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 September 30, 2001
------------------
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)
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Iowa 42-1411715
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
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(Address of principal executive offices) (Zip Code)
(515)225-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 26,198,056 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of November 5,
2001.
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 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 - $3,140,000; 2000 -
$ 2,038,161) ........................................................... 3,251,051 2,015,179
Equity securities, at market (cost: 2001 - $39,939; 2000 - $32,629) ........ 39,474 30,781
Mortgage loans on real estate .............................................. 372,408 321,862
Investment real estate, less allowances for depreciation of $3,662 in 2001
and $3,061 in 2000 ....................................................... 21,210 23,820
Policy loans ............................................................... 181,568 125,987
Other long-term investments ................................................ 5,134 4,118
Short-term investments ..................................................... 34,166 64,659
------------ ------------
Total investments ............................................................. 3,905,011 2,870,659
Cash and cash equivalents ..................................................... 146,406 3,099
Securities and indebtedness of related parties ................................ 58,988 52,458
Accrued investment income ..................................................... 49,255 34,656
Accounts and notes receivable ................................................. 128 107
Amounts receivable from affiliates ............................................ 9,280 6,522
Reinsurance recoverable ....................................................... 78,483 51,312
Deferred policy acquisition costs ............................................. 294,502 250,971
Value of insurance in force acquired .......................................... 48,484 14,264
Property and equipment, less allowances for depreciation of $47,082 in 2001
and $44,742 in 2000 ........................................................ 43,775 59,152
Current income taxes recoverable .............................................. 2,702 8,496
Goodwill, less accumulated amortization of $5,533 in 2001 and $4,878 in
2000 ....................................................................... 11,438 8,554
Other assets .................................................................. 25,035 16,389
Assets held in separate accounts .............................................. 320,318 327,407
------------ ------------
Total assets .......................................................... $ 4,993,805 $ 3,704,046
============ ============
1
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products .......................................... $ 2,221,607 $ 1,598,958
Traditional life insurance and accident and health products .......... 1,057,405 773,372
Unearned revenue reserve ............................................. 30,866 29,382
Other policy claims and benefits ........................................ 25,314 10,378
------------ ------------
3,335,192 2,412,090
Other policyholders' funds:
Supplementary contracts without life contingencies ...................... 249,656 170,404
Advance premiums and other deposits ..................................... 112,578 81,739
Accrued dividends ....................................................... 14,817 13,385
------------ ------------
377,051 265,528
Short-term debt payable to affiliate ...................................... -- 9,943
Amounts payable to affiliates ............................................. 7,208 136
Long-term debt ............................................................ 40,000 40,000
Deferred income taxes ..................................................... 75,078 19,749
Other liabilities ......................................................... 80,547 55,248
Liabilities related to separate accounts .................................. 320,318 327,407
------------ ------------
Total liabilities .................................................... 4,235,394 3,130,101
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust ..................................................... 97,000 97,000
Other ..................................................................... 135 142
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 .................................................................... 82,007 --
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 26,196,356 shares in 2001 and 26,115,120 shares
in 2000 ................................................................. 38,766 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) ............................. 57,079 (22,445)
Retained earnings ......................................................... 472,860 450,916
------------ ------------
Total stockholders' equity .............................................. 579,269 476,803
------------ ------------
Total liabilities and stockholders' equity ........................... $ 4,993,805 $ 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Revenues:
Interest sensitive product charges ................... $ 18,350 $ 14,778 $ 51,867 $ 44,525
Traditional life insurance premiums .................. 27,965 20,038 86,827 64,504
Accident and health premiums ......................... 636 2,172 2,858 9,310
Net investment income ................................ 70,599 55,579 207,549 165,635
Realized gains (losses) on investments ............... (221) (15,353) (1,490) (19,562)
Other income ......................................... 4,358 4,876 12,733 14,333
-------------- -------------- -------------- --------------
Total revenues .................................... 121,687 82,090 360,344 278,745
Benefits and expenses:
Interest sensitive product benefits .................. 44,254 32,963 122,938 96,938
Traditional life insurance and accident and health
benefits .......................................... 21,883 15,056 63,240 47,584
Increase in traditional life and accident and health
future policy benefits ............................ 4,206 2,781 17,038 14,871
Distributions to participating policyholders ......... 7,549 6,045 22,049 18,696
Underwriting, acquisition and insurance expenses ..... 23,293 17,840 72,016 54,901
Interest expense ..................................... 430 956 1,524 2,727
Other expenses ....................................... 3,372 3,696 9,960 10,787
-------------- -------------- -------------- --------------
Total benefits and expenses ....................... 104,987 79,337 308,765 246,504
-------------- -------------- -------------- --------------
16,700 2,753 51,579 32,241
Income taxes ............................................. (4,832) (289) (15,386) (9,570)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily
redeemable preferred stock of subsidiary trust .... (1,213) (1,213) (3,638) (3,638)
Other ................................................ (34) 59 (90) 17
Equity income, net of related income taxes ............... 595 571 569 10,630
-------------- -------------- -------------- --------------
Income before cumulative effect of change in
accounting principle .............................. 11,216 1,881 33,034 29,680
Cumulative effect of change in accounting for
derivative instruments ............................... -- -- 344 --
-------------- -------------- -------------- --------------
Net income ............................................... 11,216 1,881 33,378 29,680
Dividends on Series B and C preferred stock .............. (1,054) (38) (3,139) (113)
-------------- -------------- -------------- --------------
Net income applicable to common stock .................... $ 10,162 $ 1,843 $ 30,239 $ 29,567
============== ============== ============== ==============
Earnings per common share:
Income before accounting change ...................... $ 0.37 $ 0.06 $ 1.09 $ 0.95
Cumulative effect of change in accounting for
derivative instruments ............................ -- -- 0.01 --
-------------- -------------- -------------- --------------
Earnings per common share ............................ $ 0.37 $ 0.06 $ 1.10 $ 0.95
============== ============== ============== ==============
Earnings per common share - assuming dilution:
Income before accounting change ...................... $ 0.36 $ 0.06 $ 1.08 $ 0.94
Cumulative effect of change in accounting for
derivative instruments ............................ -- -- 0.01 --
-------------- -------------- -------------- --------------
Earnings per common share - assuming dilution ........ $ 0.36 $ 0.06 $ 1.09 $ 0.94
============== ============== ============== ==============
Cash dividends per common share .......................... $ 0.10 $ 0.09 $ 0.30 $ 0.27
============== ============== ============== ==============
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 nine months
ended September 30, 2000 ....... -- -- -- -- 29,680 29,680
Change in net unrealized
investment gains/losses ........ -- -- -- 2,017 -- 2,017
------------
Total comprehensive income .......... 31,697
Purchase of 608,379 shares of
common stock ..................... -- (852) -- -- (9,612) (10,464)
Issuance of 132,452 shares of
common stock under employee
benefit and stock option plans,
including related income tax
benefit .......................... -- 1,328 -- -- -- 1,328
Adjustment resulting from capital
transactions of equity investee .. -- (8) (2) -- -- (10)
Dividends on preferred stock ........ -- -- -- -- (113) (113)
Dividends on common stock ........... -- -- -- -- (8,375) (8,375)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2000 ......... $ 3,000 $ 42,776 $ 7,556 $ (47,900) $ 513,639 $ 519,071
============ ============ ============ ============ ============ ============
Balance at January 1, 2001 ............ $ 3,000 $ 37,769 $ 7,563 $ (22,445) $ 450,916 $ 476,803
Comprehensive income:
Net income for nine months
ended September 30, 2001 ....... -- -- -- -- 33,378 33,378
Cumulative effect of change in
accounting for derivative
instruments .................... -- -- -- 2,406 -- 2,406
Change in net unrealized
investment gains/losses ........ -- -- -- 77,118 -- 77,118
------------
Total comprehensive income .......... 112,902
Purchase of 5,600 shares of
common stock ..................... -- (8) -- -- (81) (89)
Issuance of 86,836 shares of
common stock under employee
benefit and stock option plans,
including related income tax
benefit .......................... -- 1,001 -- -- -- 1,001
Adjustment resulting from capital
transactions of equity investee .. -- 4 1 -- -- 5
Dividends on preferred stock ........ -- -- -- -- (3,139) (3,139)
Dividends on common stock ........... -- -- -- -- (8,214) (8,214)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2001 ......... $ 3,000 $ 38,766 $ 7,564 $ 57,079 $ 472,860 $ 579,269
============ ============ ============ ============ ============ ============
Comprehensive income totaled $51.2 million in the third quarter of 2001 and
$15.0 million in the third quarter of 2000.
See accompanying notes.
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net income ....................................................................... $ 33,378 $ 29,680
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances ...................................... 102,784 78,566
Charges for mortality and administration ................................... (50,631) (44,066)
Deferral of unearned revenues .............................................. 1,869 2,193
Amortization of unearned revenue reserve ................................... (1,220) (540)
Provision for depreciation and amortization ................................... 11,274 12,067
Equity income ................................................................. (569) (10,630)
Realized losses on investments ................................................ 1,490 19,562
Increase in traditional life and accident and health benefit accruals ......... 2,756 14,871
Policy acquisition costs deferred ............................................. (31,631) (31,022)
Amortization of deferred policy acquisition costs ............................. 12,549 8,073
Provision for deferred income taxes ........................................... 3,884 1,164
Other ......................................................................... 28,929 (5,221)
------------ ------------
Net cash provided by operating activities ......................................... 114,862 74,697
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ........................................ -- 43,561
Fixed maturities - available for sale ......................................... 399,592 158,244
Equity securities ............................................................. 9,303 16,758
Mortgage loans on real estate ................................................. 20,753 30,833
Investment real estate ........................................................ 1,528 644
Policy loans .................................................................. 31,118 23,127
Other long-term investments ................................................... 387 503
Short-term investments - net .................................................. 66,270 --
------------ ------------
528,951 273,670
Acquisition of investments:
Fixed maturities - available for sale ......................................... (426,723) (194,749)
Equity securities ............................................................. (6,392) (2,368)
Mortgage loans on real estate ................................................. (40,564) (41,194)
Policy loans .................................................................. (32,202) (24,586)
Other long-term investments ................................................... (1,252) --
Short-term investments - net .................................................. -- (698)
------------ ------------
(507,133) (263,595)
Proceeds from disposal, repayments of advances and other distributions from
equity investees .............................................................. 6,917 4,831
Investments in and advances to equity investees ................................... (1,151) (555)
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 ......................... (3,928) (9,067)
------------ ------------
Net cash provided by investing activities ......................................... 28,858 7,284
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited to policyholder
account balances ............................................................... 218,764 170,602
Return of policyholder account balances on interest sensitive and variable
products ....................................................................... (206,852) (231,072)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ............................................................... (3,638) (3,638)
Other contributions (distributions) related to minority interests - net ............ (97) 62
Purchase of common stock ........................................................... (89) (10,464)
Issuance of common stock ........................................................... 850 1,273
Dividends paid ..................................................................... (9,351) (8,488)
------------ ------------
Net cash used in financing activities .............................................. (413) (81,725)
------------ ------------
Increase in cash and cash equivalents .............................................. 143,307 256
Cash and cash equivalents at beginning of period ................................... 3,099 6,482
------------ ------------
Cash and cash equivalents at end of period ......................................... $ 146,406 $ 6,738
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ....................................................................... $ 1,460 $ 2,728
Income taxes ................................................................... 4,934 13,159
See accompanying notes.
6
FBL Financial Group, Inc. September 30, 2001
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine-month periods ended September 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 October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (Statement) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Statement No. 144 provides a
single accounting model for long lived assets to be disposed of and changes the
criteria that must be met to classify an asset as held-for-sale. Statement No.
144 also requires expected future operating losses from discontinued operations
to be displayed in discontinued operations in the period(s) in which losses are
incurred rather than as of the measurement date as presently required. The
Statement is effective for the year beginning January 1, 2002, with earlier
adoption encouraged. While we have not quantified the impact of adopting this
Statement, we believe the Statement will not have a material effect on our
financial position or results of operations.
In June 2001, the FASB issued Statement No. 141, "Business Combinations," and
Statement 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. In addition, Statement No.
142 requires the identification and amortization of certain intangible assets
that had previously been included as a component of goodwill. We will apply the
new Statements beginning in the first quarter of 2002. While we have not
quantified the impact of adopting these Statements, we believe the Statements
will not have a material effect on our financial position or results of
operations. Goodwill is currently being amortized at a rate of approximately
$0.3 million per quarter.
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 nine-month period ended September
30, 2001 was approximately $0.9 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.
7
FBL Financial Group, Inc. September 30, 2001
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.
3. COINSURANCE AGREEMENTS AND ACQUISITION
Effective September 1, 2001, we entered into a 100% coinsurance agreement to
reinsure our individual disability income business acquired through the
acquisition of Kansas Farm Bureau Life Insurance Company (Kansas Farm Bureau
Life). At September 1, 2001, the related accident and health reserves totaled
$14.4 million, deferred policy acquisition costs totaled $0.7 million and value
of insurance in force acquired totaled $3.1 million. During the third quarter of
2001, we settled this transaction by transferring cash and investments equal to
the reserves on this business at September 1, 2001. We received $3.0 million in
cash as consideration for the transaction. A loss of $0.8 million on the
transaction has been deferred and is being recognized over the term of the
underlying policies.
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 after
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 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
Investments.......................... $ 620,856 Policy liabilities and accruals...... $ 526,391
Cash................................. 2,863 Other policyholder funds............. 76,738
Value of insurance in force acquired. 51,865 Other liabilities.................... 11,621
---------
Goodwill............................. 3,539 Total liabilities.................... 614,750
Other assets......................... 16,315 Purchase price....................... 80,688
--------- ---------
Total............................ $ 695,438 Total............................ $ 695,438
========= =========
The initial purchase price allocations for the assets and liabilities of Kansas
Farm Bureau Life were preliminary and subject to change as refinements were made
in the calculation of insurance reserves on a GAAP basis. Certain purchase price
allocation adjustments were made during 2001 to record an additional $6.9
million of policy liabilities acquired as a result of refinements made to the
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 $1.9 million decrease in deferred income tax liability and the
establishment of $3.5 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
8
FBL Financial Group, Inc. September 30, 2001
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." 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:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(DOLLARS IN THOUSANDS)
Unrealized appreciation (depreciation) on fixed maturity and equity securities
available for sale ......................................................... $ 110,586 $ (24,830)
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs .......................................... (8,848) 2,202
Value of insurance in force acquired ....................................... (11,362) 271
Unearned revenue reserve ................................................... 383 (180)
Provision for deferred income taxes ............................................ (31,766) 7,888
------------ ------------
58,993 (14,649)
Proportionate share of net unrealized investment losses of equity investees .... (1,914) (7,796)
------------ ------------
Net unrealized investment gains (losses) ....................................... $ 57,079 $ (22,445)
============ ============
5. CREDIT ARRANGEMENTS
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0
million at September 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% (3.44% at September 30, 2001
and 6.50% at December 31, 2000). Fixed maturity securities with a carrying value
of $39.7 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 September 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.
9
FBL Financial Group, Inc. September 30, 2001
6. CONTINGENCIES
In the normal course of business, we may be involved in litigation where amounts
are alleged that are substantially more than contractual policy benefits or
certain other agreements. At September 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 collectible.
We participate with various unaffiliated life insurance companies in a
reinsurance pool to mitigate the impact of a catastrophic event on our financial
position and results of operations. Members of the pool share in the eligible
catastrophic losses based on their size and contribution to the pool. Under the
pool arrangement, we are able to cede catastrophic losses after other
reinsurance and a deductible of $0.4 million, subject to a pool cap of $125.0
million per event. At September 30, 2001, we accrued $1.6 million for
anticipated losses from this pool resulting from the terrorist acts on September
11, 2001.
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 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 September 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.
10
FBL Financial Group, Inc. September 30, 2001
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income before accounting change .............. $ 11,216 $ 1,881 $ 33,034 $ 29,680
Cumulative effect of change in accounting for
derivative instruments .................... -- -- 344 --
-------------- -------------- -------------- --------------
Net income ................................... 11,216 1,881 33,378 29,680
Dividends on Series B and C preferred stock .. (1,054) (38) (3,139) (113)
-------------- -------------- -------------- --------------
Numerator for earnings per common
share-income available to common
stockholders ........................... $ 10,162 $ 1,843 $ 30,239 $ 29,567
============== ============== ============== ==============
Denominator:
Denominator for earnings per common share
- weighted-average shares ................. 27,396,913 31,026,236 27,369,225 31,082,195
Effect of dilutive securities - employee stock
options ................................... 559,882 376,333 480,700 401,808
-------------- -------------- -------------- --------------
Denominator for diluted earnings per
common share - adjusted weighted-
average shares ......................... 27,956,795 31,402,569 27,849,925 31,484,003
============== ============== ============== ==============
Earnings per common share:
Income before accounting change .............. $ 0.37 $ 0.06 $ 1.09 $ 0.95
Cumulative effect of change in accounting for
derivative instruments .................... -- -- 0.01 --
-------------- -------------- -------------- --------------
Earnings per common share .................... $ 0.37 $ 0.06 $ 1.10 $ 0.95
============== ============== ============== ==============
Earnings per common share - assuming dilution:
Income before accounting change .............. $ 0.36 $ 0.06 $ 1.08 $ 0.94
Cumulative effect of change in accounting for
derivative instruments .................... -- -- 0.01 --
-------------- -------------- -------------- --------------
Earnings per common share .................... $ 0.36 $ 0.06 $ 1.09 $ 0.94
============== ============== ============== ==============
11
FBL Financial Group, Inc. September 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 nine months ended September 30, 2000 has been
restated to conform to the new segment presentation.
12
FBL Financial Group, Inc. September 30, 2001
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Operating revenues:
Traditional annuity ............................. $ 31,452 $ 22,819 $ 92,523 $ 68,801
Traditional and universal life .................. 74,715 54,577 218,653 168,019
Variable ........................................ 10,036 9,426 30,564 27,327
Corporate and other ............................. 5,681 10,675 20,131 34,257
-------------- -------------- -------------- --------------
121,884 97,497 361,871 298,404
Realized losses on investments (A) ................. (197) (15,407) (1,527) (19,659)
-------------- -------------- -------------- --------------
Consolidated revenues ........................... $ 121,687 82,090 $ 360,344 $ 278,745
============== ============== ============== ==============
Pre-tax operating income from continuing
operations:
Traditional annuity ............................. $ 4,999 $ 3,203 $ 14,591 $ 11,502
Traditional and universal life .................. 11,191 11,695 34,485 32,770
Variable ........................................ 1,358 658 3,303 1,010
Corporate and other ............................. (901) 1,419 (1,616) 18,152
-------------- -------------- -------------- --------------
16,647 16,975 50,763 63,434
Income taxes on operating income ................ (5,249) (5,670) (16,407) (21,756)
Realized losses on investments, net (A) ......... (182) (9,424) (1,322) (11,998)
-------------- -------------- -------------- --------------
Consolidated income from continuing
operations ................................ $ 11,216 $ 1,881 $ 33,034 $ 29,680
============== ============== ============== ==============
(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.
13
FBL Financial Group, Inc. September 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 (Kansas Farm Bureau
Life), 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 nine months ended
September 30, 2001 increased compared to the respective periods in 2000 as a
result of the NTL and Kansas transactions. Operating income increased
approximately $2.1 million, or $0.08 per common share, during the nine months
ended September 30, 2001 as a result of this new business.
Consistent with our objective to exit the disability income line of business,
effective September 1, 2001, we entered into a 100% coinsurance agreement to
reinsure the individual disability income business acquired through the Kansas
Farm Bureau Life transaction. As a result, the Consolidated Statements of Income
include the operating results from this accident and health business only
through August 31, 2001. Effective September 1, 2000, we entered into a 100%
coinsurance agreement to reinsure the individual disability income business on
our books at that time. As a result, the Consolidated Statements of Income
include the operating results from this business only through August 31, 2000. A
loss totaling $1.5 million on these coinsurance transactions has been deferred
and is being recognized over the term of the underlying policies.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2000
NET INCOME applicable to common stock increased 451.4% in the third quarter of
2001 to $10.2 million and increased 2.3% in the nine months ended September 30,
2001 to $30.2 million. Operating income applicable to common stock decreased
8.2% in the third quarter of 2001 to $10.3 million and 24.9% in the nine months
ended September 30, 2001 to $31.2 million. Net income increased in the third
quarter due primarily to a decrease in realized losses on investments and the
impact of the Kansas Farm Bureau Life and NTL transactions, partially offset by
increased death benefits. Operating income decreased in the third quarter due to
increased death benefits, including $1.6 million in death benefits as a result
of the terrorist attacks on September 11, 2001, and a reduction in net
investment income resulting from stock repurchase activity during 2000. See
discussion following for details on the positive impact this repurchase activity
had on a per share basis. Net income and operating income for the nine month
period decreased principally due to decreases in equity income from investments
in various partnerships and joint ventures, partially offset by a decrease in
realized losses on investments.
14
FBL Financial Group, Inc. September 30, 2001
The following is a reconciliation of net income to operating income.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income applicable to common stock ....... $ 10,162 $ 1,843 $ 30,239 $ 29,567
Adjustments:
Net realized losses (gains) on
investments .......................... 182 9,424 1,322 11,998
Cumulative effect of change in
accounting for derivative
instruments .......................... -- -- (344) --
-------------- -------------- -------------- --------------
Operating income applicable to common
stock .................................... $ 10,344 $ 11,267 $ 31,217 $ 41,565
============== ============== ============== ==============
Earnings per common share - assuming
dilution ................................. $ 0.36 $ 0.06 $ 1.09 $ 0.94
============== ============== ============== ==============
Operating income per common share -
assuming dilution ........................ $ 0.37 $ 0.36 $ 1.12 $ 1.32
============== ============== ============== ==============
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 21-month period ended September 30, 2001. Weighted average common shares
outstanding, assuming dilution, decreased 11.0% in the third quarter of 2001 to
27,956,795 and 11.5% in the nine months ended September 30, 2001 to 27,849,925
as compared to the respective periods in 2000. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ....... $ 18,350 $ 14,778 $ 51,867 $ 44,525
Traditional life insurance premiums ...... 27,965 20,038 86,827 64,504
Accident and health premiums ............. 636 2,172 2,858 9,310
-------------- -------------- -------------- --------------
Total premiums and product charges .... $ 46,951 $ 36,988 $ 141,552 $ 118,339
============== ============== ============== ==============
PREMIUMS AND PRODUCT CHARGES increased 26.9% in the third quarter of 2001 to
$47.0 million and 19.6% in the nine months ended September 30, 2001 to $141.6
million. These increases are due primarily to the addition of the Kansas Farm
Bureau Life and NTL business. Revenues from this additional business in the
nine-month period included interest sensitive product charges of $5.4 million,
traditional life insurance premiums of $20.5 million and accident and health
premiums of $2.7 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 the 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 27.0% in the third quarter of
2001 to $70.6 million and 25.3% in the nine months ended September 30, 2001 to
$207.5 million. The annualized yield earned on average invested assets increased
to 7.48% in the nine months ended September 30, 2001 from 7.39% 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 $3.3 million in the 2001 period compared to less than $0.1
million in the 2000 period. Average invested assets in the 2001 period increased
23.8% to $3,732.4 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.
15
FBL Financial Group, Inc. September 30, 2001
REALIZED GAINS (LOSSES) ON INVESTMENTS totaled ($0.2) million in the third
quarter of 2001 compared to ($15.4) million in the third quarter of 2000. For
the nine months ended September 30, 2001, realized losses decreased 92.4% to
($1.5) million. Realized losses during the nine-month periods include writedowns
of investments that became other-than-temporarily impaired totaling $5.9 million
in 2001 and $20.4 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive product benefits ................. $ 44,254 $ 32,963 $ 122,938 $ 96,938
Traditional life insurance and accident and
health benefits .................................. 21,883 15,056 63,240 47,584
Increase in traditional and accident and health
future policy benefits ........................... 4,206 2,781 17,038 14,871
Distributions to participating policyholders ........ 7,549 6,045 22,049 18,696
-------------- -------------- -------------- --------------
Total ............................................ $ 77,892 $ 56,845 $ 225,265 $ 178,089
============== ============== ============== ==============
POLICY BENEFITS increased 37.0% in the third quarter of 2001 to $77.9 million
and 26.5% in the nine months ended September 30, 2001 to $225.3 million. These
increases are due primarily to the addition of the Kansas Farm Bureau Life and
NTL business. Benefits incurred from this additional business for the nine-month
period included interest sensitive product benefits of $26.9 million,
traditional life insurance and accident and health benefits, including change in
reserves, of $21.3 million and distributions to participating policyholders of
$3.1 million. The increase in traditional life benefits is also due to increased
death benefits on our direct business and our participation in a reinsurance
pool for catastrophic events. We accrued $1.6 million of death benefits for
anticipated losses from this pool resulting from the terrorist attacks on
September 11, 2001. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ................ $ 2,804 $ 2,396 $ 8,725 $ 7,776
Amortization of deferred policy acquisition costs ... 4,205 2,236 12,557 8,073
Amortization of value of insurance in force
acquired ......................................... 559 93 2,870 745
Other underwriting, acquisition and insurance
expenses, net of deferrals ....................... 15,725 13,115 47,864 38,307
-------------- -------------- -------------- --------------
Total ............................................ $ 23,293 $ 17,840 $ 72,016 $ 54,901
============== ============== ============== ==============
16
FBL Financial Group, Inc. September 30, 2001
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 30.6% in the third
quarter of 2001 to $23.3 million and 31.2% in the nine months ended September
30, 2001 to $72.0 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 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 Farm Bureau Life business, amortization of value
of insurance in force acquired increased $0.8 million during the nine-month
period as a result of the impact of realized gains on the investments backing
the related policyholder liabilities.
INTEREST EXPENSE decreased 55.0% in the third quarter of 2001 to $0.4 million
and 44.1% in the nine months ended September 30, 2001 to $1.5 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 to $4.8 million in the third quarter of 2001 from $0.3
million in the 2000 quarter. Income taxes increased 60.8% in the nine months
ended September 30, 2001 to $15.4 million. The effective tax rate for the nine
months ended September 30, 2001 was 29.8% compared to 29.7% 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, NET OF RELATED INCOME TAXES, increased 4.2% in the third quarter
of 2001 to $0.6 million and decreased 94.6% in the nine months ended September
30, 2001 to $0.6 million. Equity income includes our proportionate share of
gains and losses attributable to our ownership interest in partnerships, joint
ventures and certain companies where we exhibit some control but have a minority
ownership interest. Given the timing of availability of financial information
from these entities, we will consistently use information that is as much as
three months in arrears for certain of these entities. Several of these entities
are venture capital investment companies, whose operating results are derived
primarily from unrealized and realized gains and losses generated by their
investment portfolios. The income in 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. 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.
17
FBL Financial Group, Inc. September 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges ............. $ 232 $ 217 $ 771 $ 888
Net investment income .......................... 31,220 22,602 91,752 67,913
-------------- -------------- -------------- --------------
31,452 22,819 92,523 68,801
Benefits and expenses ............................. 26,453 19,616 77,932 57,299
-------------- -------------- -------------- --------------
Pre-tax operating income .................... $ 4,999 $ 3,203 $ 14,591 $ 11,502
============== ============== ============== ==============
OTHER DATA
Annuity premiums collected, net of reinsurance .... $ 23,325 $ 7,817 $ 74,162 $ 35,010
Policy liabilities and accruals, end of period .... 1,621,039 1,129,942
Pre-tax operating income for the traditional annuity segment increased 56.1% in
the third quarter of 2001 to $5.0 million and 26.9% in the nine months ended
September 30, 2001 to $14.6 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 nine-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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges ............. $ 10,905 $ 7,791 $ 28,711 $ 23,717
Traditional life insurance premiums and other
income ...................................... 27,965 20,098 86,827 64,614
Net investment income .......................... 35,845 26,688 103,115 79,688
-------------- -------------- -------------- --------------
74,715 54,577 218,653 168,019
Benefits and expenses ............................. 63,524 42,882 184,168 135,249
-------------- -------------- -------------- --------------
Pre-tax operating income .................... $ 11,191 $ 11,695 $ 34,485 $ 32,770
============== ============== ============== ==============
OTHER DATA
Life premiums collected, net of reinsurance ....... $ 40,491 $ 29,826 $ 122,533 $ 96,397
Policy liabilities and accruals, end of period .... 1,881,679 1,367,052
18
FBL Financial Group, Inc. September 30, 2001
Pre-tax operating income for the traditional and universal life insurance
segment decreased 4.3% in the third quarter of 2001 to $11.2 million and
increased 5.2% in the nine months ended September 30, 2001 to $34.5 million.
Revenues, benefits, expenses and pre-tax operating income increased due to the
addition of the Kansas Farm Bureau Life and NTL business. Benefits in this
segment include the $1.6 million in anticipated losses resulting from the
terrorist acts on September 11, 2001 (see Note 6 to the Consolidated Financial
Statements). Death benefits for the third quarter, excluding the impact of
Kansas Farm Bureau Life, NTL and the catastrophe pool, totaled $11.6 million in
2001 and 2000. Death benefits for the nine-month period, excluding the impact of
Kansas Farm Bureau Life, NTL and the catastrophe pool, totaled $34.3 million in
2001 and $34.5 million in 2000. Included in the increase in expenses for the
third quarter is a $1.4 million increase in amortization of deferred policy
acquisition costs resulting from a change in the assumptions used to calculate
deferred acquisition costs.
VARIABLE SEGMENT
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges ............. $ 7,189 $ 6,824 $ 22,422 $ 20,017
Net investment income .......................... 2,607 2,288 7,497 6,613
Other income ................................... 240 314 645 697
-------------- -------------- -------------- --------------
10,036 9,426 30,564 27,327
Benefits and expenses ............................. 8,678 8,768 27,261 26,317
-------------- -------------- -------------- --------------
Pre-tax operating income .................... $ 1,358 $ 658 $ 3,303 $ 1,010
============== ============== ============== ==============
OTHER DATA
Variable premiums collected, net of reinsurance and
internal rollovers ............................. $ 24,645 $ 23,968 $ 77,720 $ 83,906
Policy liabilities and accruals, end of period .... 141,766 118,495
Separate account assets, end of period ............ 320,318 322,983
Pre-tax operating income for the variable segment increased 106.4% in the third
quarter of 2001 to $1.4 million and 227.0% in the nine months ended September
30, 2001 to $3.3 million. Revenues increased in the quarter and nine-month
period due to an increase in the volume of business in force. Death benefits in
excess of related account values on variable universal life policies increased
178.0% in the third quarter of 2001 to $2.4 million and 29.8% in the nine months
ended September 30, 2001 to $5.0 million. For the third quarter, the increase in
death benefits was offset by a $1.5 million decrease in amortization of deferred
policy acquisition costs resulting from a change in the assumptions used to
calculate deferred acquisition costs. 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 and the significant fixed
costs of administering the business is spread over a larger block of policies.
19
FBL Financial Group, Inc. September 30, 2001
CORPORATE AND OTHER SEGMENT
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Accident and health insurance premiums ......... $ 636 $ 2,172 $ 2,858 $ 9,311
Net investment income .......................... 927 4,001 5,185 11,421
Other income ................................... 4,118 4,502 12,088 13,525
-------------- -------------- -------------- --------------
5,681 10,675 20,131 34,257
Benefits and expenses ............................. 6,250 8,980 18,894 28,839
-------------- -------------- -------------- --------------
(569) 1,695 1,237 5,418
Minority interest ................................. (1,247) (1,154) (3,728) (3,621)
Equity income (loss), before tax .................. 915 878 875 16,355
-------------- -------------- -------------- --------------
Pre-tax operating income (loss) ............. $ (901) $ 1,419 $ (1,616) $ 18,152
============== ============== ============== ==============
Pre-tax operating income (loss) for the corporate and other segment decreased
163.5% in the third quarter of 2001 to ($0.9) million and 108.9% in the nine
months ended September 30, 2001 to ($1.6) million. The current quarter decrease
results from a decrease in net investment income, 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. The decrease for the nine-month period is primarily due to the
decrease in equity income as described above.
FINANCIAL CONDITION
INVESTMENTS
Our total investment portfolio increased 36.0% to $3,905.0 million at September
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.
20
FBL Financial Group, Inc. September 30, 2001
Our investment portfolio is summarized in the table below:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------------------- -------------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public ............................. $ 2,468,301 63.2% $ 1,727,513 60.2%
144A private placement ............. 521,666 13.4 402,877 14.0
Private placement .................. 261,084 6.7 169,042 5.9
-------------- -------------- -------------- --------------
Total fixed maturities ............. 3,251,051 83.3 2,299,432 80.1
Equity securities .................... 39,474 1.0 30,781 1.1
Mortgage loans on real estate ........ 372,408 9.5 321,862 11.2
Investment real estate:
Acquired for debt .................. 3,275 0.1 5,285 0.2
Investment ......................... 17,935 0.5 18,535 0.6
Policy loans ......................... 181,568 4.7 125,987 4.4
Other long-term investments .......... 5,134 0.1 4,118 0.1
Short-term investments ............... 34,166 0.8 64,659 2.3
-------------- -------------- -------------- --------------
Total investments ................ $ 3,905,011 100.0% $ 2,870,659 100.0%
============== ============== ============== ==============
As of September 30, 2001, 94.5% (based on carrying value) of the fixed maturity
securities were investment grade debt securities, defined as being in the
highest two National Association of Insurance Commissioners (NAIC) designations.
Non-investment grade debt securities generally provide higher yields and involve
greater risks than investment grade debt securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities is usually more limited than for investment grade debt
securities. We regularly review the percentage of our portfolio, which is
invested in non-investment grade debt securities (NAIC designations 3 through
6). As of September 30, 2001, the investment in non-investment grade debt was
5.5% 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
SEPTEMBER 30, 2001
-------------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS(1) CARRYING VALUE PERCENT
- ---------------------- ------------------------------------------- -------------- --------------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A) .............................. $ 1,994,360 61.3%
2 (BBB) ..................................... 1,078,474 33.2
-------------- --------------
Total investment grade .................... 3,072,834 94.5
3 (BB) ...................................... 114,949 3.5
4 (B) ....................................... 50,698 1.6
5 (CCC, CC, C) .............................. 7,178 0.2
6 In or near default ........................ 5,392 0.2
-------------- --------------
Total below investment grade .............. 178,217 5.5
-------------- --------------
Total fixed maturities .................... $ 3,251,051 100.0%
============== ==============
- ---------
(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.
21
FBL Financial Group, Inc. September 30, 2001
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at September 30, 2001:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies . $ 58,106 $ 3,974 $ (6) $ 62,074
State, municipal and other governments 74,477 3,549 (462) 77,564
Public utilities ...................... 153,867 7,356 (2,166) 159,057
Corporate securities .................. 1,606,563 77,857 (25,349) 1,659,071
Mortgage and asset-backed securities .. 1,188,649 49,307 (2,880) 1,235,076
Redeemable preferred stocks .............. 58,338 2,025 (2,154) 58,209
-------------- -------------- -------------- --------------
Total fixed maturities ................... $ 3,140,000 $ 144,068 $ (33,017) $ 3,251,051
============== ============== ============== ==============
Equity securities ........................ $ 39,939 $ 1,670 $ (2,135) $ 39,474
============== ============== ============== ==============
The carrying value and estimated market value of our portfolio of fixed maturity
securities at September 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 .................. $ 39,153 $ 40,153
Due after one year through five years .... 385,317 400,951
Due after five years through ten years ... 565,558 585,991
Due after ten years ...................... 902,985 930,671
-------------- --------------
1,893,013 1,957,766
Mortgage and asset-backed securities ..... 1,188,649 1,235,076
Redeemable preferred stocks .............. 58,338 58,209
-------------- --------------
$ 3,140,000 $ 3,251,051
============== ==============
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
22
FBL Financial Group, Inc. September 30, 2001
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 Farm
Bureau Life acquisition, we did acquire Z securities with a carrying value of
$33.2 million at September 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.
The following table sets forth the amortized cost, par value and carrying value
of our mortgage and asset-backed securities at September 30, 2001, summarized by
type of security.
PERCENT OF
FIXED
AMORTIZED COST PAR VALUE CARRYING VALUE MATURITIES
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential .................................. $ 365,676 $ 369,092 $ 380,982 11.7%
Pass through ................................ 119,514 119,006 122,933 3.8
Planned and targeted amortization class ..... 84,236 84,005 87,621 2.7
Other ....................................... 51,933 53,233 55,463 1.7
-------------- -------------- -------------- --------------
Total residential mortgage-backed securities ... 621,359 625,336 646,999 19.9
Commercial mortgage-backed securities .......... 268,982 267,647 276,278 8.5
Other asset-backed securities .................. 298,308 299,810 311,799 9.6
-------------- -------------- -------------- --------------
Total mortgage and asset-backed securities ..... $ 1,188,649 $ 1,192,793 $ 1,235,076 38.0%
============== ============== ============== ==============
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 September 30, 2001, we held $372.4 million or 9.5% 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
September 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 September 30, 2001
include: Pacific (29%) which includes California; and West South Central (22%)
which includes Oklahoma and Texas. Mortgage loans on real estate are also
diversified by collateral type with office buildings (40%) and retail facilities
(36%) representing the largest holdings at September 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 September 30, 2001, the weighted average life
of the fixed maturity portfolio, based on market values and excluding
convertible bonds, was approximately 7.6 years. Based on our utilization of the
fixed income analytical system, including our mortgage backed prepayment
assumptions, the effective duration of the fixed income portfolio was 4.5 as of
September 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
$146.4 million at September 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
23
FBL Financial Group, Inc. September 30, 2001
acquired. Reinsurance recoverable increased 53.0% to $78.5 million at September
30, 2001 due principally to the reinsurance of our individual disability income
business. Assets held in separate accounts decreased 2.2%, to $320.3 million at
September 30, 2001 due primarily to the decline in the market value of the
assets. At September 30, 2001, we had total assets of $4,993.8 million, a 34.8%
increase from total assets at December 31, 2000.
LIABILITIES AND REDEEMABLE PREFERRED STOCK
Policy liabilities and accruals and other policyholders' funds increased 38.6%
to $3,712.2 million at September 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 $940.1 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 280.2%
to $75.1 million at September 30, 2001 due primarily to an increase in deferred
taxes on the change in unrealized appreciation/depreciation on fixed maturity
securities and deferred taxes recorded in connection with the Kansas Farm Bureau
Life and NTL transactions. At September 30, 2001, we had total liabilities of
$4,235.4 million, a 35.3% increase from total liabilities at December 31, 2000.
We issued Series C redeemable preferred stock with a carrying value of $82.0
million at September 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 September 30, 2001, common stockholders' equity was $576.3 million, or $21.04
per share, compared to $473.8 million, or $17.35 per share at December 31, 2000.
Included in stockholders' equity per common share is $2.08 at September 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 $77.1 million during the nine months ended
September 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 nine months ended September 30, 2001 and 2000.
24
FBL Financial Group, Inc. September 30, 2001
During the nine months ended September 30, 2001, we repurchased 5,600 shares of
Class A common stock for $0.1 million. The repurchases were made in accordance
with a $25.0 million stock repurchase plan approved by our Board of Directors on
December 20, 1999.
During the nine months ended September 30, 2001 and 2000, we paid cash dividends
on our common and preferred stock totaling $9.4 million and $8.5 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 $3.1 million.
In addition, interest payments on the parent company debt issued to a subsidiary
are estimated to be $1.3 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 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 $39.9 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 September 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 nine-month period ended September 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. During the
nine-month period ended September 30, 2001, the Life Companies' continuing
operations and financing activities relating to interest sensitive products
provided funds amounting to $128.4 million. During the nine-month period ended
September 30, 2000, the Life Companies experienced net cash outflows of $4.8
million from continuing operations and financing activities related to interest
sensitive products as a result of increased surrender benefits on interest
sensitive products and rollovers from traditional products to variable products.
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
25
FBL Financial Group, Inc. September 30, 2001
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
September 30, 2001. At September 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% (3.44% at September 30, 2001). Fixed
maturity securities with a carrying value of $39.7 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
September 30, 2001, included $34.2 million of short-term investments, $146.4
million of cash (consisting primarily of securities purchased with a maturity of
three months or less) and $470.6 million in carrying value of U.S. Government
and U.S. Government agency backed securities that could be readily converted to
cash at or near carrying value.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
From time to time, we may publish statements relating to anticipated financial
performance, business prospects, new products, and similar matters. These
statements and others, which include words such as "expect", "anticipate",
"believe", "intend", and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
these types of statements. In order to comply with the terms of the safe harbor,
please note that a variety of factors could cause our actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of our business include but are not limited to the following:
* Changes to interest rate levels and stock market performance may
impact our lapse rates, market value of our investment portfolio and
our ability to sell life insurance products, notwithstanding product
features to mitigate the financial impact of such changes.
* The degree to which customers and agents (including the agents of our
alliance partners) accept our products will influence our future
growth rate.
* Extraordinary acts of nature or man may result in higher than expected
claim activity.
* Changes in federal and state income tax laws and regulations may
affect the relative tax advantage of our products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in the market risks of our financial
instruments since December 31, 2000.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K filed during the quarter ended September 30, 2001:
None
26
FBL Financial Group, Inc. September 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: November 5, 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