based
on the amount of capital stock of the FHLB owned by Farm Bureau Life, which
supported a collateralized borrowing capacity of $78.9 million as of June 30,
2001. At June 30, 2001, Farm Bureau Life had borrowings outstanding of $40.0
million under this arrangement, leaving a collateralized borrowing capacity of
$38.9 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% (3.92% at June 30, 2001). Fixed maturity securities with a
carrying value of $42.4 million are on deposit with the FHLB as collateral for
the note.
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, 2001, included $24.7 million of short-term investments, $121.3 million of
cash (consisting primarily of securities purchased with a maturity of three
months or less) and $479.4 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.
24
FBL Financial Group, Inc. June 30, 2001
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, 2000.
25
FBL Financial Group, Inc. June 30, 2001
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 15,
2001.
(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............ 37,325,146 24,131
John W. Creer................ 37,325,292 23,985
John E. Walker............... 37,326,303 22,974
(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 -
Alan L. Foutz................ 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 -
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 an amendment to the Director Compensation Plan.
Shareholders cast 38,418,135 votes for and 117,810 against the
amendment to the Director Compensation Plan. There were 6,322
abstentions and no broker non-votes.
(iv) Approval of the appointment of Ernst & Young LLP as independent
auditors for the Company for the year 2001. Shareholders cast
38,521,955 votes for and 19,072 votes against the appointment of
Ernst & Young LLP. There were 1,240 abstentions and no broker
non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K filed during the quarter ended June 30, 2001:
None
26
FBL Financial Group, Inc. June 30, 2001
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 3, 2001
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)
27